Key parameter of valuing real estate

1. Ready reckoner rate

This rate is the government’s estimate of minimum property values in various locations. It is It’s very
clear, that ready reckoner price is the FAIR PRICE (which is fair value) set by govt itself. Now builders
can charge the premium on that fair price depending on market condition, demand, quality and their
goodwill and their exploitation power :). So the market price (the actual prices prevailing in market),
will definitely be always higher than than ready reckoner prices (benchmark) . Now if the benchmark
itself is higher at any given point of time and also keeps increasing over years, the market price
quoted by builders will also be high. the minimum price on which the government will charge stamp
duty and registration fees. Market rates of properties are almost always higher and property prices
in an area tend to increase, when the RR rate is expected to be increased. It is also beneficial for
buyers to purchase property in an area, where the gap between the RR and market rates is relatively
smaller

2. Tier 1/2/3 cities/ location

1. Tier I cities have a developed, established real estate market. These cities tend to be highly
developed, with desirable schools, facilities, and businesses. These cities have the most
expensive real estate.
2. Tier II cities are in the process of developing their real estate markets. These cities tend to be
up-and-coming and many companies have invested in these areas, but they haven't yet
reached their peak. Real estate is usually relatively inexpensive here; however, if growth
continues, prices will rise.
3. Tier III cities have undeveloped or nonexistent real estate markets. Real estate in these cities
tends to be cheap, and there is an opportunity for growth if real estate companies decide to
invest in developing the area

3. RERA (real estate regulatory authority)- Since developers will now be required to work within the
strict framework of the regulatory body, supply will reduce and only those project will be launched
which are likely to complete within the promised timeframe. On the other hand, due to the strict
regulatory framework, government incentives for the buyers and increased consumer confidence,
there will an increase in the demand. And eventually, with reduced supply and increasing demand,
there is a high chance that the residential market will soon witness an increase in property prices. It
is now mandatory for the developers of all ongoing projects, to disclose the size of their apartments,
on the basis on carpet area (i.e., the area within four walls). This includes usable spaces, like kitchen
and toilets.

4. Stakeholders- developers- background , projects done, brand name , political connections –

permisions required, political connections lead to reduction in permission cost, easy to get
Occupation certificate, people who invest in the project

5.Leasing- if people start leasing , the price of the flats will come down since people will reduce
buying the flats.

6. connectivity- what transport and other facilities are connected near it

Types of mutual funds

1)ELSS

An equity linked savings scheme, or ELSS, is a tax saving vehicle as well as an equity instrument. Such
funds have diversified portfolios where the fund manager can invest in stocks of his choosing –
small, mid and large caps from all sectors. This tax saving instrument has the shortest lock in period
of just three years,

2) Sector funds

Sector funds concentrate their investments in a single sector, such as FMCG, financial services,
healthcare and technology. These are sectors which an investor would find represented in a
diversified equity fund.. The volatility of such funds is much more than a regular equity diversified
fund.

3) Equity diversified

These funds are exactly what their name signifies – they invest across sectors. However, investors
will need to look at the market cap. Funds focused on small- and mid-cap stocks should not be the
core holding in your portfolio. What should be a core holding in your portfolio is one or two large-
cap funds. The main primary purpose of such funds is to provide a stable base that does not require
much adjustment.

4) Global funds

This category is extremely diverse. Some global funds can be categorised as sector funds that scout
for stocks globally. For example, a gold fund would invest in gold mining stocks across the globe. In a
similar vein you have funds focused on stocks in specific areas - mining, commodities, agriculture
and energy. There could be funds focused on a particular geography such as Europe, Asia, Brazil,
China, Japan or the U.S. They could also be thematic by looking at emerging markets.

5) Hybrids

Here you have balanced funds which allocate at least 65% of their portfolio to equity, so that
for tax purposes they can qualify as equity funds. These are great funds for investors starting
out as they get an automatic allocation to debt and equity by investing in one fund. Or, if an
investor already has an equity fund and wants a meager exposure to debt in his portfolio, he
could opt for a balanced fund.
index Fund
An index fund is a fund whose returns are matched with the market index
component. These funds are passive in nature. Index funds generally have
low expense ratio because of which they tend to outperform various other
indexes. However, one should know that these funds consist of moderately
high risk.
The fund of funds (FOF) strategy aims to achieve broad diversification and appropriate asset

allocation with investments in a variety of fund categories that are all wrapped into one fund.
These are fund of funds characteristics that attract small investors who want to get better

exposure with fewer risks compared to directly investing in securities

Debt funds

Gilt Funds:

Gilt funds invest in Government securities with varying maturities. Average maturities of government
bonds in the portfolio of long term gilt funds are in the range of 15 to 30 years.. The returns of these
funds are highly sensitive to interest rates movements. The NAVs of gilt funds can be extremely
volatile. The primary objective of Gilt Funds is capital appreciation

Income Funds:

Income funds invest in a variety of fixed income securities such as bonds, debentures and government
securities, across different maturity profiles. This enables them to earn good returns in different
interest rate scenarios. However, the average maturities of securities in the portfolio of income funds
are in the range of 7 to 20 years. Therefore, these funds are also highly sensitive to interest rate
movements.

Short Term Debt Funds:

Short term bond funds invest in Commercial Papers (CP), Certificate of Deposits (CD) and short
maturity bonds. The average maturities of the securities in the portfolio of short term bond funds are
in the range of 2 – 3 years.. Short term debt funds are suitable for investors with low risk tolerance,
looking for stable income.

Credit Opportunities Funds:

The fund managers lock in a few percentage points of additional yield by investing in slightly lower
rated corporate bonds.. The average maturities of the bonds in the portfolio of credit opportunities
funds are in the range of 2 – 3 years. T. Credit Opportunities funds are suitable for investors with low
risk tolerance, looking for slightly higher income than short term debt funds.

Fixed Maturity Plans:

Fixed Maturity Plans (FMPs) are close ended schemes. In other words investors can subscribe to this
scheme only during the offer period. The tenure of the scheme is fixed. This is done to reduce or
prevent re-investment risk. FMPs are suitable for investors with low risk tolerance, looking for stable
returns and tax advantage over an investment period of 3 years or more.

Liquid Funds:
Liquid fund are money market mutual funds and invest primarily in money market instruments like
treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of
providing investors an opportunity to earn returns, without compromising on the liquidity of the
investment. Typically they invest in money market securities that have a residual maturity of less than
or equal to 91 days. Withdrawals from liquid funds are processed within 24 hours on business days.

Monthly Income Plans:

Monthly income plans are debt oriented hybrid mutual funds. These funds invest 75 – 80% of their
portfolio in fixed income securities and the 20 – 25% in equities. Monthly income plans can generate
higher returns from pure debt funds. However, the risk is also slightly higher in monthly income.

Need for life insurance and explain any 2 types

. Risk Coverage: Insurance provides risk coverage to the insured family in form of monetary
compensation in lieu of premium paid.
2. Difference plans for different uses: Insurance companies offer a different type of plan to the
insured depending on his need for insurance. More benefits come with the more premium.
3. Cover for Health Expenses: These policies also cover hospitalization expenses and critical illness
treatment.
4. Promotes Savings/ Helps in Wealth creation: Insurance policies also come with the saving plan
i.e. they invest your money in profitable ventures.
5. Guaranteed Income: Insurance policies come with the guaranteed sum assured amount which is
payable on happening of the event.
6. Loan Facility: Insurance companies provide the option to the insured that they can borrow a
certain sum of amount. This option is available on selected policies only.
7. Tax Benefits: Insurance premium is tax deductible under section 80C of the income tax Act, 1961.

Types

1. Term Insurance or Term Plan

Term insurance or term plan is a type of life insurance plan that provides coverage for a specific period.
In case of demise of the insured during the policy tenure, the nominee receives death benefit (sum
assured). If the policyholder survives the entire policy term, no payout will be provided. Term plans
provide life cover with no profits/ savings component. The premiums are much cheaper in a term
insurance than other Life Insurance plans.

2. Whole Life Policy

This type of policy provides permanent life insurance. Whole life policy offers a savings component
(also known as cash value), and lifelong protection cover as long as the insured pays premiums. Under
this policy, beneficiaries receive a death benefit after the death of the insured person. By paying
regular premiums, the policyholder gets a complete life cover.
3. Endowment Plan
It is a life insurance plan which not just covers the life of the insured, but also helps them save regularly
for a specific time period so that they can get a lump sum amount on the maturity of the policy in case
they survive the policy term. an endowment plan pays out the sum assured along with profits in case
of an eventuality during the policy term as well as on survival of insured. The profits are the result of
investing the premiums in the asset market. Another difference is, endowment plans come with higher
fees and premiums for paying out sum assured with profits in both scenarios – death or maturity.

Parameters of valuing an art

1. Past record of sales- estimates are made by looking at what a comparable piece of art sold
for recently,
2. Most of the pieces available through auction at galleries- Valuations for art sold at the
market's top auction houses usually carry more weight than valuations from less established
houses, as most of the top houses have hundreds of years of experience.[17][18]
3. Many galleries give price protection for new artists.
4. Individual purchase would be purely on negotiations.

5. Artist- artists were more important than others and therefore their works will have more
value than others. The prolificity of the artist affects the value as well. All things being
equal, an work by an artist who produced more will not hold the same value as one who
produced less.

6. Subject- Although it’s a matter of taste to some degree, certain subjects will generally sell
better than others, therefore increasing the value

7. Condition- Restorations of any kind will decrease the value of art, in fact some collectors
will only pursue un-restored works., the better the condition the higher the value, but like
all other factors on this list.

8. Size-Size matters in art. Not to say that bigger is always better, however it does represent
a certain level of skill that often adds value to a work.

9. Market- The art market is fluid and in a booming economy, art and other luxury goods
become more sought after. Conversely, in a declining economy, the same piece could sell
for half of its value.

1. Top-down approach –
Top-down investing is an investment analysis approach that involves looking first at the
macro picture of the economy, and then looking at the smaller factors in finer detail. After
looking at the big-picture conditions around the world, analysts next examine the general
market conditions followed by particular industrial sectors to select those that are forecast
to outperform the market. From this point, they further analyze the stocks of specific
companies to choose potentially successful ones as investments by looking last at a
particular company's fundamentals. Top-down approaches prioritize macroeconomic or
market-level factors most.
When looking at the bigger picture, investors use macroeconomic variables, such as GDP,
trade balances, currency movements, inflation, interest rates and other aspects of the
economy. Then it works down a level to identify high-performing sectors, industries, or
regions within the macroeconomy. Based on these factors, top-down investors allocate
investments from efficient diversified asset allocations, rather than by analyzing and betting
 on specific companies. For example, if economic growth in Asia is better than the domestic
growth in the United States, an investor might shift his assets internationally by purchasing
exchange-traded funds (ETFs) that track specific Asian countries.
Top-down investing may produce a more long-term or strategic portfolio, including
more passive indexed strategies, while a bottom-up approach may lead to
more tactical, actively managed strategies.

2. Bottom-up approach –
focuses on selecting specific companies that are doing well, no matter what the prospects
are for their industry or the economy. Bottom-up investing is an investment approach that
focuses on the analysis of individual stocks and de-emphasizes the significance of
macroeconomic cycles and market cycles. In bottom-up investing, the investor focuses his
attention on a specific company and its fundamentals, rather than on the industry in which
that company operates or on the greater economy as a whole. This approach assumes
individual companies can do well even in an industry that is not performing, at least on a
relative basis.Bottom-up investing forces investors to consider microeconomic factors first
and foremost. Most of the time, bottom-up investing does not stop at the individual firm
level, although that is the dimension where analysis begins and where the most weight is
given. Industry group, economic sector, market and macroeconomic factors are brought into
the overall analysis in turn, but starting from the bottom and working your way up in scale.
5. Common stock approach of investment
Couldn’t find
5.b. Diversification is the only way to earn higher return at lower risk,
however too much diversification may even make fund return lower?
Diversification is a technique that reduces risk by allocating investments among various
financial instruments, industries, and other categories. It aims to maximize return by investing
in different areas that would each react differently to the same event.
1. Minimising risk of loss – if one investment performs poorly over a certain
period, other investments may perform better over that same period, reducing
the potential losses of your investment portfolio from concentrating all your
capital under one type of investment.

2. Preserving capital – not all investors are in the accumulation phase of life;
some who are close to retirement have goals oriented towards preservation of
capital, and diversification can help protect your savings.

3. Generating returns – sometimes investments don’t always perform as

expected, by diversifying you’re not merely relying upon one source for income.

Disadvantages of diversification
1. But just as diversification can limit your downside by averaging out risk and
volatility across a group of investments, it can also limit your upside. As your
level of diversification increases, your returns will be more likely to mimic the
market average.
 2. It's also possible for diversification to increase your risk if it leads you to
purchase investments that are risky or that you don't understand very well.
For example, an investor who lacks exposure to pharmaceutical companies,
gold miners, hedge funds, or emerging market economies and knows nothing
about these (risky) fields, might make a mistake by investing in them purely
for the sake of diversification.
3. A highly diversified portfolio can also be more time-consuming to manage
than a less-diversified portfolio because you'll have more investments to
follow and trade, plus more layers of diversification to make sure you're
adhering to.
4. Transaction costs could also be higher if maintaining your diversification
requires you to micromanage and trade more frequently.
5. Finally, while diversification can reduce risk, volatility, and heartburn better
than non-diversification, it doesn't always work as well as hoped. During the
2008-2009 financial crisis, for instance, pretty much every stock fell
substantially, and asset classes that had historically performed differently from
each other moved in tandem. The relative inefficacy of diversification during
financial crises can come as a shock.

https://efinancemanagement.com/mergers-and-acquisitions/diversification

How much is too much? This is the diversification question that often
comes up. Portfolio theory states 25-30 stocks are needed for efficient
diversification and the best risk-return trade off. On the other hand,
veteran long-term investor, Warren Buffett says that diversification is for
those who don’t know what they are doing (investing in).
Too much of diversification
There is always the danger that in a bid to reduce risk of exposure to one type of asset, company, or
market; you end up investing in too many companies across too many markets and asset classes.

What is the danger in doing so? diversifying too much can lead to lower-than-expected returns. The
risk with adding too many companies or having every type of asset in your portfolio is that the
positive performance of some will be negated by the lack of performance from the others.

The adequate level of diversification is a debatable topic and can also differ across assets and
geographies.

In case of real estate, having four or five properties in different cities is adequate diversification. But
even this level of diversification is hard to achieve for the retail investor, given the price of each
 purchase and limited availability of managed funds. On the other hand, in case of equity, owning
four or five large-cap funds that have 40-50 shares each may be considered over-diversification

https://www.livemint.com/Money/dvv39OemfWlZ2zPB9RGobL/Diversifi
cation-How-much-is-too-much.html

Value Investing:
Value investing is an investment strategy where stocks are selected that trade for less than
their intrinsic values. Value investors actively seek stocks they believe the market has
undervalued. Investors who use this strategy believe the market overreacts to good and bad
news, resulting in stock price movements that do not correspond with a company's long-
term fundamentals, giving an opportunity to profit when the price is deflated.

Read more: Value

Investing https://www.investopedia.com/terms/v/valueinvesting.asp#ixzz5TFO6gAEp

For principles of value investing i.e a bigger answer go to this link: (can’t copy
text from this link)
https://www.privatebanking.societegenerale.com/en/media/investment-
strategy/equity-solutions/equity-nutshell/value-investing-understanding-
the-principles/

Portfolio Performance Evaluation Methods

The objective of modern portfolio theory is maximization of return or minimization of risk. In this
context the research studies have tried to evolve a composite index to measure risk based return. The
credit for evaluating the systematic, unsystematic and residual risk goes to Sharpe, Treynor and
Jensen.

The portfolio performance evaluation can be made based on the following methods:

1. Sharpe’s Measure
2. Treynor’s Measure
3. Jensen’s Measure

1. Sharpe’s Measure

Sharpe’s Index measure total risk by calculating standard deviation. The method adopted by Sharpe is
to rank all portfolios on the basis of evaluation measure. Reward is in the numerator as risk premium.
Total risk is in the denominator as standard deviation of its return. We will get a measure of portfolio’s
total risk and variability of return in relation to the risk premium. The measure of a portfolio can be
done by the following formula:

SI =(Rt – Rf)/σf

Where,
 SI = Sharpe’s Index
 Rt = Average return on portfolio
 Rf = Risk free return
 σf = Standard deviation of the portfolio return.

2. Treynor’s Measure

The Treynor’s measure related a portfolio’s excess return to non-diversifiable or systematic risk. The
Treynor’s measure employs beta. The Treynor based his formula on the concept of characteristic line.
It is the risk measure of standard deviation, namely the total risk of the portfolio is replaced by beta.
The equation can be presented as follow:

Tn =(Rn – Rf)/βm

Where,

 Tn = Treynor’s measure of performance

 Rn = Return on the portfolio
 Rf = Risk free rate of return
 βm = Beta of the portfolio ( A measure of systematic risk)

3. Jensen’s Measure

Jensen attempts to construct a measure of absolute performance on a risk adjusted basis. This
measure is based on Capital Asset Pricing Model (CAPM) model. It measures the portfolio manager’s
predictive ability to achieve higher return than expected for the accepted riskiness. The ability to earn
returns through successful prediction of security prices on a standard measurement. The Jensen
measure of the performance of portfolio can be calculated by applying the following formula:

Rp = Rf + (RMI – Rf) x β

Where,

 Rp = Return on portfolio
 RMI = Return on market index
 Rf = Risk free rate of return

https://www.investopedia.com/articles/08/performance-measure.asp for examples

Behavioural Finance

Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to

explain stock market anomalies, such as severe rises or falls in stock price. The purpose is to identify
and understand why people make certain financial choices. Within behavioral finance, it is assumed
the information structure and the characteristics of market participants systematically influence
individuals' investment decisions as well as market outcomes.
Behavioral finance encompasses many concepts, but four are key: mental accounting, herd
behavior, anchoring, and high self-rating. Mental accounting refers to the propensity for people to
allocate money for specific purposes. Herd behavior states that people tend to mimic the financial
behaviors of the majority, or herd. Anchoring refers to attaching a spending level to a certain
reference, such as spending more money on what is perceived to be a better item of
clothing. Lastly, high self-rating refers to a person's tendency to rank him/herself better than others
or higher than an average person. For example, an investor may think that he is an investment guru
when his investment performs optimally but will dismiss his contributions to an investment
performing poorly.

One of the terms that tends to pop up more and more when people talk about money and
economics is “behavioral finance.”

Behavioral finances is a relatively new field of study. The idea is to look at the reasons that people
make the money choices they do (those choices are often irrational). Behavioral finance applies
psychological theories, particular those related to cognition and behaviorism, to economics and
personal finance.
Behavioral finance is all about trying to understand biases in human behavior when it comes to
money. By extension, the personal decisions that people make about money can be extended to
influence the economy. With more and more individuals participating in the economy through
consumerism as well as investing, it is little surprise that what makes humans “tick” when it comes
to money is of prime interest.

Key Concepts in Behavioral Finance

It helps to understand some of the key concepts in behavioral finance if you want to grasp what this
study is all about. Here are some of the main ideas that stem from behavioral finance:

 Mental Accounting – This is the tendency of people to designate money for a certain purpose.
For instance, they divide up money and treat it differently, depending what “account” it’s in. So,
money in a savings jar is treated differently than money meant for debt repayment. People tend
to say that money in that savings jar can’t be used for another purpose, even if it means paying
down debt at 15% interest.
 Herd Behavior – Following the crowd is something quite common, and it results in some of the
most interesting effects. As the larger group does something — like buy a “hot” stock, or sell in a
panic when the market drops — individuals tend to follow suit. Breaking herd mentality is one of
the best things you can do for your own finances.
 Anchoring – This is the idea that you attach your spending level to a specific reference. You
might think that a “good” bottle of wine should cost a certain amount of money. You might see
the most expensive wine on a restaurant’s list costs $100 a bottle. Normally, you would only
spend $25 on a bottle of wine. But since you are now anchored to the idea of “the best” costing
$100, you don’t want to spend “only” $25. Instead, you “compromise” on a $45 bottle of wine.
You spent more than you wanted, because of that anchor. The same thing happens with clothes,
shoes, homes, and a number of other purchases.
 Belief in Being “Above Average” – Most people rate their intelligence as “above average.” At
least that’s what my Psychology Ph.D. husband tells me. He also points out that most people see
success as something that they caused. Setbacks, though, are blamed on external forces. So, an
investor might believe that he or she is a stock picking genius when an investment performs
well. However, when that investment tanks, that same person, rather than believing that he or
she is below average at stock picking, blames the drop on “the market” or “the economy.”
ART funds

Art funds are generally privately offered investment funds dedicated to the generation of returns
through the acquisition and disposition of works of art. They are managed by a professional art
investment management or advisory firm who receives a management fee and a portion of any
returns delivered by the fund.

The underlying characteristics of art investment funds are diverse and vary from fund to fund. While
all art funds utilize some form and degree of a traditional “buy and hold” strategy, art funds differ in
their aggregate size, duration, investment focus, investment strategies and portfolio restrictions.

The unifying factor of all art investment vehicles is their focus on the art market, which is
characterized by a lack of regulatory authority, deficient price discovery mechanisms, the non-
transparency of the market and the subjective value and illiquid nature of fine art. Proponents of art
investment funds argue that it is these very characteristics that generate the significant arbitrage
opportunities within the market that seasoned art professionals can exploit for the benefit of the
fund’s investors. Likewise, critics of art investment funds in turn point to such characteristics as
denoting art as the riskiest asset class, thereby creating the potential for substantial investment
losses among the fund’s investors.

nlike mutual funds and other regulated investment vehicles, art funds are not restricted by contract
or under law in their choice of investment strategies, and therefore they can and do employ a varied
basket of investment strategies. As a result, it is important to understand the differences between
the various strategies as each strategy or combination thereof have varying degrees of risks and
rewards.

The major strategies typically utilized by art investment funds include traditional “buy and hold”
strategies; “geographic arbitrage”, which aim to exploit differences in price realization for certain
artists’ works in different geographic locations; “artwork driven” strategies, which seek to profit
from issues impacting a specific artwork’s offered price (such as issues relating to its condition,
provenance, title, etc.); “regional art” strategies, which concentrate on investing in art from a
particular geographic region (i.e., Chinese art); “period strategies”, which focus on investing in a
particular period of art (modern, contemporary, impressionist, etc.); “emerging artists” strategies,
which center around the investment in artists that are not yet established and therefore have the
potential for rapid price appreciation; “intrinsic value” strategies, which involve investing in works by
artists perceived by the fund manager to be selling at deep discounts to their actual or potential
value; “leveraging” strategies, which involve borrowing on the art held by the art fund and using
such funds to acquire additional art expected to produce returns greater than the borrowing costs
during the term of the loan; “distressed art” strategies, which focus on the acquisition of artworks at
deep discounts from collectors facing bankruptcy or insolvency; “co-ownership” strategies, which
involve the art fund acquiring works jointly with other third party investors to share the risk of a
particular investment and provide for further diversification of the art fund’s investment portfolio;
“showcasing” strategies, which seek to increase the value of the fund’s art portfolio by arranging for
the placement of such works in important museum shows; “bulk buying” strategies, which involve
buying large lots of art in order to attain better pricing and lower transaction costs; and “medium”
strategies, which center on the investment in a single form of media of art (i.e. photography) for
which the art fund manager has particular expertise and deal flow.

Most art fund managers employ a diversified investment approach using more than one strategy
simultaneously to realize gains for the fund’s investors. In doing so, the art fund manager is able to
overweight or underweight the fund’s various strategies to reflect trends in, and to capitalize on
available opportunities within, the art market.

It is worth noting that many of the foregoing strategies are impacted by both the number of
available artworks satisfying the investment criteria of the art fund and the amount of capital that an
art fund is able to successfully employ before the returns to be made from a particular strategy
diminish. Accordingly, many art funds seek to limit the amount of capital they will accept.