A REPORT ON CONTEMPORARY ISSUE PORTFOLIO MANAGEMENT

Submitted in partial fulfillment for the Award of degree of Master of Business Administration

Submitted By: NIRMAL YADAV SHILPIKHANDELWAL MBA 2th SEM DEPTT.}

Submitted To: H.O.D. {MBA

APEX INSTITUTE OF ENGINEERING & TECHNOLOGY

SITAPURA, JAIPUR 2009-2011

ACKNOWLEDGEMENT

It gives me immense pleasure to present the REPORT on CONTEMPORARY ISSUE ON PORTFOLIO MANAGEMENT. I would like to thank Mrs SHILPI KHANDELWAL. their efforts and providing the necessary guiding steps in completing the project in a standard form. I sincerely thank the efforts without whose efforts this report would not have been completed in the desired manner and within the time duration.

SIGNATURE Nirmal Yadav

Table of Contents
Abstract.......................................................................................................................4 Introduction ................................................................................................................5 Limitations of the Study..............................................................................5 Understanding Portfolio Management........................................................................5 Need for Portfolio Management..................................................................7 Scope of Portfolio Management..................................................................9 Fundamentals of Portfolio Management...................................................12 Practice of Portfolio Management.............................................................15 Financial Products....................................................................................................19 Mutual Funds.............................................................................................25 ...............................................................................................................25 Mutual Fund Operation Flow Chart......................................................25 Mutual Funds Industry in India.............................................................29 Types of mutual funds...........................................................................35 Open-end Fund......................................................................................35 Equity Funds..........................................................................................36 Funds of Funds......................................................................................37 Stocks ........................................................................................................37 Trading.......................................................................................................38 Bombay Stock Exchange (BSE) ...............................................................39 Life Insurance............................................................................................45 Life Insurance Products ........................................................................46 Market Share of Life Insurers................................................................49 Life Insurer................................................................................................51 2004-2005..................................................................................................51 2005-2006..................................................................................................51 Private Sector.............................................................................................51

 2,233,075...................................................................................................51 3,871,410...................................................................................................51 LIC.............................................................................................................51 23,978,213.................................................................................................51 31,590,707.................................................................................................51 Total...........................................................................................................51 26,211,198.................................................................................................51 35,462,117.................................................................................................51 Other Investment Products.......................................................................................51 Model Portfolios.......................................................................................................56 Client Portfolios .......................................................................................................60 References ................................................................................................................66 Annexure I................................................................................................................67

Abstract
The term asset management is often used to refer to the investment management of collective investments, whilst the more generic fund management may refer to all forms of institutional investment as well as management of investments for private investors. Investment managers who specialize in advisory management on behalf of private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking". The provision of 'portfolio management services' (PMS), includes the following elements: Financial analysis Asset selection Stock selection Plan implementation and Ongoing monitoring of investments Investment management is a large and important global industry in its own right responsible for managing of trillions of dollars. Coming under the remit of financial services many of the worlds largest companies are at least in part investment managers and employ staff to create billions in investment income. Investment avenues of Portfolio Management include: 4

 Equity Mutual Funds Insurance Commodity Real Estate IPO In private banking, a high-net-worth individual (HNI) is a person with a high net worth. Typically these individuals have investable assets (financial assets not including first piece of real estate) in excess of Rs. 50 lacs. Ultra HNIs, individuals or families have at least Rs. 2 crores in investable assets. Most global banks, such as Credit Suisse or UBS, have a separate Business Unit with designated teams consisting of client advisors and product specialists exclusively for HNIs & Ultra HNIs. Because of their extreme high net worth, these clients are often considered to have semiinstitutional or institutional like characteristics. Portfolios of HNI clients are analyzed in detail to understand their investment patterns.

Introduction
This project aims to identify & study Investment Portfolios of High Net-Worth Individuals (HNIs) in detail. This will enable me to understand their investment needs in order to maximize their returns. The various aspects of their investments are analyzed in detail. This project will also facilitate me to succeed in my career.

Limitations of the Study

I may face the following limitations: Time Constraints Vast Knowledge of the subject required

Understanding Portfolio Management

India is truly on a high. As the line between people, places and preferences begin to blur to include a new global reality; stereotypes about India and Indian culture are beginning to break, to form a mosaic of intriguing patterns. A new India has now taken shape. With an economy that has been growing at a sustained rate of 8.5% in the past few years, rising foreign exchange

reserves and a booming capital market, India now boasts of having more billionaires than China. This is a land where people dare to dream and have a story to tell. India is fast emerging as the preferred destination for business in the field of the service sector, manufacturing, information technology, telecommunications and infrastructure and of course, financial services. The Indian stock markets are scaling new heights and the upward movement seems unstoppable. The capital market is at the peak of its performance and it makes investors happier than before. This eventually brings us to the simple understanding that it is time to manage ones wealth before markets start taking reversionary trends, which some call the correction phase. If one focuses on the global trends of wealth creation, both on an individual as well as on an institutional basis, the common observations only lead to a positive outlook that gives a clear picture about the expected robust wealth creation in the developed and developing economies across the globe. The portfolio (wealth) management market is the fastest growing market in the financial services segment of the Indian industry. It is growing at approximately 25% annually. Today, the wealth management market is specifically designed for HNIs. As people become wealthier, managing wealth will become more complex and intricate. Instances in the past have confirmed that rich people often fail to manage their wealth properly, prompting organizations, like private banks, to manage their wealth for them. The major growth drivers of the increasing wealth of these HNIs are a speedy economic growth worldwide and a bullish stock market, along with strong stock market capitalization. During the past couple of years, stock markets worldwide have witnessed record high indices. The economic fundamentals also seem to be buoyant for the future with the world GDP growth at 5.3% during 2006, according to the economic Intelligence Unit (EIU) report. The dictionary meaning of wealth management states: A comprehensive service to optimize, protect and manage the financial well being of an individual, family or corporation. The definition thus covers advice on loans, investments, insurance, etc. giving a broad picture of how investors should best deploy their financial resources. A broader description may include tax advice, estate planning, business planning, charity foundations and other financial needs. In other words, wealth management is the co-ordination of a clients investment, tax, estate, debt strategies into a comprehensive plan to achieve his personal goals. It can be defined as a professional service that combines

financial or investment advice, accounting or tax services and legal or estate planning. Clients have their own financial goals and it is the task of the wealth manager or financial planner to help them achieve these goals. After the dot-com bubble bust, there was a sharp decline of the indices in the stock markets worldwide and a number of investors lost their hard earned money. Subsequently, the investors realized that they had made a mistake by investing in poor financial instruments. It was at this time that services of financial planners emerged. Financial institutions too began looking for new ways to earn profits, as the stock market bust reduced their profit margins as well. The necessity and desire on both sides; i.e. the consumer and supplier side, resulted in a new profession called financial advisors or finance managers. It is widely believed that financial planning and wealth management are the same, however, even if they may be associated with each other, it is not so. Financial planning is to know ones financial situation and determine ones goals and plans. Financial planning is a continuous activity for achieving the objective of the organization. In financial planning, the plan is reviewed regularly and the performances measured at regular intervals, so that the company can achieve its goals. On the other hand, wealth management is only coordinating a clients investment, tax and real estate plans and making a specific plan to achieve the individuals personal financial goals. As far as an individual is concerned, planning for future earnings according to his current financial position is wealth management. In case of wealth management, there are wider varieties of options of investments, such as venture capital, hedge funds, insurance, etc. while financial planning consists of services of financial institutions which can be provided to individual clients.

Need for Portfolio Management

Planning for retirement, saving for childrens education, arranging enough liquidity to buy a house or property, inclination to maximize the returns on investment are some of the reasons why people spend less than they earn. Managing wealth is not only restricted to regular investment and savings, but also concerned with housing finance, mortgages, financial planning for unmarried children, solutions for asset management after demise, legal arrangement of will and healthcare planning. Thus, the functions of a wealth manager are evolving and taking a new shape to perform various roles and responsibilities for managing the wealth of their clients. An article in a journal called Portfolio Organizer by T S Ramakrishna, reported that wealth management is meant to help clients get a complete 7

perspective of their wealth. A similar view is expressed in a report by Schwab Institutional, which claims that wealth management is a holistic approach that seeks to co-ordinate high net-worth investors needs over their lifetime with the needs of their families. Based on these definitions, it is quite reasonable to wonder just how wealth management differs from comprehensive financial planning. The Schwab International report also notes that wealth managers get involved in aspects of their clients lives that other financial advisors might not consider appropriate. Obviously, knowledge besides finance and investing is essential if one is to function effectively as a wealth manager. In recent years, financial advisors of all types have come to recognize that the role of psychology plays an important role in providing financial services to clients. As the number of high net worth individuals has continued to rise in the major economies around the world, so has the demand for wealth management services. The private wealth market is a growing one for financial institutions and firms of advisors able to offer wealth management services that meet the demanding requirements of wealthy investors. Increasingly, high net worth individuals look for diversification in their investments to obtain the returns they need to protect and grow their wealth. To draw up the investment strategies their private wealth customers require, wealth management professionals need access to comprehensive coverage of the global financial markets and to the news which affects them. They look for services that enable them to find and filter information quickly and build personalized displays. They also seek purpose-built tools and models to help them analyze instruments, sectors, funds, indices or economic conditions and test the level of risk versus return of proposed investments. To perform, wealth management professionals need advanced portfolio management systems that allow them to analyze their private wealth customers' portfolios, value them in a range of currencies and measure performance. Wealth management professionals want portfolio management systems that automate administrative functions so that they can spend more time developing good relationships with private wealth customers. Effective portfolio management systems enable wealth management professionals to generate customized reports for customers and colleagues. They also give private wealth customers the means to access their own accounts directly so they can view their portfolio valuation, transaction history or cash position. Proponents of wealth management stress that successful practitioners must know their clients values, lifestyle, ambitions and priorities. Wealth managers, like other financial planners tend to equate client happiness with the accumulation, management and growth of financial wealth. Affluent individuals often need sophisticated advice and strategic guidance to 8

capitalize on opportunities to preserve, grow and transfer their wealth. In addition, a desire exists within wealthy families to simplify the management of multigenerational needs and lessen the profound emotional impact of wealth on family members. Financial service professionals can best serve the interests of clients by helping them achieve a balance between the pursuit of wealth and the use of wealth in ways that can maximize happiness. Successfully implementing a financial strategy depends upon how well a wealth manager knows his client and how strong the advisorclient relationship is. Wealth advisors who can bridge the gap between wealth satisfaction and the clients financial goals can create a deeper and longer lasting advisor-client relationship.

Scope of Portfolio Management

Just like the Indian stock market, the wealth management industry in the country is on a remarkable growth path. In India, there has been a significant growth in income and wealth levels over the past few years. Financial intermediaries have begun to recognize the importance of wealth management as a profitable business. India, an emerging economy and a part of the BRIC nations, has a large proportion of younger population (less

than 15 years). The percentage of population in the age group of 15-64 is expected to increase to 65.5% by 2010. As the economy & GDP grows, the scope for the growth of the wealth management business becomes huge. The graph below shows Indias GDP growth rate for the past 9 years.

The number of High Net-Worth Individuals (HNIs) as well as the size of the middle class in India has also been increasing at an impressive rate. A recent study showed that there are over a hundred thousand HNIs in India. According to the Asia-Pacific Wealth Report published by Merrill Lynch & Capgemini, the number of HNIs in India at the end of 2006 grew by 20.5%, which makes India the second fastest growing population of HNIs in the Asia-Pacific Region. All these figures definitely augur well for wealth managers across the country. In India, there is a noticeable shift of mindset as well. From a generation of savers, we are slowly, but surely transforming into a generation of investors. A long-drawn process, to achieve a smooth transition, wealth managers, private bankers and financial planners have to play a very significant role. The job of a wealth manager would be to identify and create an optimum portfolio with a right balance for the client and to convey in unequivocal terms that they have no interest in selling any particular financial product to them. Investment areas in India normally include equities, derivative instruments, mutual funds, bonds, and of late, commodities. Today, the suite of wealth management products is expanding into many areas, including insurance, art, real estate, jewellery advisory, etc. The estimates of the market size vary 10

from Rs. 20,000 crore to Rs. 200,000 crore. The wide range is on account of the fact that there are various definitions for the wealth management service and the entry level of wealth to be a wealth management customer varies from bank to bank, from Rs. 500,000 to Rs. 5 crore. The table below shows the number of HNIs in the world, segmented by region, in 2006

HNIs (more than $1 million, in 2006)

Region Number of HNIs Percentage of Regional Population 0.15% 0.62% 0.41% 0.06% 0.07% unknown 0.01%

Global North America Europe Asia-Pacific Latin America Middle East Africa

9,500,000 3,200,000 2,900,000 2,600,000 400,000 300,000 100,000

The main players in the wealth management services industry include HSBC, Standard Chartered, Citibank, BNP Paribas, ICICI Bank, HDFC Bank, Kotak Mahindra Bank, ABN-Amro Bank, etc., apart from a host of brokers including DSP Merrill Lynch, JP Morgan, Edelweiss Capital, Indiabulls, India Infoline, etc. The world of wealth management services is growing from strength to strength and banks and other major players are focusing on the affluent population of society. However, wealth management is still in its infancy.

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Today, India and China are considered to be economic powerhouses of the world. With continuous corporate earnings, individual disposable incomes are on an exponential growth. This has resulted in the growing number of HNIs in our country in line with the global phenomenon. The direct outcome of this soaring growth of the population of HNIs is the increasing interest shown by banks and other financial institutions in managing the wealth of these people. Wealth managers are a much sought after bunch, with their ability to set a trend and provide investment advice to their clients before the crowd gets there. There is an immediate need for such wealth management professionals in the country. This new industry is therefore becoming one of the most exciting and rewarding professions today.

Fundamentals of Portfolio Management

Managing wealth is a business. Wealth management is an integrated plan utilizing an array of capabilities that encompass planning, investment management, trust services and private banking. In other words, wealth management is a professional service, which is a combination of financial and investment advices, accounting and tax services, estate management and administration, succession planning and legal planning, for a fee. The management of wealth is a vibrant process. Wealth gives rise to uncommon challenges as well as unique opportunities. Market ripples, portfolio swings, changes in tax and estate laws make the task of managing the clients investments more difficult. Investing in long term investment plans is not as simple as delivering the wealth to banks or fixed deposits. Investments are affected by a host of factors like interest rates, inflation, economic developments, political issues, etc. Wealth management services are provided by banks, professional trust companies, financial service providers and brokers. Wealth managers in India are involved in managing assets of HNIs, NRIs, FIIs, Overseas Corporate Bodies and Indian Corporates. Today, wealth management service companies are also providing various financial services like portfolio management services, securities trading which include online trading in equities and derivatives, custodial services, service for distribution of financial products like mutual funds, PPF, postal savings, government securities and other investment products, insurance products, both life and general insurance. Besides these, the institutional clients offer merchant banking services which include private equity, venture capital and loan syndication. 12

The Cycle of Wealth Most individuals and families go through a series of financial events during their lives. As they pass each of these stages, their financial strategies need to change to reflect their evolving needs and financial circumstances. These different stages are known as the Cycle of Wealth. It is important to gain an insight and understanding of the cycle of wealth and how each phase has a profound impact on one's fortunes. The wealth cycle is commonly known to consist of four pillars - creation, enhancement, preservation and distribution. Wealth Creation, also known as start-up, is the first pillar of the cycle. It plays a vital role in forming the base for the wealth accumulation process. Wealth creators are individuals who are in the early stages of their professional career; generally between 25 & 45; and tend to have larger financial responsibilities such as mortgages and credit purchases. Their liabilities tend to be higher than their income. Financial decisions tend to be mostly short term and they often adopt the characteristic of an aggressive investor, seeking ways to maximize the returns on their assets. Once wealth is established and created, these individuals; by now in their mid to late career life; would shift their focus to Wealth Enhancement. The primary objective of this cycle is to multiply or enhance the returns on the accumulated assets with lower risks or better capital protection. This is where, with proper asset allocation, they are able to determine areas of financial interest and investment products that suit them in order to generate more income. Managing the acquired wealth is also crucial at this stage, taking into account tax considerations and debt management. Wealth Preservation starts when one has built up a substantial amount of wealth. The key strategy is to ensure that wealth is well managed with protection being the key objective. At this stage, the portfolio is managed with greater focus to generate income, while minimizing risk. Many times, individuals or families fail to anticipate and prepare for this cycle. They focus on accumulating wealth only to lose almost everything in the end as a result of not having proper wealth management structure. Finally, the Wealth Distribution phase is where one ensures that one's assets or wealth and even business are transferred or distributed in the most optimal way and according to one's wishes. This is also a stage most individuals and families often ignore. Estate

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and succession plans should be put in place well in advance to ensure that the family wealth and the reins of the family business are handed over to the following generations in an orderly manner. It is every individual's dream to have financial freedom at retirement or at the very least, most hope to be free from any debt obligation. This is achievable if one were to diligently practice the management of wealth cycle accordingly. The Cycle of Wealth may also get disturbed due to possible but uncertain factors in an individual life. In any given year, some families will either be above or below their typical or average incomes because of some transitory economic factors, such as, no earning or partial earning due to training programs, unemployment or business setbacks, timeout from work for family responsibilities or leisure, irregular or fluctuating incomes characteristic of certain occupations, etc. In essence, one needs to understand that, the key to success in using the wealth cycle, is to know what steps to take and in what order. Advantages of Portfolio Management Some of the advantages of portfolio management include: Investors would not want to spend much of their valuable time, Investors can do away with enduring complicated transactions and voluminous paperwork, It is a better way to manage wealth, It provides proper planning of estate or investment of assets based on personal criteria and financial goals, It is the most efficient and profitable use of ones wealth.

Like newly-wed couples understand each others behaviours in pursuit of a better relationship between them; in the same way, wealth managers and their clients need to interact with each other to understand each others requirements better. Wealth management services are like partnering the investments, their behaviours and psychology. Wealth management should deliver multi-goal based advice integrated with the customers integrated information. This ability facilitates the customer to be as involved in the planning procedure as desired, and the investment manager can guide and advice the customer whenever the need arises.

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Wealth managers should be familiar with certain focus areas of building a strong relationship with his client, which are: Work on building a lasting, rewarding relationship with every customer, Show commitment to build quality relationships with the customers, Assume to provide complete transparency and openness in managing wealth, Maintain consistency in stated investment plan and strategy.

An advisor should be a symbol of integrity. The trust that an investor puts on the wealth advisor is unconditional. High levels of ethics are required from the advisor to keep the clients interest on top of the agenda and sustain independence and impartiality. The advisors opinion and advice should be honest. Most of the advisors have a professional edge and they work in tandem with the standards of their respective institutions. Each professional institution has its own set of codes, rules, ethics and standards which help the advisor in serving the clients most appropriately. Wealth management has emerged as a leading trend in the world due to the confluence of multiple factors, including recent stock market performance, consumer demands and a shift in the regulatory and legal landscape. Regardless of some factors being unique to a particular region, the delivery of a wealth management engagement by establishing deep relations through providing financial planning, asset management and supporting financial solutions holds great promise as a business deliverable in any environment that generates high average revenue per client from an affluent client base.

Practice of Portfolio Management

In todays fast changing and highly competitive financial markets, it is quite difficult to earn an impressive rate of return on personal investments that arise out of the funds saved by an ordinary individual. The quantum usually is not comparable to the amount invested by large players such as the corporate houses. One need not compare their investment returns with the big leaders in the market; rather they need to judiciously plan before investing. Thus, there is a need to plan the personal investments with care and intelligence and to pay attention to the mode of pursuit. As individuals, we are less aware of the risks associated with the investment avenues we select for investment. However, skilled wealth managers, as trained professionals, can clearly grasp the criteria for any investment decision.

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The future is unpredictable and the active management of an investors private wealth is of utmost importance to ensure the well being of himself and his family. This takes a lot of valuable time and requires special expertise to manage a portfolio. Just as one would seek out professionals such as doctors and lawyers to provide them with guidance in their special areas of expertise, wealth managers provide the professionalism necessary for the protection and growth of an individuals assets. However, as we have seen, the definition of wealth management goes much further than just providing assistance in the management of wealth. It includes advice in areas such as tax and inheritance planning, as well as providing assistance in areas of estate planning, insurance advice and wealth creation. The wealth management profession is all about becoming the clients personal, trusted, professional advisor and providing him with financial solutions tailored to his needs. Adam Smith, the father of Economics, in his book Wealth of Nations, stated that the wealth of a nation is not the commodities or resource reserves it has; it exists in the productive knowledge of its people. The ability to make use of these reserves productively may be said to be the true source of a nations wealth. Broadly, the creation of wealth is based on the knowledge or the ability to convert the reserves into productive purposes. Mathematically, we can determine wealth by using a simple formula: Asset Liabilities = Net Worth and that net worth of the individual is wealth. Wealth can be created through different methods, such as by creating a savings account, by investing in fixed deposits, mutual funds, stocks, bonds or real estate, having a retirement plan, etc. Investing in a savings scheme will give specific returns, whereas investing in the stock market will bring high returns, but with added risk. Similarly, investing in real estate has proved to be a high wealth creator in the past few years. The present scenario of wealth management in India is totally different from that which prevailed five years ago, when the Indian rich class used to send its money offshore to escape being taxed. Now Indias economic growth has forced them to bring their money back to India and invest here for better returns. Most of the wealthy are engaged in business to preserve their wealth for future generations. Today, investors are also investing openly in IPOs. Many foreign banks and financial institutions are coming to India with a variety of financial products and techniques that deal with wealth management. It seems wealth managers in India will become a busier lot in the years to come and their role in managing their clients wealth will become more challenging and demanding. The basic idea of wealth management is to help the individual investors get a complete perspective on their wealth. A wealth manager is more objective. The challenge for wealth managers today is to achieve the right balance of investments in their clients portfolio, so as to help them realize their 16

pecuniary ambitions. He first analyses ones portfolio, finds out the long and short term goals of the investor and decided on the asset mix that will fetch the best desired returns given the investors risk profile. Portfolio Manager A portfolio manager has to focus on three things: 1. Wealth Accumulation the clients wealth should grow, 2. Wealth Preservation the clients wealth should be well protected, and 3. Wealth Transfer smooth transfer of clients assets to his legal heirs with minimum cost. While making an investment decision, a wealth manager must remember the following four major parameters: a) Safety: The amount we invest must remain safe. Investment is not speculation or gambling, rather it is an intelligent move of postponement of present consumption of funds with an objective of having an increased amount in hand available on a future date of consumption. b) Returns: The returns on any investment are directly correlated with the amount of risk involved in that investment. The higher the risk, the higher are the returns. c) Liquidity: The ready availability of funds is called liquidity. One should see that the money is available to us as and when needed. Besides being safe and profitable, an investment must also have a fair degree of liquidity. d) Value Appreciation: If we are investing in assets other than those with fixed income, one must check for appreciation in the value of the asset. This provides a hedge against inflation. Investment in gold, real estate, equity shares, art, etc. must be analyzed from this viewpoint.

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Thus, intelligence is not only in getting higher returns but also in striking the right balance between risk, returns, liquidity and value appreciation.

Portfolio Managers Guide to Investment

Here are certain points to guide you through the act of investment for the client: Identify Investment Objectives: a wealth manager must be aware of his clients investment objectives. Whether the client wants abnormal, returns, consistent returns, tax benefits or hedge against inflation, the client should inform his wealth manager. Invest in Available Funds: a wealth manager must work out emergency funds and ensure to invest only in these available funds. He should not mix the terms savings and investments. He should make a strategy to invest the saved funds when an upper limit of savings is crossed. Aware of Limitations: a wealth manager must be aware of his clients limitations. In particular, he must be aware of the duration of the investment. Investments with short or medium durations are preferred. Aware of Risk Level: a wealth manager must be aware of the clients risk profile, while keeping an eye on the objectives of their investments. He must diversify the portfolio by including different types of assets and investments. Diversify: a wealth manager must remember to diversify; not to put all eggs in one basket. He must try to diversify amongst financial instruments, among companies and among industries he plans to invest in. Aware of All Investments: a wealth manager must just forget about an instrument after investing in it, but keep a check on the clients portfolio. This would allow him to reduce the risk through diversification. If needed, modify their investment strategy. This would ensure optimum performance of the portfolio.

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Aware of Areas of Investment: a wealth manager must decide where the clients money should be invested; whether it is in shares, fixed deposits, mutual funds, insurance, holding cash, etc.

A rule of thumb followed by most wealth managers is given in the table on the next page. The table tells us what percentage of the clients funds can be invested in which avenue, equity or debt or if it should remain in liquid form, as non-marketable financial assets.

Optimal Investment Decision

Age At 30 years By 50 years Retirement Strategy Aggressive Moderate Conservative Equity 70% 50% 20% Debt 20% 30% 40% Liquid 10% 20% 40%

The clients personal investment plan depends upon the wealth managers decisions. Hence, they are required to decide prudentially regarding the amount, duration, risk level and avenues of the clients investments.

Financial Products
Financial products are at the heart of a financial service provider's business; they are what are sold to clients. Like any other business, therefore, a financial service provider must be market-driven and aim to identify and meet customers' needs on a profitable basis. Customers may be private individuals or businesses and their financial service needs will range from needing somewhere safe to keep surplus money to being able to borrow to meet a cash shortfall or being able to send money to a relative in a rural area. Someone providing financial services, therefore, has to decide whether to offer their customers one product or several products and how much to charge in order to make a sustainable business. As we have understood in the previous section of this project, wealth management is the comprehensive mix of asset, debt, tax and risk management strategies into one single financial solution. Hence, it is imperative that a wealth manager possess the awareness and knowledge of the vast and extensive catalogue of financial products & services on offer in

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todays market, in order to advice his clients accurately. This catalogue will be opened and examined in the following pages. To begin with, the table given on the next page might provide a comparative picture of investments in various assets or avenues.

Comparative Picture of Investments

Type of Asset Governmen t Securities Bank Deposits Post Office Savings Duration Risk Medium / Long Medium Low Safety High Return Low / Moderate Low / Moderate Low / Moderate Liquidity Low Value Appreciation No

Low

High

High

No

Medium

Low

High

Low / Moderat e

No

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Debentures

Medium / Long Medium / Long Medium / Long

Moderat e Moderat e Moderat e / High

Moderat e Moderat e Moderat e / Low

Moderate

Low / Moderat e Moderat e Low / Moderat e Low

No

Preference Shares Convertible Debentures

Moderate

No

Moderate / Low

Sometimes

Bonds

Medium / Long Medium / Long

Moderat e Moderat e

Moderat e / Low High / Moderat e Low

Moderate

No

Mutual Funds

Moderate / High

Moderat e / High

Yes

Equity Shares

Long

High

Unpredictabl e

High / Low

Unpredictable

Physical Assets (e.g.: Gold, Silver, Real Estate)

Long

Moderat e / High

Low

Unpredictabl e

Low

Unpredictable

Identification of the Right Investment Avenue

Investment Products are the tools of the trade for financial advisors; hence it is vital that they understand the various options available. It is essential that wealth managers have an in-depth knowledge of this range of investment classes before combining them into a portfolio or selecting specific assets or investment products.

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Though investment opportunities are thriving all the time and in almost all situations, often they may not be very easy to identify. A shrewd and discerning wealth manager will usually find opportunities for making money in places, and in situations, where a less discerning one will not. The best investment opportunities are often found in the most unlikely places and situations. For example, in the beginning of 1994, few could have predicted that the shares of the then relatively unknown company like Infosys Technologies, focusing primarily on Y2K software projects, would provide one of the best investment opportunities of the last decade. Let us consider some typical situations, which provide excellent investment opportunities: 1. Changes in Government Policies: Major changes in government policies often benefit some companies by opening up new avenues for growth and higher profits and such companies provide excellent investment opportunities for investors who are quick in recognizing the implications of such policy changes. In the early 1980s, removal of price controls over cement ushered in a period of high growth for ACC and other cement companies. In 1988, the lifting of price controls over aluminium boosted the profits of companies, like Hindustan Aluminium and Indian Aluminium. Changes in government policy can also sometimes affect a company adversely. If you are a shareholder and are quick to foresee the implication of such a change, you can sell your shares before their prices begin to fall. Shrewd investors reacted quickly to these disadvantageous budgetary provisions and immediately offloaded their steel shares. However, these detrimental changes in excise and customs duties did not necessarily imply the death-knell of the steel industry. The long-term prospects of wellmanaged steel companies continue to be bright, notwithstanding the inevitable erosion of their profits in the short run due to increased competition from cheaper imports.

2. Technological innovations: We are living in a society, which is being increasingly dominated by technology. Accordingly, alert investors on the lookout for big gains will find suitable investment opportunities in companies, which go in for technological 22

innovations in a big way. For example, IT services companies, biotechnology companies and telecommunication companies are major beneficiaries of technological changes. 3. Anticipating the future: The best investment opportunities are available to those who can successfully anticipate the future. If you can identify the future areas or directions of growth, you would have identified when and where to invest for maximum returns. Making an accurate assessment of future conditions and future growth areas is not as easy as it sounds; it involves a lot of study and analysis. If you want to be a successful investor, such study and analysis are very necessary. Investment is an activity, which by its very nature involves looking into the future. Unless one looks into the future and forms a personal viewpoint on what it would be like, they will not be able to decide where and when to invest their money. For an investor, anticipating the future is unavoidable. The best way to anticipate the future is to be always alert to what is happening around you. The seeds of the future are present today. 4. International trends: Globalisation is the buzzword since the 1990s. No country in the world can now hope to remain immune from the influence of international economic trends. As a result, it has now become imperative for Indian stock market investors to keep a close watch on international economic developments and to analyse their likely impact on the performance of Indian companies. In the 21st century, a stock market investor who is aware of what is happening in the larger world beyond Indias borders and who keeps a close tab on major international developments will definitely find himself in a more advantageous position vis--vis an inward-looking investor whose awareness is confined only to what happens within the country.

Financial Products & Services

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The broad range of customers needs have put a big challenge before wealth managers to come up with different business models to service these different segments. The major players in the segments are large Indian domestic brokerage houses, professional portfolio managers, banks and even mutual fund houses. The factor that determines success of wealth managers in the Indian markets is the ability to tap proper channels and diversification of portfolio. Indian mutual fund industry has come up ages in terms of managing wealth. During the market plunge in May 2006, mutual fund industry grew like never before and proved itself as a true contrarian fund that the market could recon with. Mutual fund industry has been coming up with different options for investors. Particularly retail investors have been putting their money in mutual funds, which is a good sign for the future of the Indian capital markets. While on the subject of retail investors in wealth management, there are various avenues available in the capital markets now. The trigger lies in the SIP or systematic investment plan. However, ELSS or Equity Linked Saving Scheme is one of the best options available in the markets today. The main benefit of ELSS is the tax advantage under Section 80C, where the assessee gets the deduction from its taxable income up to Rs.100,000 per year on investments under the scheme. These funds also give handsome returns in the future. Among the various other options available in the market presently, the real estate sector in India today, is witnessing a wide spectrum of changes and is certainly a preferred investment avenue for the investors. The euphoria about this sector can be assessed by the number of mutual funds vying for this sector. Presently, they are intended for HNIs, the days may not be far for wealth managers looking at this segment for his retail clients as well. The changing demographic equations, the rising income levels, increasing urbanization and the spread of township projects have been the major success factors for growth in residential property. At the same time, commercial space requirements across a range of industries have seen the increase in demand for extra space. Hence, this option of investment may be a good avenue in the present context. In the present scenario, apart from the common investment in precious metals like gold and silver, art has also become a reliable capital asset. Now financial institutions are prepared to invest in art as part of a diversified portfolio. Analysts believe that investment in art for HNIs too would fetch more gains in the future, in comparison to equity shares.

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Mutual Funds
A mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. The NAV is the current market value of a fund's holdings, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

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Mutual Funds Organization

There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

Organization of a Mutual Fund

Mutual Funds - The Global Perspective

Mutual Funds as a concept developed in the early 20th century. But the idea of pooling together money for investment purposes started in Europe in the mid-1800s mainly in Netherlands and Scotland followed by Belgium, England and France. Though today the largest market of Mutual Funds is USA yet the first Mutual Fund that was launched in USA is the New York Stock Trust in 1889 followed by the widely known open-ended Massachusetts Investors Trust in 1924, now called the MFS. These developments led to the establishment of Fidelity Investments that today is the worlds largest MF Company and other companies like Pioneer, Scudder and Putnum funds. MFs were initially termed as trusts.

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The Indian mutual fund industry: Trends mirror the US The mutual fund industry in the United States (US) and India share many common traits. The US fund industry has a rather long history of eighty years compared to its Indian counterpart which came into being with the launch of the first scheme Unit 64. Considering the mutual fund industries in both the countries share a few common traits, there could be some lessons for the Indian Mutual Fund Industry and also the course it may take in times to come. Sharp growth in US fund industry In the global context Mutual funds have long been a popular investment avenue with assets under management (AUM) exceeding 60% of the gross domestic product (GDP) in developed markets like the US. Historically, US investors have been net buyers of equity mutual funds. Major drivers for that behavior have been the need to build capital for retirement and the knowledge that the average historical returns on equities have exceeded that of bond funds. As in prior years, US households remain net buyers of socks and bond through mutual funds and net sellers of these securities through other means. The number of US households owning mutual funds reached 54.9 million as of December 2006. As a result, close to half of the estimated 114.37 million US households now own mutual funds, and an estimated 96 million individual shareholders in those households invest in funds. The Indian mutual fund industry follows suit In India mutual funds have been able to command significant investor appetite only in the recent past with the increasing presence of private sector mutual funds and a distinct shift in investor preferences towards mutual funds. This has resulted in the AUM of mutual funds growing around 3.5 times from March 1999. Further the share of the Indian mutual fund industry in the global pie has doubled in this period. The shift in investor preference towards mutual funds has been facilitated by fiscal incentives, availability of higher choices to investors, the gradual change in risk profile of the investors, increasing returns from equity funds due to good performance of equity markets as well as the attempts by the SEBI. Comparative Analysis The US Mutual Fund industry is twice as old as its Indian counterpart. The AUM in US is more than 200 times the Indian counterpart at $10.57 trillion. The Indian industry has to cover a lot of ground to narrow the gap. However, 27

in other areas, the distance between the two industries is not much. For example, the breadth of the regulatory framework in Indian is more or less comparable to the US. In the product offering too, the Indian fund industry is very close to US. Their long history gives the US market more depth though. The distribution channels in India have to improve substantially as the funds have so far not been able to reach the smaller towns.

The way forward While the AUM of the Indian mutual fund industry as a percentage of GDP has increased from 3% in 1999 to about 5% in 2003, it still pales in comparison to the size of this sector in other countries both in developed and developing world.

Country India Australia Brazil Canada France Germany Hong Kong Japan Korea United Kingdom USA

AUM as % of GDP 5.16% 99.91% 38.15% 43.99% 64.58% 10.67% 259.12% 10.43% 25.27% 24.95% 71.50%

Table 1: Global mutual fund industry (AUMs as a percentage of GDP as of 2009) However, one must look at this more from the view of the huge growth potential available for the Indian mutual fund industry even if it is able to

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reach 35% levels of a country like Brazil leave alone the US or Hong Kong. Indian mutual funds will thrive in the financial landscape if the Indian investor is better informed about the benefits of investment in mutual funds as compared to alternative investment avenues. Once this is done, this industry would be on course to expand and meet the demands of the broad spectrum of investors who would like to experiment with new investment opportunities. This would pave the way for the mutual fund industry to become the primary investment vehicle for the retail investors. Much would also depend on the way the expectations are created and fulfilled by the fund industry.

Mutual Funds Industry in India

The Indian mutual fund industry has already opened up many exciting investment opportunities to the Indian investors. We have started witnessing the phenomenon of more savings now being entrusted to the funds. Despite the expected continuing growth in the industry mutual fund is still a new financial intermediary in India. The Indian equity market has gained significantly in the last one year and mutual funds are not left far behind. Both the avenues have created wealth for the investors. But the equity market has attracted much more attention than the mutual fund market. The reason behind this is in India the investment in equity market has been there since long whereas the mutual fund market is still growing. For the creation of wealth through this avenue a proper understanding of mutual fund is must. The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 billion in March 1993 and till April 2007; it reached the height of 4850 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be familiarized with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. 29

The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under management. Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003

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This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Industry AUM
250000 200000 150000 AUM 100000 50000 0 1988 1993 2003 2004 2005 2006

Year AUM (Rs in Crores)

GROWTH IN ASSETS UNDER MANAGEMENT The following figure shows the growth in AUM of the Indian MF Industry from March, 1965 to March, 2006. There has been a decrease in the AUM of the industry from January, 2003 to March, 2003. The reason for the fall in the AUM from Rs. 121805 crores in Jan 2003 to Rs. 79464 crores in March

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2003 was because of the bifurcation of UTI into two separate entities UTI and UTI Mutual Fund.

Product Focus From the time UTI was set up, till the entry of private players, the primary focus of the MF Industry was to offer different products. During this time there was an array of products categorized primarily based on two factors. One was the way the schemes were traded and the other was through different composition of debt and equity securities in the scheme. By trading of schemes: Open Ended Schemes Closed Ended Schemes In an open-ended scheme there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended scheme at any point of time at a price that is linked to the net asset value (NAV). In case of close-ended schemes, the total size of the corpus is limited by the size of the initial offer. The entry and exit of investors is possible by only trading on the stock exchanges. Due to liquidity constraints posed by close-ended funds, they 32

were soon rendered obsolete and most of the prevailing schemes today are open-ended schemes.

By Composition of Debt and Equity in the Scheme: Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

The funds were segregated based on the composition of debt and equity in various schemes. Growth Schemes invested more in Equity with a long-term perspective of Capital Gains where as Income Schemes invested in fixed income debt securities. Balanced funds also known as Hybrid funds tried to derive advantage of both debt and equity by investing in both. Money Market Schemes invested in short term liquid securities. In this Product Focus Stage the primary aim of the fund houses was to offer an array of products and due too a very few number of players there were no dearth of subscribers. Distribution Focus Till 2-3 years after the entry of private sector players in 1993 the product focus approach was prevalent. To begin with, the private sector companies introduced the same products offered from the pubic sector players and promised higher returns. Soon they realized that they needed to make a distinction on some other parameter as well, they focused on Distribution. As it was difficult and time consuming to replicate the wide-spread distribution structure of Agents set up by UTI, they encouraged third-party distribution companies to distribute their products all over India. Specialist distribution companies such as Karvy, Bajaj Capital, and Integrated Enterprises etc. had emerged. Special focus was given to investor servicing so that investors could experience better servicing standards from private players. While the focus on improved Distribution and better customer servicing led to private players being in a position to compete against UTI, but it also had its share of problems. In a rush to sell high volumes and there by earn fee based income many a times resulted in selling the wrong product to the

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wrong customer. A Growth product, which is inherently risky, was sold to old and retired people who should have been sold something which gave them fixed and regular income. This led to the dissatisfaction of customers, which led to a more customer ownership focus approach.

Customer Ownership Focus The Asset management Companies started to segment their customers according to their needs. The categorization happened into institutional segment and individual investor segment. The institutional segment consisted of treasury departments of Corporates, Trusts etc and suitable products such as Institutional Income schemes and Money Market schemes were targeted at them. The Individual investor was further segmented into Young Families with small or no children, Middle-aged People saving for retirement and Retired People looking for steady income. Suitable products such as Growth and Balanced schemes for young families and Income schemes for retired people were marketed. With the help of customer centric approach the Mutual Fund Companies hoped to regain the confidence of the investor. Specialized Product & Service Focus The trends in the recent past show that the Companies have been taking the above customer centric approach further by designing and launching dedicated products and services. As awareness levels of individual investors go up, focus is on identifying one's investment needs depending on one's financial goals, risk taking ability and time horizon. Investors chose companies, which help them in the above through specialized products and services.

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Types of mutual funds Open-end Fund

An open-end(ed) fund is a collective investment which can issue and redeem units at any time. An investor can purchase units in such funds directly from the mutual fund company, or through a brokerage house. Being open-ended means that, at the end of every day, the fund issues new units to investors and buys back units from investors wishing to exit the fund. An open-ended fund is equitably divided into units which vary in price in direct proportion to the variation in value of the funds net asset value. Each time money is invested new units are created to match the prevailing unit price; each time units are redeemed the assets sold match the prevailing unit price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Open-ended funds are available in most developed countries; however terminology and operating rules vary. For example in the U.S. they are called mutual funds, in the UK they are either unit trusts or OEICs (Open-Ended Investment Companies). Closed-end fund

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Closed-end Fund is a collective investment scheme with a limited number of units. New units are rarely issued after the fund is launched; units are not normally redeemable for cash or securities until the fund liquidates. Typically an investor can acquire units in a closed-end fund by buying shares on a secondary market from a broker, market maker, or other investor - as opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly (in exchange for either cash or securities) or redeeming shares (for cash or securities). The price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium (or discount) placed on it by the market. The total value of all the securities in the fund divided by the number of shares in the fund is called NAV. The market price of a fund share is often higher or lower than the NAV: when the fund's share price is higher than NAV it is said to be selling at a premium; when it is lower, at a discount to the NAV. Like a company going public, a closed-end fund will have an initial public offering of its shares at which it will sell, say, 10 million shares for Rs.10 each. That will raise Rs.100 million for the fund manager to invest. At that point, however, the fund's 10 million shares will begin to trade on a secondary market. Any investor who wishes to buy or sell fund shares at that point will have to do so on the secondary market. Except for exceptional circumstances, closed-end funds do not redeem their own shares. Nor, typically, do they sell more shares after the IPO (although they may issue preferred stock, in essence taking out a loan secured by the portfolio).

Equity Funds
Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold a large part of all amounts invested in mutual funds. Often equity funds focus investments on particular strategies and certain types of issuers. Debt Funds Debt funds are those that pre-dominantly invest in debt securities. They are also known as Income Funds. Debt securities comprise of long term instruments such as bond issues by central or state government, public sector organizations, public financial institutions and private sector companies. 36

 Funds of Funds
Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i.e., they are funds comprised of other funds). The funds at the underlying level are typically funds which an investor can invest in individually. A fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation services. The fees charged at the underlying fund level do not pass through the statement of operations, but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. The fund should be evaluated on the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor. Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in funds managed by other (unaffiliated) advisors. The cost associated with investing in an unaffiliated underlying fund is most often higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Recently, FoFs have be classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).

Stocks
In financial markets, a share is a unit of account for various financial instruments. The income received from shares is called a dividend, and a person who owns shares is called a shareholder. A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Stock typically takes the form of shares of common stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to

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receive a certain level of dividend payments before any dividends can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares". A shareholder is an individual or company that legally owns one or more shares. Shareholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company.

Trading
A stock exchange is an organization that provides a marketplace for either physical or virtual trading shares, bonds and warrants or other financial products where investors (represented by stock brokers) may buy and sell shares of a wide range of companies. There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange. There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers. Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a

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number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss. As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, discount or full service, handles the transaction. After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.

Bombay Stock Exchange (BSE)

As the first stock exchange in India, the Bombay Stock Exchange is considered to have played a very important role in the development of the country's capital markets. The Bombay Stock Exchange is the largest of 22 exchanges in India, with over 6,000 listed companies. It is also the fifth largest exchange in the world, with market capitalization of $466 billion. The Bombay Stock Exchange uses the BSE Sensex, an index of 30 large, developed BSE stocks. This index gives a measure of the overall performance of the Bombay Stock Exchange, and is closely followed around the world. Based on the Sensex, the BSE equity market has grown significantly since 1990. In addition to individual stocks, the BSE also has a market in derivatives, which was the first to be established in India. Listed derivatives on the exchange include stock futures and options, index futures and options, and weekly options. The Bombay Stock Exchange is also actively involved with the development of the retail debt market. The debt market in India is considered extremely important, as the country continues to develop and depends on this type of investment for growth. Until recently, the debt market in India was limited to a wholesale market, with banks and financial institutions as the only participants. The Bombay Stock Exchange believes that a retail market will bring great opportunities to individual investors through better diversification. The BSE is also one of the busiest stock exchanges in the world, currently ranking around number five in terms of annual transactions. The exchange has experienced explosive growth with a four-fold increase in trading volume over the last 15 years.

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History of the Bombay Stock Exchange: The Bombay Stock Exchange is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbai's Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Vision and Security of the BSE The vision of the Bombay Stock Exchange is "Emerge as the premier Indian stock exchange by establishing global benchmarks." That means the exchange is thinking big in terms of customer service and trading activity. That being said, the market has not only experienced explosive growth in terms of trading volume, but also in terms of overall return to investors. After compensating for inflation, the BSE has averaged a roughly 18% annual return when measured by Sensex - the most popular stock index in India - over the last 15 years. Other important indices originating from the Bombay exchange include BSE 100 BSE 500 BSEPSU BSEMIDCAP BSESMLCAP BSEBANKEX

Protecting the interests of investors dealing in securities is one of the primary objectives of the exchange. The exchange provides this additional security by ensuring remedy of grievances whether this is against member companies or member/brokers. Overall guidelines for the marketplace are established by the Securities and Exchange Board of India (SEBI).

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The Bombay Stock Exchange has a national reach in India, claiming a presence in over 400 towns and cities throughout the country. The exchange is operated through a unique and propriety computer system known as the "BSE on Line Trading System" or BOLT. The exchange has also received ISO 9001:2000 certification in the areas of surveillance and clearing / settlement functions. BSE Facts and Figures The follow are some of the facts and figures that can help you get a better feel for the volume of trading that occurs on the Bombay Stock Exchange: In 2007, the average volume of business conducted on the BSE was approximately $30 billion each month. The number of shares traded each month on the BSE is in the range of 40 - 50 million. The total market capitalization for the companies traded on the BSE is in the area of $1.6 trillion. All of the above dollar values are stated in USD. Following is the timeline on the rise and rise of the Sensex through Indian stock market history. 1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical fourdigit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results. 2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh. 3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by the then Finance Minister, Dr Manmohan Singh. 4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

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5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000mark as the BJP-led coalition won the majority in the 13th Lok Sabha election. 6000, February 11, 2000 On February 11, 2000, the infotech boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006. 7000, June 20, 2005 On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy [Get Quote], Reliance Capital [Get Quote], and IPCL [Get Quote] made huge gains. This helped the Sensex crossed 7,000 points for the first time. 8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk buying by foreign and domestic funds in early trading. 9000, November 28, 2005 The Sensex on November 28, 2005 crossed the magical figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors. 10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10K-mark on February 7, 2006. 11,000, March 21, 2006 The Sensex on March 21, 2006 crossed the magical figure of 11,000 and touched a life-time peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points. 12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000mark and closed at a peak of 12,040 points for the first time. 13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the magical figure of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days for the Sensex to move from 12,000 to 13,000 and 123 days to move from 12,500 to 13,000. 14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000 to the 14,000 mark.

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15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of 15,000 to touch 15,005 points in afternoon trade. It took seven months for the Sensex to move from 14,000 to 15,000 points. 16,000, September 19, 2007 The Sensex scaled yet another milestone during early morning trade on September 19, 2007. Within minutes after trading began, the Sensex crossed 16,000, rising by 450 points from the previous close. The 30-share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at 4659, up 113 points. The Sensex finally ended with its biggest-ever single day gain of 654 points at 16,323. The NSE Nifty gained 186 points to close at 4,732. 17,000, September 26, 2007 The Sensex scaled yet another height during early morning trade on September 26, 2007. Within minutes after trading began, the Sensex crossed the 17,000-mark. Some profit taking towards the end, saw the index slip into red to 16,887 - down 187 points from the day's high. The Sensex ended with a gain of 22 points at 16,921. 18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on October 09, 2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The index zoomed to a new all-time intra-day high of 18,327. It finally gained 789 points to close at an all-time high of 18,280. The market set several new records including the biggest single day gain of 789 points at close, as well as the largest intra-day gains of 993 points in absolute term backed by frenzied buying after the news of the UPA and Left meeting on October 22 put an end to the worries of an impending election. 19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by revival of funds-based buying in blue chip stocks in metal, capital goods and refinery sectors. The index gained the last 1,000 points in just four trading days. The index touched a fresh all-time intra-day high of 19,096, and finally ended with a smart gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670. 20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the back of aggressive buying by funds ahead of the US Federal Reserve meeting. The index took only 10 trading days to gain 1,000 points after the index crossed the 19,000-mark on October 15. The major drivers of today's rally were index heavyweights Larsen and Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among others. The 30-share index spurted in the last five minutes of trade to fly-past the crucial level and scaled a new intra-day peak at 20,024.87 points before 43

ending at its fresh closing high of 19,977.67, a gain of 734.50 points. The NSE Nifty rose to a record high 5,922.50 points before ending at 5,905.90, showing a hefty gain of 203.60 points. 21,000, January 8, 2008 The Sensex crossed the 21,000 mark in intra-day trading after 49 trading sessions. This was backed by high market confidence of increased FII investment and strong corporate results for the third quarter. However, it later fell back due to profit booking.

Sensex Constituents Name ACC Ltd. Ambuja Cements Ltd. Bajaj Auto Ltd. Bharat Heavy Electricals Ltd. Bharti Airtel Ltd. Cipla Ltd. DLF Ltd. Grasim Industries Ltd. HDFC HDFC Bank Ltd. Hindalco Industries Ltd. Hindustan Unilever Ltd. ICICI Bank Ltd. Infosys Technologies Ltd. Sector Housing Related Housing Related Transport Equipments Capital Goods Telecom Healthcare Housing Related Diversified Finance Finance Metal, Metal Products & Mining FMCG Finance Information Technology

44

ITC Ltd. Larsen & Toubro Limited Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. NTPC Ltd. ONGC Ltd. Ranbaxy Laboratories Ltd. Reliance Communications Limited Reliance Energy Ltd. Reliance Industries Ltd. Satyam Computer Services Ltd. State Bank of India Tata Consultancy Services Limited Tata Motors Ltd. Tata Steel Ltd. Wipro Ltd.

FMCG Capital Goods Transport Equipments Transport Equipments Power Oil & Gas Healthcare Telecom Power Oil & Gas Information Technology Finance Information Technology Transport Equipments Metal, Metal Products & Mining Information Technology

Life Insurance
Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money (SA) upon the occurrence of the insured event. In return, the policy owner (proposer) agrees to pay a stipulated amount (premium) at regular intervals. Insured events that may be covered include: Death (Natural or Accidental) Diagnosis of a critical illness Permanent/Temporary disability Requirement for long term care Withdrawal of Premium

45

Life Insurance Products

Plans of Insurance

Term Insurance Risk Cover Only No Survival Benefit Term Insurance

Endowment Survival Benefit Risk Cover

Term assurance is a straightforward protection tool. A policy holder insures his life for a specified term. If he dies before that specified term is up, his estate or named beneficiary (ies) receives a payout. If he does not die before the term is over, he receives nothing. In the past these policies would almost always exclude suicide. However, after a number of court judgments against the industry, payouts do occur on death by suicide after completion of one year (presumably except for in the unlikely case that it can be shown that the suicide was just to benefit from the policy). However, a death benefit will usually be paid if the suicide occurs after the two year period. The three key factors to be considered in term insurance are: o Sum Assured (protection or death benefit), o Premium to be paid (cost to the insured), and o Duration of coverage (term). Endowment Policy Maturity Benefit & Death Benefit An endowment policy is a life assurance contract designed to pay a lump sum after a specified term. Policies are typically with-profits or unitlinked. A full endowment is a with-profits endowment where the basic sum assured is equal to the death benefit at start of policy. A low cost endowment is a with-profits endowment policy with reduced basic sum assured (typically 1/3 of the target amount) with an element of life assurance. The idea is that the life assurance element and basic sum

46

assured repay the target amount on death. These plans were originally designed to act as a mortgage repayment vehicle. The variations of Endowment policy include: Childrens Plan Marriage Education

ULIP (Unit Linked Insurance Plan) Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time. ULIP provides multiple benefits to the consumer. The benefits include:

Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident Disability Critical Illness Surgeries Liquidity Tax planning

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Premium Underwritten By Life Insurers Insurer LIC Private Sector Total LIC Private Sector Total LIC Private Sector Total LIC Private Sector Total 2004-2005 First Year Premium 1165824 422309 1588133 Single Premium 899482 134148 1033630 Renewal Premium 5447422 216293 5663716 Total Premium 7512729 772751 8285480 2005-2006 1372803 754773 2127576 1478784 272194 1750978 6227635 481387 6709022 9079222 1508354 10587576

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Market Share of Life Insurers

First Year Premium
100 80 Percentage 60 40 20 0 2004-05 Year 2005-06
LIC Private Sector

49

Single Premium
100 80 Percentage 60 40 20 0 2004-05 Year 2005-06

LIC Private Sector

Renewal Premium
100 80
Percentage

60 40 20 0 2004-05 Year 2005-06

LIC Private Sector

50

Total Premium 100 80 Percentage 60 40 20 0 2004-05 Year 2005-06

LIC Private Sector

New Policies Issued: Life Insurers Life Insurer Private Sector LIC Total 2004-2005 2,233,075 23,978,213 26,211,198 2005-2006 3,871,410 31,590,707 35,462,117

Other Investment Products

Derivates In finance, a derivative is a financial instrument that is derived from an underlying asset's value; rather than trade or exchange the asset itself, market participants enter into an agreement to exchange money, assets or some other value at some future date based on the underlying asset. Examples of assets could be anything from bars of gold, to a stock, or even an interest rate. A simple example is a futures contract: an agreement to exchange the underlying asset (or equivalent cash flows) at a future date. The exact terms of the derivative (the payments between the counterparties) depend on, but

51

may or may not exactly correspond to, the behaviour or performance of the underlying asset. There are many types of financial instruments that are grouped under the term derivatives, but options/futures and swaps are among the most common. Options are contracts where one party agrees to pay a fee to another for the right (but not the obligation) to buy something from or sell something to the other. For example, a person worried that the price of his XYZ stock may go down before he plans to sell it may pay a fee to another person (the "writer" or seller of a put option) who agrees to buy the stock from him at the strike price. The buyer is using an option to manage the risk that his stock may go down, while the writer of the put option may be using the option to earn the fee income and may have the view that the stock will not go down. In contrast to a put option, a call option gives the buyer of the option the right to buy the underlying asset at a later date and at the specified price (this specified price is known as the option's strike). Later, contracts known as interest rate swaps appeared, where one party agrees to swap cash flows with another. For example, a business may have a fixed-rate loan, while another business may have a variable-rate loan; each of the businesses would prefer to have the other type of loan. Rather than cancel their existing loans (if this is possible, it may be expensive), the two businesses can achieve the same effect by agreeing to "swap" cash flows: the first pays the second based on a floating-rate loan, and the second pays the first based on a fixed-rate loan (in practice, the two will net out the amounts owing). By swapping the cash flow, each has "converted" or "swapped" one type of loan into another. Derivatives can be based on different types of assets such as commodities, equities or bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) see inflation derivatives or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the payoffs. The main use of derivatives is to either remove risk or take on risk depending if one were a hedger or a speculator. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. The main types of derivatives are futures, forwards, options and 52

swaps. Derivatives are increasingly being used to protect assets from drastic fluctuations and at the same time they are being reengineered to cover all kinds of risk and with this the growth of the derivatives market continues. It is, indeed, ironic that something set up to prevent risk will also allow parties to expose themselves to risk of exponential proportions. Commodity A commodity is something that is relatively easily traded, that can be physically delivered, and that can be stored for a reasonable period of time. It is a characteristic of commodities that prices are determined on the basis of an active market, rather than by the supplier (or other seller) on a "cost-plus" basis. Examples of commodities include not only minerals and agricultural products such as iron ore, crude oil, ethanol, sugar, coffee, aluminum, rice, wheat, gold, diamonds, or silver, but also so-called "commoditised" products such as personal computers. A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts. Commodities trading Commodities exchanges, usually trade futures contracts on commodities. Such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Speculators also buy and sell the futures contracts to make a profit and provide liquidity to the system.

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 Real Estate With the development of private property ownership, real estate has become a major area of business. Purchasing real estate requires a significant investment, and each parcel of land has unique characteristics, so the real estate industry has evolved into several distinct fields. Specialists are often called on to valuate real estate and facilitate transactions. Rising demand for real estate, corporatization of the sector, greater transparency, shift in the regulatory outlook have all contributed to the metamorphosis of real estate from an asset to an investment class. Investment returns in Real Estate have outstripped other investment avenues. Thus an investment foray into real estate through a fund was the need of the hour. Recent Developments Indian Real Estate to take off 50 mn sq.ft. of retail space to be developed by 2006-07 Leading corporates foray into real estate Property prices in some metros surge by 100% Mill lands turn into lifestyle destinations

IPO An initial public offering (IPO) is the first sale of a corporation's common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock exchange imposes heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares. If a company later sells newly issued shares (again) to the market, it is called a 'Seasoned Equity Offering'. When a shareholder sells shares it is called a "secondary offering" and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering. These terms are often confused. In distinguishing them, it is important to remember that only a company which issues shares can make a "primary offering". Secondary offerings occur on the "secondary market", where shareholders (not the issuing company) buy and sell shares with each other.

54

 Art Fund Art is an investment alternative that helps you diversify. Art as an investment can be a great hedge against inflation and does not follow the sometimes sudden market shifts of stocks and bonds. Quality art consistently appreciates over time. Why invest in art? Asset class has established its return credentials Market depth increasing every day Auctions now proven mechanism for liquidity Contemporary art grows as economies globalize: the story is still unfolding in India, China and Korea Strong resident focus now driving growth in these countries Insurance and logistics provide safety net Early mover scenario is still on offer.

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Model Portfolios
In preparing an Investment Program, the investor or the advisor would have to deal with investors at different stages of their life-cycle and therefore with different needs. Each type of investor may be advised to have some typically suitable model portfolio. Jacobs gives four different portfolios, summarized below. The exact percentage allocations have been recommended for the investors in the U.S.A. Besides, the percentage allocations can change depending upon specific facts about an investor, or also in the light of his changing conditions. However, the following four portfolios are still of general applicability and the mutual fund distributors in India are well-advised to consider them as the basis to develop similar model portfolios for Indian mutual fund investors. Investor Recommended Model Portfolio 50% in Aggressive Equity Funds 25% in High Yield Bond Funds, and Growth and Income Funds 25% in Conservative Money Market Funds 10% in Money Market 30% in Aggressive Equity Funds 25% in High Yield Bond Funds, and Long Term Growth Funds 35% in Municipal Bond Funds 30% in short-term Municipal Funds 35% in long-term Municipal Funds 25% in moderately Aggressive Funds 10% in Emerging Growth Equity 35% in conservative Equity Funds for capital preservation/income 25% in moderately Aggressive Equity for modest capital growth 40% in Money Market Funds

Young, Unmarried Professional

Young Couple with Two Incomes and two Children

Older Couple, Single Income

Recently Retired Couple

56

Investors in the Accumulation Phase: During this phase, clients are looking to build wealth because their financial goals are quite some time away and investments can be made for the longterm. Another point to be noted here is that the risk tolerance level for the investors can greatly influence the percentages. For this purpose, the earlier classification of the investors (based on the risk quiz) into the three main categories: Low risk, Moderate risk and High risk will be used. For such clients, the following asset allocation may be appropriate: Asset Diversified Equity, Sector and Balanced Funds Debt funds and Monthly Income Plans Liquid Funds Low Risk 40% 45% 15% Moderate Risk 60% 30% 10% High Risk 80% 15% 5%

Investors in the Transition Phase: During this phase, one or more of the clients goals are approaching and clearly in sight. If a salaried executive is planning to retire at 60 years of age, he should start preparing about 3 years in advance by gradually transitioning from growth to income generating investments. Likewise, a couple in their mid 40s who have children approaching the age of higher education or marriage, should gradually start converting some of their equity investments into income and cash funds to prepare for these financial commitments. Investors in the Distribution or Reaping Phase: This is the cashing out stage. For example, if the client has retired, investments need to generate income for a comfortable post-retirement life. Hence, the financial planner has to ensure there is enough investment in fixed income funds to support the client. If the post-tax returns expected are 8% per annum, then the client needs to set aside about 150times their monthly requirement in an income fund, and opt for a monthly dividend plan or systematic withdrawal plan.

57

Some investments should certainly be left in growth assets like equities, because only these can provide a hedge against inflation. This is because while expenses will rise over the years, the inflows from fixed income investments may not. All other things being constant, a typical asset allocation for clients in the retirement stage could be: Asset Diversified Equity, Sector and Balanced Funds Debt funds and Monthly Income Plans Liquid Funds Low Risk 10% 80% 10% Moderate Risk 20% 70% 10% High Risk 30% 65% 5%

If the cash inflow from income funds is not sufficient to meet the monthly retirement, a retired client can adopt a couple of strategies: Sell some of their fixed and hard assets, because this will release fresh cash flow into the system which can help fund the gap, or Make small monthly withdrawals from the principal of both their equity and fixed income investments to bridge the gap. There is no rule that clients should not gradually draw down on principal, as long as they dont outlive all their sources of money. In case of a client who wants to buy a home or fund a childs education, the financial planner can advise the client to liquidate a combination of equity and fixed income investments to come up with whats required. The decision on how of equity and fixed income funds to redeem should be determined by the clients other goals, what residual asset allocation is appropriate for these remaining goals, as well as the state of the markets (when equity markets are down, liquidating income funds may be a better option). Investors in the Inter-Generational Transfer Phase: Younger clients up to their early 50s would depend on life insurance policies to take care of the next generation in event of death. For older investors, who want to transfer their wealth, the recommended investment strategies will depend upon the beneficiaries: Children: If the children are grown up, then leaving behind a balanced combination of growth and income funds may be appropriate for them. 58

Grandchildren: If the grandchildren are young, then growth funds may be best, as this group has a lot of time available for the investment to grow in value. Charitable causes: Typically, income funds are best to support such endeavors, as they have the capacity to provide current income. Investors in the Sudden Wealth Stage: The financial planner should advise clients who acquire sudden wealth: To take into account the effect of taxes, because this one time windfall may be greatly reduced after taxes have taken their bite. To keep the money in safe, liquid investments while they take their time on deciding what to do with the money. This advice is very useful because clients tend to spend the money immediately, or just give it away recklessly in the first flush of getting a big amount. By giving themselves time, clients will act more rationally and they can then be advised to make the appropriate investments at a later stage. Financial Planning for Affluent Investors The wealthy investors can be classified into two groups: Wealth-Creating Individuals: For such investors, a 70% to 80% allocation to diversified equity and sector funds would provide the kind of aggressive plan that they may be looking for. It should be kept in mind that wealthy investors have a higher risk bearing capacity as even the incurrence of losses may not seriously impair their lifestyle or ability to fund their normal, routine expenses. Wealth-Preserving Individuals: For such investors, a conservative portfolio with a 70% to 80% exposure to income, gilt and liquid funds would be appropriate, with the remaining in lowrisk diversified equity or balanced funds. The financial planner should recommend a low-risk investment strategy for such clients, because these investors have enough already, do not need to bear any risk, and are likely to go through unnecessary trauma if their investments decline in value.

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Client Portfolios
Portfolio of Mr. X Age 40 Occupation Businessman (Automobiles) Salary 35 lakhs p.a.
Sr. No 1 2 3 4 5 6 Investment Product Life Insurance (Term) Mutual Funds Shares Fixed Deposits Gold PPF Total Amount 3,000,000 1,500,000 1,000,000 1,000,000 500,000 500,000 7,500,000

60

7% 7%

Portfolio of Mr. X

13%

40%

Life Insurance (Term) Mutual Funds Shares Fixed Deposits Gold

13%

PPF

20%

Mr. X is a moderate risk-taker. He invests majority of his money in safe investment tools like insurance, mutual funds, FDs, PPF etc. He has invested only Rs. 10 lakhs in shares, which is a mere 13% of his total investment. Thus one can safely assume that he prefer to play it safe. His investments in other products are detailed out in the above pie chart.
Sr. No 1 2 3 4 5 6 7 8

Mutual Funds SBI Magnum Contra Fund HDFC Equity Birla Tax Relief 96 Birla MIP DSP Cash Plus Reliance Equity Reliance Regular Saver Reliance Tax Saver Total

Amount 200,00 0 200,00 0 100,00 0 100,00 0 200,00 0 500,00 0 100,00 0 100,00 0 1,500,00 0

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7%

7%

Mutual Funds

13% 13%

33% 13%
SBI Magnum Contra Fund Birla MIP Reliance Regular Saver HDFC Equity DSP Cash Plus Reliance Tax Saver

7% 7%
Birla Tax Relief 96 Reliance Equity

However in case of Mutual Funds, Mr. X. has a slightly aggressive approach. He has invested 33% in Reliance Equity Fund, which is a diversified equity fund. His other investments are in debt based mutual funds and 14% in ELSS funds for the purpose of tax saving.

Sr. No 1 2 3 4 5 6 7

Shares

Reliance Energy Reliance Industries ICICI Bank HDFC Bank Infosys Technologies Reliance Power DLF Total

Amount 100,00 0 200,00 0 200,00 0 100,00 0 200,00 0 100,00 0 100,00 0 1,000,00 0

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10% 10%

10%

Shares

20%

20%

20% 10% Reliance Energy HDFC Bank DLF Reliance Industries Infosys Technologies ICICI Bank Reliance Pow er

When it comes to shares Mr. X. is very focused on the Blue-chip stocks. His ideology is simple i.e. to only invest in a company with strong fundamentals. One can see from the graph above that he has invested in the big companies of the Sensex. Portfolio of Mr. Y Age 42 Occupation Businessman (Export - Import) Salary 45 lakhs p.a.
Sr. No 1 2 3 4 5 6 Investment Product Life Insurance (Term) Mutual Funds Shares Fixed Deposits Gold Real Estate

Amount 3,500,00 0 2,000,00 0 1,500,00 0 1,000,00 0 500,00 0 2,000,00 0

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PPF Total

500,00 0 11,000,00 0

5% 18%

Portfolio of Mr. Y

31%

Life Insurance (Term) Mutual Funds Shares Fixed Deposits Gold Real Estate PPF

5% 9%

14%

18%

One can argue that Mr. Y. is a more of a risk taker than Mr. X. He has invested Rs. 15 lakhs in shares compared to Rs. 10 lakhs of Mr. Y. Overall he has invested a larger amount than Mr. X. He is more comfortable with investments. He has also invested in Real Estate. His investment products are detailed in the above graph.
Sr. No 1 2 3 4 5 6 7 Mutual Funds Franklin Prima Plus Reliance Equity Fidelity Tax Adv ING Income Fidelity Equity ABN MIP Reliance Tax Saver Total Amount 500,00 0 400,00 0 200,00 0 100,00 0 300,00 0 300,00 0 200,00 0 2,000,00 0

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Mutual Funds
10% 15% 25%

15% 5%
Franklin Prima Plus Fidelity Equity ABN MIP

20% 10%
Reliance Equity Fidelity Tax Adv Reliance Tax Saver ING Income

Being more prone to risk, Mr. Y. has invested more than 50 % of his mutual funds investment in Diversified Equity Funds. He has also invested 20 % in ELSS tax saver funds.

Sr. No 1 2 3 4 5 6 7

Shares

Amount 300,00 0 200,00 0 200,00 0 100,00 0 200,00 0 100,00 0 100,00 0

Larsen & Tubro Reliance Industries SBI TCS TISCO Wipro DLF

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8 9

Grasim ONGC Total

200,00 0 100,00 0 1,500,00 0

7% 20% 13%

Shares

7% 13% 7%

13% 7% Larsen & Tubro TCS DLF

13% Reliance Industries TISCO Grasim SBI Wipro ONGC

Mr. Y. also prefers to invest in blue-chip companies of the Sensex. He has diversified his investments in various sectors so as to broaden his investment horizon and minimize his risk.

References
Books: Association of Mutual Funds India (AMFI) Module Arindam Banerjee, Wealth Management, 2nd edition, ICFAI University Press, 2007

Periodicals: Security Markets module of NCFM

66

Financial Markets module of NCFM ICFAI University Press on Wealth Management

Websites: www.wikipedia.com www.investopedia.com www.moneycontrol.com www.valueresearchonline.com IRDA (Insurance Regulatory Development Authority) Mutual Fund websites

Annexure I
Questionnaire 1) Do you invest on your own or through a financial advisor? Own Financial Advisor 2) What percentage of your income do you normally save? 20% - 30% 30% - 40% 50%

40% -

More than 50%

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3) What percentage of your savings do you invest? 20% - 30% 30% - 40% 50%

40% -

More than 50%

4) Rank the following attributes, in the context of your financial decisionmaking, from 1 (Highest Priority) to 4 (Lowest Priority). Attributes Rank Risk Returns Liquidity Security 5) You just received a substantial sum of money. How would you invest it? a. In something that offers moderate current income and is very safe b. In something that offers high current income with moderate risk c. In something that offers high total return (current income plus capital appreciation) with moderately high risk d. In something that offers substantial capital appreciation even though it is high risk 6) Which of the following statements best describes your reaction if the value of your portfolio suddenly declined 15%? a. Very concerned - I cannot accept fluctuations in the value of my portfolio b. Would not bother me if the amount of income I received is unaffected c. Be concerned about a temporary decline even though I invest for long-term growth d. Accept temporary changes due to market fluctuation 7) Which of the following investments would you feel most comfortable owning? a. Certificates of Deposit b. Government securities c. Stocks of older, established companies d. Stocks of newer, growing companies

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8) How optimistic are you about the long-term prospects for the economy? a. Pessimistic b. Unsure c. Somewhat optimistic d. Very optimistic 9) What are the various financial instruments you invest in? Mutual Funds Insurance Stocks Gold Real Estate Commodities Derivatives Others __________________________ 10) How experienced are you at investing? (Tick any one) Inexperienced Experienced Moderately experienced

11)Have you already started investing in mutual funds? Company Scheme Amount

12).

What is your main purpose of investing?

For tax saving For receiving dividends For capital appreciation Others, please specify _________________________________ 13). What is your investment horizon? Upto 6 months Upto 1 year Upto 3 years

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 Upto 5 years Beyond 5 years

Name _____________________ Age _____________________ Occupation _______________ Annual Income ______________ PAN No _______________ Address _______________ _____________________ _____________________ Conact Nos _______________ _______________ No of Family Members _______________

Sign _____________ Date _____________ Place _____________

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