PMS | Investment Management | Investing

Summer Project Report On

“Portfolio Management”An Empirical Study on the Art of Investing

Acknowledgement

Table Of Contents
Topic Acknowledgement Executive Summary Company Profile Project Profile & Need for Study Objective of Study Research Methodology Data Collection Functioning of project Finding & Interpretation- Part 1 Finding & Interpretation- Part 2 Implementation Limitations Future Scope, Recommendations, Conclusions Bibliography Appendix Page no

Executive Summary:
Portfolio Management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors.. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund.

Returns:
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment).

Diversification:
Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond.

Risk - Factor:
Measurement of risk taken is an integral tool for Performance measurement of various Investments for the interest of Investors. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers etc.

This Project Planner would give us an insider’s view on “How to Invest Right in order to lay a Strong Foundation of Wealth” for one’s stable future prospects. The core study area of this project would follow a flow through a Four – Step Portfolio Construction Process, which would go as follows:

1. Construct Policy Statement

2. Examine economic Environment

4. Evaluate Portfolio Performance

3. Portfolio Construction

Company Profile: .

Asset management companies are responsible for the financial. Asset management companies act solely in the Investor’s Interest. where they are known as "portfolio management companies". Asset Management Companies: Asset management companies play the leading role for managed investment. . Asset management companies provide investors with more diversification and investing options than they would have by themselves. This Project examines some of the practical implications of risk management in the context of asset allocation. administrative and accounting management of products under management in collective investment schemes and under discretionary mandates. Asset allocation is the process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes. A company that invests its clients' pooled fund into securities that match its declared financial objectives.Project profile and need for study: “Portfolio Management”A Theoretical Study on the Art of Investing The practice of investing funds and managing portfolios should focus primarily on managing risk rather than on managing returns.

.R.Objective of the study: Every individual is populated with specific financial and social events that he needs to plan for. Investment & Protection) plan.I. It will enable him to articulate his needs. for an easy future living. He has his own Wealth G. convert them into financial goals and effectively plan for the same. (Goals. Retirement. The Objective of this Study is to study the Ideal Investment Pattern suitable for an Individual.P. to be met upon. based on the following parameters: Age Risk – Taking Profile Financial Goals This Project planner will help him understand his Investment requirements and start planning for the above mentioned events.

. that a detailed written study of all the five individuals would run into quiet a lengthy affair. interviewing five different people through the Risk – Profiler. while a lot of data would seem similar between a minimum of two consecutive Age – Brackets. as it was of the view. namely to study the Investment Pattern of a 23-year-old and a 51-year-old in detail. falling under five distinct Age – Brackets. being: Under 30 30 – 40 41 – 50 51 – 60 Above 60 This project would brief you on the Asset – Allocation for two employed Investors of the age – bracket: Under 30 and 51 – 60 respectively It was decided to take the two extreme limits. The study involved.Research Methodology: The Research Methodology used is Exploratory in nature. The study was conducted through a Risk Profiler and secondary data analysis.

Under 30 & 51 – 60.Thus we focus on the twp extreme age – brackets. . as these two individuals would display a very distinct behavior with regards to their Investment Response towards various Investment tools and the quantum of Money to be allocated against each Investment Vehicle being quite different on account of their differences with regards to their: Risk Level Need Age Tax Needs Benefits Family Responsibilities etc.

The Risk – Analyzer. . as Investors of the following classes: Conservative Moderate Balanced Aggressive Highly Aggressive The respondents were placed in any of the above relevant class of Investment Behavior in relation to their individual opinions and answers from the duly filled profiler which was matched against certain ratings (The Ratings Calculation is explained in the attached Profiler in the Appendix) that signified their risk related investment behavior. after being administered on the Respondents categorizes each of them on the basis of their risk – taking appetite.Data Collection: Risk-Analyzer Questionnaire The data collected through the Profiler provided for an Analysis of an Individual’s Risk – taking capacity through the Risk – Analyzer.

.Customer Profile The Customer Profile provided for details and analysis of an individual in areas as follows: Personal Details Income Level Number of Dependents His Financial Goals etc.

we present an overview of A four-step portfolio management process in order to chalk out a fairly balanced risk – return basket of securities for an investor : . rather.Functioning of the project: The asset allocation decision is not an isolated choice. it is a component of a portfolio management process. In this project.

As part of this. This background will help prevent them from making inappropriate investment decisions in the future and will increase the possibility that they will satisfy their specific. Such an objective is well suited for someone going to the racetrack or buying lottery tickets. objectives. When asked about their investment goal. An important purpose of writing a policy statement is to help investors understand their own needs. There are two important reasons for constructing a policy statement: It helps the investor decide on realistic investment goals after learning about the financial markets and the risks of investing. but it is inappropriate for someone investing funds in financial and real assets for the long term. it is too open-ended to provide guidance for specific investments and time frames. the policy statement helps the investor to specify realistic goals and become more informed about the risks and costs of investing. inappropriate decisions. and second. . Such a goal has two drawbacks: First. It creates a standard by which to judge the performance of the portfolio manager.” or some similar response. a policy statement will provide discipline for the investment process and reduce the possibility of making hasty.STEP – 1: A Policy Statement is a road map that guides the investment process. measurable financial goals. Constructing a policy statement is an invaluable planning tool that will help the investor understand his or her needs better as well as assist an advisor or portfolio manager in managing a client’s funds. “to make a lot of money. investors need to learn about financial markets and the risks of investing. While it does not guarantee investment success. people often say. Thus. it may not be appropriate for the investor. and investment constraints.

they are affected by numerous industry struggles. we should examine the macroeconomic impact of inflation and interest rates. We have all realised the critical role of expected inflation and nominal interest rates in determining the required rate of return used to derive the value of all investments. as reflected in the policy statement. . Thus. In the second step of the portfolio management process. The investor’s needs. We would expect these variables that are very important in microeconomic valuation to also affect changes in the aggregate markets. Economies are dynamic. and changing demographics and social attitudes. and financial market expectations will jointly determine investment strategy. politics. the manager should study current financial and economic conditions and forecast future trends.STEP – 2: The process of investing seeks to peer into the future and determine strategies that offer the best possibility of meeting the policy statement guidelines. the portfolio will require constant monitoring and updating to reflect changes in financial market Because this research is concerned with the macroeconomic analysis of security markets.

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and securities.STEP – 3: The Third & the heart of all steps of the portfolio management process is to construct the portfolio. With the investor’s policy statement and financial market forecasts as input. for a given level of expected return. Portfolio Construction is based on is based on certain true assumptions regarding investor behavior: 1. the advisors implement the investment strategy and determine how to allocate available funds across different countries. so their utility curves are a function of expected return and the expected variance (or standard deviation) of returns only. asset classes. This involves constructing a portfolio that will minimize the investor’s risks while meeting the needs specified in the policy statement. investors prefer higher returns to lower returns. Investors estimate the risk of the portfolio on the basis of the variability of expected returns. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. Similarly. investors prefer less risk to more risk. 4. Financial theory frequently assists portfolio construction. . Investors base decisions solely on expected return and risk. For a given risk level. 2. 5.

Because of changes in their net worth and risk tolerance. “a single asset or portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers higher expected return with the same (or lower) risk. individuals’ investment strategies will change over their lifetime.Under these assumptions. we review various phases in the investment life cycle. Through the below pictorial representation. or lower risk with the same (or higher) expected return. some general traits affect most investors over the life cycle. 1) Individuals can start a serious investment program with their savings. The four life cycle phases are shown (the third and fourth phases are shown as concurrent) and described here: . Although each individual’s needs and preferences are different.

if a firm increases its financial risk by selling a large bond issue that increases its financial leverage. no gain”? In the investment world. and such). no reward. it changes its position on the SML. SECURITY MARKET LINE The line that reflects the combination of risk and return available on alternative investments is referred to as the security market line (SML). whereas others welcome high-risk investments. The SML reflects the risk-return combinations available for all risky assets in the capital market at a given time.” How you feel about risking your money will drive many of your investment decisions. For example. Note that the SML does not change. Obviously. Investors would select investments that are consistent with their risk preferences. some would consider only low-risk investments. The risk-comfort scale extends from very conservative (you don’t want to risk losing a penny regardless of how little your money earns) to very aggressive (you’re willing to risk much of your money for the possibility that it will grow tremendously). it will move along the SML. its beta) will cause the asset to move along the SML as shown in the below graph. As the common stock becomes riskier. the comparable phrase would be “no risk. . Any change in an asset that affects its fundamental risk factors or its market risk (that is.1) THE RISK – RETURN SAGA: HOW MUCH RISK IS RIGHT FOR YOU? You’ve heard the expression “no pain. most investors’ tolerance for risk falls somewhere in between. Investors place alternative investments somewhere along the SML based on their perceptions of the risk of the investment. As you might guess. Investors will then require a higher rate of return. investors will perceive its common stock as riskier and the stock will move up the SML to a higher risk position. only the position of assets on the SML. if an investment’s risk changes due to a change in one of its risk sources (business risk.

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is the Investor’s Age – Risk combination. the main arena of focus of the research in this project. needs. The Risk – Analyzer incorporated various open – ended and closed – ended questions in relation to various parameters. namely: Under 30 30 – 40 41 – 50 51 – 60 Above 60 . an intricate Risk – Analyzer was drafted (A copy of the same has been enclosed in the Appendix section for reference).Procedure and analysis of data: In view of the above vital constraints.e. How old is the individual and how his age determines his risk – holding capacity and consequently the profound Roadmap that would guide his Investment process towards building up a corpus for his secure future. i. elements to be borne in mind while drawing out a proficient Portfolio for an Ideal Common Investor. Now. The Risk – Profiler was thus administered on five distinct individuals falling under different age – brackets. being: Personal Details Risk – Taking Profile Income Level Number of Dependents His Investment Areas & Preferences His Financial Goals etc.

. as Investors of the following classes: Conservative Moderate Balanced Aggressive Highly Aggressive The respondents were placed in any of the above relevant class of Investment Behavior in relation to their individual opinions and answers from the duly filled profiler which was matched against certain ratings that signified their investment behavior.This project would brief you on the Asset – Allocation for two employed Investors of the age – bracket: Under 30 and 51 – 60 respectively. after being administered on the Respondents categorizes each of them on the basis of their risk – taking appetite. The Risk – Analyzer.

in correlation to a certain percentage range that would justify the description of each exclusive Nature of Investing term as mentioned below. yet a proficient nature of investing criteria was conceptualized.100% PREFERENTIAL NATURE OF INVESTING Below Average Moderate High Very High Aggressive The above strategies gives us a broad guideline to determine an overall investment strategy for a class – specific investor.40% 41% . The following tabular content and each preferred nature of investing would be appropriately placed against each Investment tool. A generalized. that would vary with respect to the individual Investor’s utility towards the Investments and his category of being a Risk .20% 21% . Though a detailed study would be drawn to indicate which specific securities to purchase and when they should be sold. and through a detailed discussion with the guide at Reliance Money. it should provide guidelines as to the asset classes to include and the . This allocation is explained below in a tabular form as given below: PROPOSED RANGE 0% .80% 81% .60% 61% .An analysis of the secondary data collected through various Investment based books and websites.taker .

The asset allocation decision is very vital. very. from periods of time extending from the early 1970s to the late 1990s.relative proportions of the investor’s funds to invest in each class. using data from both pension funds and mutual funds. How important is the asset allocation decision to an investor? In a word.The studies all found similar results: About 90 percent of a fund’s returns over time can be explained by its target asset allocation policy. How the investor divides funds into different asset classes is the process of asset allocation. . Several studies have examined the effect of the normal policy weights on investment performance.

strongly defining the class of Investor that he has been bracketed under as per the results of his Risk – Profiler. and as against his scores being matched against the relevant ratings. Firstly. we came to the conclusion that the individual was to be placed under the Balanced Class of Investors i. The project-relevant details of the individual are given as follows: a) From the Risk-Profiler section of the Questionnaire (Refer to Appendix) being filled by the individual. He is known to be one who would prefer to take a balanced amount of risk in comparison to his returns from his Investment. and with the assistance of the earlier devised Nature of Investing criteria . This graph indicates an approximate perception and a recommendation for the individual’s Investment basket allocation. while framing their portfolios.e. in order to initiate the Asset – Allocation process for our concerned investor.Findings and Interpretations: Part-1 To illustrate the above framework.. b) Thus. a pie – diagram is graphed for the same. we take into account the findings of a 25-year-old investor through the Risk-Analyzer that was administered upon him. we discuss the investment objectives and constraints that may confront “typical” employed 25-year-old and 51-year-old investors.

this investor class being studied through vital secondary data and with the help of the rich experience in the field of Investments Study held by my guide.c) NOTE: The percentages mentioned in the below graph. based on the ongoing Consumer Behavior of a Balanced Class of Individuals. . are purely approximated statistics.

the above mentioned percentage allocation of the various Investment tools for the proposed 25-year-old investor in his portfolio is a generalized rational allocation. income details and financial goals. Thus. as tabled as follows: . this would be altered with an error margin of -5 to +5.However. depending upon his specific personal.

. an Optimal Portfolio is now proposed to the individual to roadmap a path that would reasonably help him achieve his financial and security goals: 1) INSURANCE: a) WHY INSURANCE? MY INSURANCE. including being a means to meet the individual’s long term goals. spouse retirement. parents health needs). retire debt.” Lack of insurance coverage can ruin the best-planned investment program. such as retirement planning.. Life insurance protects loved ones against financial hardship should death occur before our financial goals are met. a first step in a sound financial plan is to have adequate coverage “just in case. or invest for future needs (for example. The death benefit paid by the insurance company can help pay medical bills and funeral expenses and provide cash that family members can use to maintain their lifestyle. children’s education. Therefore. Life Insurance should be a component of any financial plan. On reaching retirement age. Although nobody ever expects to use his or her insurance coverage. you can receive the cash or surrender value of your life insurance policy and use the proceeds to supplement your retirement lifestyle or for estate planning purposes.With the data in hand and keeping the Balanced Asset-Allocation class proposed to him in mind. . Insurance can also serve more immediate purposes. one of the first steps in developing a financial plan is to purchase adequate life insurance coverage.

Term life insurance provides only a death benefit. based on the size of the excess premium and on the performance of the underlying investment funds. The policy’s cash value grows over time. Term insurance is the least expensive life insurance to purchase. ULIPs also offer features that no other investment instruments offer. although the premium will rise as you age to reflect the increased probability of death. the excess premium is invested in a number of investment vehicles chosen by the insured. ULIPs (Unit Linked Investment Plans) policies. Insurance companies may restrict the ability to withdraw funds from these policies before the policyholder reaches a certain age.b) CHOICE OF PLAN The individual can choose among several basic life insurance contracts. provide both a death benefit and a savings plan to the insured. the premium to purchase the insurance changes every renewal period. The premium paid on such policies exceeds the cost to the insurance company of providing the death benefit alone. ULIPs offer features such as: Top up Switch between funds Increase or decrease the protection level during the term of the policy Cover continuance option Surrender options Range of riders which can be attached to the main policy to provide you added protection .

ULIPs have higher costs associated with it in the initial years because of charges which go towards the policy charges. you should remain invested in the ULIP for the long-term of at least 6-10 years Investments in ULIPs attract tax benefits under Section 80C. They invest the premium in market-linked instruments like stocks. However. Maturity proceeds from ULIPs are 100% tax free. The returns and the lock-in period depend on the plan chosen. c) RETURNS: ULIPs are considered to be better for long-term investments because of the following reasons: Higher product costs in the initial years . However.ULIPs basically work like a mutual fund with a life cover thrown in. market fluctuations will tend to provide lower amount of returns as the amount invested would be slightly lesser in the first couple of years of the policy. long-term. overall charge structure for the term comes down substantially over a long period of time thus allowing greater allocation of your premium in the chosen funds. Also. but also have the least downside to them. corporate bonds and government securities. To get the best out of your ULIP. Market fluctuations can hamper returns in the short-term. . market linked investments not only yield very attractive returns.

His amount of investment into Insurance can increase over time. . with an increase in his age and overall income in his hands. Automobile and home (or rental) insurances provide protection against accidents and damage to cars or residences. preferably one of the good ULIP schemes. Disability insurance provides continuing income should you become unable to work. Thus. d)FEW PROFICIENT INSURANCE INVESTMENT PLANS: TATA AIG MAHALIFE HDFC FREEDOM 58 LIC’s JEEVAN LAKSHYA RELIANCE ULIP SCHEME etc. whose returns will not only help him reap goo returns. but also acts as a Life-cover and a Tax-saver.Insurance coverage also provides protection against other uncertainties: Health insurance helps to pay medical bills. our 25-year-old young investor can place aside around 20% of his Net Disposable Income for Investment purposes in Life Insurance.

GOOD STOCKS??: As the individual being placed In the Balanced Class. b) RETURNS: However one must not make the mistake of buying when the markets are up. Also the conservative policies followed by the RBI and Indian government have provided the necessary security to the Indian economy. Indian economy is still strong and the companies are still making profits. Equity stocks are known to have given a 30% rate of return YoY. is quiet young at age and thus has a god amount of risk – appetite (the fact that he is not married as yet also supports his increased risk capacity) he has the capacity to invest around 30% of his Net Disposable Income into pure stocks. Despite the market slowdown and crash in stock markets. thus shielding it from the global economy problems. Equities are at the top of the list of hot investment options.. Instead wait for the market to crash.EQUITY MARKETS: a) INVESTING IN STOCK MARKET. So despite all the surrounding doom and gloom.. Moreover Indian economy is not dependent on exports. which will help you buy good companies with strong fundamentals at bargain prices. Indian equities remain your best bet to make money. .

providing him a neat corpus in order to support his endeavor for his future marriage and buying a new house expenditure. the individual must understand certain ratios that describes the profitability and value of the said stock and then make the best possible stock selection. he may find it quiet cheap to own common stocks. In order to gain maximum returns against his stocks. The key ratios to watch out for would be: Price-Earning Ratio Earnings Per Share Dividend and Yield Return on Capital Employed c) CURRENT SECTOR-BASED SPECIALIZED STOCKS: Infrastructure Steel Banks . that would help him acquire capital appreciation at a later stage of his life.For a 25-year-old Investor.

There are many ways to invest in gold. Our investor may directly in bars and coins.6% The $100 gold stocks invested in 1971 would have grown to nearly $3800 dollars at the end of May 2009. fastest-growing form of gold investment is also the newest: gold traded in the form of a security on stock exchanges around the world. cost-efficient and secure way to access the gold market. generally referred to as “gold ETFs”. it could further increase the investment appeal of mining stocks. They may also hold gold in metal accounts with their bank in just the same way they could have a foreign currency account. but old and new research shows that judicious use can enhance investor returns without adding portfolio risk. The most popular. options. While the same amount in the S&P 500 INDEX would be worth around $3400. Gold stocks have delivered a 9. warrants and certificates. while the S&P 500 annualized returns has been 9.9%average annual returnsince 1971. Gold Exchange Traded Funds offer investors an innovative. through gold futures.THE RIGHT TIME TO ENTER GOLD EQUITIES!!! Conditions have improved for gold equities and with enhanced economic policy decisions. Gold stocks are among the most volatile asset classes. . Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges. without taking physical delivery of gold.

It is very necessary that the investors understand properly the conceptual framework of Mutual Fund and its operational features. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal . TEN ADVANTAGES OF INVESTING IN MUTUAL FUNDS Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of Schemes Well Regulated .MUTUAL FUNDS: Our investor in his early twenties has wide exposure benefit towards MUTUAL FUNDS – The hottest Investment arm in today’s Money Market. we recommend him to have around 35% of his NDI being placed in distinct return bearing Mutual Funds. a) WHY MUTUAL FUNDS? Mutual Fund both conceptually and operationally is different from other savings instruments. professionally managed basket of securities at a relatively low cost. Considering his risk-return profile. Mutual Funds invest in instruments of capital markets which have different riskreturn profile. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. as suggested.Anybody with an investible surplus of as little as a few hundred rupees can invest in Mutual Funds.

could divide and break his money to be invested into mutual funds into the following Schemes: Balanced/ Sectoral Schemes Money Market / Liquid Schemes Tax Saving Schemes (Equity Linked Saving Scheme – ELSS) . To begin with. He needs to place your money judiciously in different schemes to be able to get the combination of growth. in the form of Systematic Investment Plan (SIP). funds that will give him lump sum returns after a few years. Our young investor. As always. income and stability that is right for this 23-year-old investor. and in line with his future financial and security goals. He has to bear in mind that any one scheme may not meet all your requirements for all time. we recommend him to invest in a couple of good Mutual Funds.CHOICE OF FUND & RETURNS: As a young investor. higher the return you seek higher the risk you should be prepared to take.

certificates of deposit. commercial paper and interbank call money. short term instruments such as treasury bills. the NAV of these schemes may not normally keep pace or fall equally when the market falls. These schemes generally invest in safer. It is ideal for our investor looking for a combination of income and moderate growth. In a rising stock market. Returns on these schemes may fluctuate. b) CURENT PROMINENT SCHEMES : RELIANCE GROWTH FUND RELIANCE INFRASTRUCTURE FUND HDFC TOP 100 FUND FRANKLIN TEMPLETON BLUE CHIP FUND Money Market / Liquid Schemes: This would Aim to provide easy liquidity. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. And thus it is ideal for our respondent as a means to park their surplus funds for short periods or awaiting a more favourable investment alternative. preservation of capital and moderate income to our investor. depending upon the interest rates prevailing in the market.Balanced / Sectoral Schemes: a) This aims to provide both growth and income by periodically distributing a part of the income and capital gains they earn. .

it has been seen that they yield healthy returns. 2006 the investment limit in ELSS has been increased to Rs.1. 1961. From March 31st.000/. These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.ELSS: a) ELSS as the name clearly suggests is a savings scheme linked to equity markets. 00. c) CURENT PROMINENT ELSS SCHEMES : Canara Robecco Tax Saver Fund Reliance Tax Saver . 5000 is locked in for three years. Although.and this entire investment is eligible for deduction under sec 80C of Income tax Act. ELSS gains are linked to the market performance. The minimum amount of Rs.

the rate of interest for the loan will be a few notches higher than that of the FD. either to buy a house or to fund for his further education. b) RETURNS AND PROMINENT RATES: With many private players and with the evolution of NBFCs on the way. your rate of interest will not be affected. as your money is locked for just 5 years while your capital is safe. While his FD continues to earn interest.BANK / FIXED DEPOSITS: a) In order to enjoy a capital safety. we offer a recommendation of about 10-12% of our young investor’s NDI to be locked in a Fixed Deposit offered by banks. with the stock markets in the continuous downward spiral. . as the rate of interest for the particular term is constant. we have the latest Mahindra Finance Ltd. since the bank has the assurance of claiming your deposit if he fails to repay the loan. So you are guaranteed a regular income. The interest earned on an FD is fixed. Then he can avail of a loan by offering his FD as collateral. Hence this type of loan works out cheaper than any other type of loan.9. offering attractive rates. Even if the rates increase or decrease subsequent to your opening an FD. Offering a handsome rate of as high as 10% on its Fixed Deposit Scheme. banks came out with various FDs. when our investor would be looking for a secured loan.5% The tax saving FD offers the best of both the world. making it an ideal investment option for those looking for regular income. In future. The bank return rates stay close to a neat number of about 7% . In recent times.

or if you cannot withstand the volatility of these assets. Don’t be taken in by the high returns offered by equities or gold if your goal is short term (within 2-3 years of investment). don’t put your entire corpus in those funds.1: We have thus managed to help our 23-year-old investor in educating him on investing the Right Way to lay a strong foundation for wealth! It is always important for us to understand our goals as well as our risk appetite.CONCLUSION TO PART . as inflation tends to erode the value of your investment. Similarly. just because income funds tend be safe. .

. This individual will want less risk exposure than the 25-year-old investor. because her earning power from employment will soon be ending. she may need some current income from her soon-to-retire portfolio to meet living expenses. she will need protection against inflation. she will not be able to recover any investment losses by saving more out of her paycheck. Depending on her income from social security and a pension plan. The project-relevant details of the individual are given as follows: a) From the Risk-Profiler section of the Questionnaire ( Refer to Appendix) being filled by the individual. . Given that she can be expected to live an average of another 20 years. we came to the conclusion that the individual was to be placed under the Moderate Class of Investors i. A risk-averse investor will choose a combination of current income and capital preservation strategy.Findings and Interpretations: Part-2 We now take into account the findings of a 51-year-old investor through the Risk-Analyzer that was administered upon her. and as against his scores being matched against the relevant ratings. a more risk-tolerant investor will choose a combination of current income and total return in an attempt to have principal growth outpace inflation.e.

based on the ongoing Consumer Behavior of a Balanced Class of Individuals. this investor class being studied through vital secondary data and with the help of the rich experience in the field of Investments Study held by my guide. that this individual’s Investment basket allocation would be devised on the basis of the earlier graphed (pie-diagram) asset – allocation strategy. a pie – diagram is graphed for the same. strongly defining the class of Investor that he has been bracketed under as per the results of his Risk – Profiler. in order to initiate the Asset – Allocation process for our concerned investor. are purely approximated statistics. and with the assistance of the earlier devised Nature of Investing criteria e) NOTE: The percentages mentioned in the below graph. . This graph indicates an approximate perception and a recommendation for the individual’s Investment basket allocation. being: d) Thus.This implies.

the above mentioned percentage allocation of the various Investment tools for the proposed 51-year-old investor in his portfolio is a generalized rational allocation.MODERATE CLASS However. as tabled as follows: . depending upon his specific personal. income details and financial goals. Thus. this would be altered with an error margin of -5 to +5.

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These ULIPs would give her the best of both worlds. the obvious reason being her present age. she could very well adopt for two ULIPs. as well she has a less risk – appetite as well. namely: Reasonable returns in her hands A cover in the form of the Sum Assured for her family. the “Age – factor” plays a strong determining role in almost all her Investment decisions.With the data in hand and keeping the Moderate Asset-Allocation class proposed to him in mind. She has a whole family to look after. in case of the Investor’s demise b) CHOICE OF FUNDS & RETURNS: As in the case of our 51-year-old investor. in view of the above instances. Thus. an Optimal Portfolio is now proposed to the individual to roadmap a path that would reasonably help him achieve his financial and security goals: 1)INSURANCE: a) Our said Investor being 51 years old has a shorter life – span and would soon reach the Retirement stage. her husband is already a retired individual. and not to forget. our Investor must invest around 20 – 25% in a couple of ULIPs as part of her Investment Bag. which could be as follows: Growth Fund Bond Fund (Pension Plan) .

thus giving her a higher liquidity and a higher returns’ opportunity.Growth Fund: A good popular ULIP Growth Fund will complement her Investment strategy as it would give her timely regular returns. thus enabling her to build a corpus that would support her financial goal with regards to her son’s marriage. So the Individual’s tax – matters are also taken care of. Bond Fund: A Pension Plan in her portfolio would help her to reap sufficient funds to meet her post – retirement needs. . Maturity proceeds from ULIPs are 100% tax free. “The reason behind allocating a Growth – Bond Fund ULIPs is to her best advantage: What the Investor earns from a Growth Fund could be very well transferred to a Bond Fund. Investments in ULIPs attract tax benefits under Section 80C. And nevertheless. The returns and the lock-in period depend on the plan chosen.

.2) EQUITY MARKET INVESTMENT a) As this individual will want less risk exposure than the 25-year-old investor. she will not be able to recover any investment losses by saving more out of her pay check. b) CHOICE OF STOCKS AND RETURNS This amount could be very well invested in stock and bond investments to meet income needs (from bond income and stock dividends) and to provide for real growth (from equities). therefore we suggest a nominal rate of about 15 – 20% of Her NDI into equity stocks. because her earning power from employment will soon be ending.

the whole gamut of merits that Mutual Funds offer to its Investors in recent times since its inception. Although she may receive regular checks from her pension plan and social security. b) CHOICE OF FUNDS & RETURNS: Our soon-to-be-retired 51-year-old investor has a greater need for liquidity.3) MUTUAL FUNDS: a) As we have seen quite briefly while detailing the portfolio construction of the 23-year-old investor. we have thus recommended about 35% of the individual’s NDI to be invested into various schemes of Mutual Funds matching our individual’s needs and lifestyle. and how it has exclusive benefits to people of all age – classes. She will want some of her portfolio in liquid securities to meet unexpected expenses or bills. namely: Liquid Funds Growth Funds Dividend Funds Infrastructure Funds . Therefore. Not to forget. it is not likely that they will equal her working paycheck. we would recommend her to ideally go in for couple of mutual funds through an SIP. her son’s marriage and retirement fund plans on the cards.

. will cause an increase in the value of the units of the fund. Growth/Dividend/Infrastructure Funds: Though on the slightly riskier side. but nevertheless. our Investor could very well think of having an SIP in any of the above mentioned three funds. thus ensuring sound liquidity measures that our Investor earnestly looks out for in her Investment planner.Liquid Funds: A Liquid Mutual Fund is a must – have for our 51-year-old individual. thus generating regular income. With the inflation showing downward trend. the interest rates are set to fall. “No pains. This in turn. ELSS: An ELSS scheme could very well offer tax incentives to the investor under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds. No gains” and also with the recent upward trend that the market seems to be working on lately. This fund shall have the Investor’s money being predominantly invested in Debt and Money Market Instruments.

It is safe. 1 lakh is insured by Deposit Insurance Credit Guarantee Corporation. Bank Fixed Deposits are the safest and most secure option for our experienced investor. This makes an FD an ideal investment option for the elderly. as your money is locked for just 5 years while your capital is safe. if the bank fails. who would soon be approaching retirement. So in case. liquid and fetches high returns. Thus. . a Fixed Deposit Scheme is ideal. her money is still secured. The tax saving FD offers the best of both the world.4)BANK/ FIXED DEPOSITS Investors with shorter time horizons like our 51-year-old investor generally favor more liquid and less risky investments because losses are harder to overcome during a short time frame. FD is comparatively lot safer than equities. In a fixed deposit saving scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest (currently between 8% and 10% depending on banks). When you want to invest your hard earned money for a longer period of time and get a regular income. as the investor’s deposit up to Rs.

It can also rise in value overtime and prove a good investment in the cash value of the home or land that you buy. . Once you have done the research. You should carry good insurance on the property and be prepared to deal with additional costs and other situations as they arise. at other times it will decrease the value.EXTRAS FOR OUR 51-YEAR-OLD: Is Real Estate a Good Investment? Real estate investing is providing retirement incomes for many. You need to price your rental property so that all of these fees and other expenses are fully covered. Don't buy that first real estate investment property without thorough study of the process. Find out if any roads are planned close to the land you purchase and consider how that will affect the property value. When purchasing real estate as an investment. At times it will help make the land more valuable. but it will also cost you money. This takes away part of the burden of caring for your property. you need to consider the cost of taxes and the way that you plan on renting it out. Real estate is a great investment option. you should be able to make the correct decision about purchasing it for investment. If you are purchasing land that you plan to sell at a later date you need to research the land deed thoroughly. Often it is easy to go through a rental company and contract through them for repairs and rent collection. It can generate an ongoing income source. Additionally you should take the first few months of surplus money and set it aside to cover the cost of repairs on the property. It has brought excellent returns on investment to those who have learned the tools and pitfalls well. However you need to be sure that you are ready to begin investing in real estate.

again driving up rent prices if supply cannot keep pace. your property can also be improved in order to garner a better price and more profit when you do choose to liquidate it as an investment. real estate has shown to be an excellent source profit through the increase in investment property value over time. . and it varies significantly by area. keeping the property interesting to renters will at the very least help you to retain value. Of course. inflation that drives up home construction costs will also drive up rents. Should you be fortunate enough and have the experience to locate a valuepriced property. this percentage of return has exceeded that of dividend yields on Average 2) Increases in Value Due to Appreciation Historically. 3) Improving Your Investment Property . this is an immediate way to increase your net worth and the value of your investment portfolio. Historically. Population growth creates housing demand. As trends and styles change. 5) Paying Off Your Mortgage As you pay down your mortgage. one cannot predict that this trend will always be true. the increase in equity can be used for other purposes and investments. Upgrades to the appearance and functionality of a real estate investment property can significantly increase value. Though it's frequently accessed by selling the property. a real estate investor can also take out equity loans if the terms are right and use those funds for more investing or other purposes. 4) Inflation is Your Friend When it Comes to Rent Though your fixed mortgage will remain constant over time.More Value at Sale While it's providing rental income cash flow.Top 5 Ways that Real Estate Investment Property Returns Profits: 1) Cash Flow from Rental Income As with a stock that pays dividends. a properly selected and managed rental property will provide a steady stream of income in the form of rental payments.

The above Asset – Allocation idea framed in the project would hopefully help in its endeavor towards guiding Indian investors in transacting in financial markets and those availing its financial services. when it comes to guiding Investors on how to strike a right balance between various Investment alternatives. .Implementations The above mentioned strategies for both the Investors can prove to be an insight.

Future scope. Recommendation and Conclusion .

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which withstands volatility. This approach would result in differing allocations to the various asset classes. but by your competence of knowing which funds and stocks to pick. A simple methodology to construct such a portfolio is through funds requirement planning projections. which may also be blended into this approach to yield a portfolio that provides security and reasonable returns. must be after close deliberation as to whether the fund management style and intent suits the investor’s perceptions and goals. CONCLUSION: Warren Buffett recommends that 'broad diversification is used by people to protect themselves against their own ignorance. The individual’s projected liquidity requirements over the immediate two-to-three years should be funded through investments in liquid/debt funds. you should concentrate your portfolio into equities (stocks & mutual funds) as they achieve the highest return. the debt and equity funds. depending on the existing liquidity requirement/wealth ratio.Thus. A disciplined approach to investing will result in a well-balanced portfolio. .' If you know what you are doing (high financial intelligence). And you can achieve low risk not by simply spreading your money around. The remainder should be invested in a blend of diversified Tequity and sector funds. The allocation made to both. rather than the conventionally followed age parameters. My Ideal Portfolio Mix for Long-Term Wealth Creation: The simplest way to create long-term wealth from financial markets is to persist with a permanent portfolio allocation.

ALL AT A GLANCE…. .

com “Investment Analysis & Portfolio Management” by Riley Brown .amfiindia.org www.Bibliography www.com www.investopedia.moneycontrol.irdaindia.com www.

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