Wealth management

NAME- Dhruvil Shah /ROLL NO. - B009 /CLASS- MBA E & FB

Q1) What are the Objectives and Constraints related to wealth management? (3 marks)
Objectives and constraints are the basis of any investment policy statement and the wealth
managers/ financial advisors/ portfolio managers need to document this before allocation of
wealth or portfolio management. Anything what is included in the portfolio should be chosen
after the thorough understanding of the client and his investment objectives and constraints.
Objectives in wealth management is what the client wants to achieve with this assets in the
portfolio. It’s basically the purpose and why the investor wants to purchase these assets.
Objectives are of two types –

 Risk objectives – it’s basically concerned with the appetite or capacity the investor has
and is willing to take. Risk tolerance is the capacity and risk aversion is basically the
unwillingness to take risk.

 Investor’s ability
 Specify measure of risk
 Investor’s willingness

 Return objectives- it’s basically the returns the client needs or expects to get from the
investment done and has some plans with that in future

 Specify measure of return

 Required return
 Specific return objectives
 Desired return
Constraints in wealth management are basically factors or conditions that limit the investment
options available to an investor. The investor must have some constraints for example not to
invest in stocks which are associated with child labor or companies which have resorted to huge
amount of pollution etc. types of constraints are as follows-
 Time horizon
 Liquidity
 Legal and regulatory
 Taxes
 Unique circumstances
Q2) Consider a scenario where a new client, who is new to the equity markets seeks your advice. He
asks you about the ways in which you can participate in Primary & Secondary market. Do guide him
with the ways he can do so. (4 marks)

Firstly I would explain my client what is equity markets and how it works as he will get a better idea
about it before I guide him. I will explain him all the risk and return associated and also would
recommend him to research on his own how much ever he can and would suggest him to check markets
daily and talk to people with sufficient knowledge about markets.

Markets in equity is divided into two terms-

Primary markets- where securities are made and launched and it’s the start of the trading of the stock
like Initial public offerings ( IPO) , FPO’S, NFO’s etc. it’s basically sale of new stocks/ bonds to the public. .
These trades provide an opportunity for investors to buy securities from the bank that did the initial
underwriting for a particular stock. An IPO occurs when a private company issues stock to the public for
the first time.

For example, company LMN Inc. hires 10 underwriting firms to determine the financial details of its IPO.
The underwriters detail that the issue price of the stock will be 20- 25$. Investors can then buy the IPO
at this price directly from the issuing company.

Corporate entities raise funds from the primary market in three ways

 Public Issue - a stock exchange lists the securities and the corporation raises funds through
initial public offering (IPO).
 Rights Issue - existing shareholders are offered more shares at a discounted price and on a pro-
rata basis.
 Preferential Allotment - a corporate issues shares at a price which may or may not be related to
the current market price of the same security.

Types of primary market issues

 Public issue
 Initial Public Offer
 Further Public Offer
 Private placement
 Preferential issue
 Qualified institutional placement
 Rights issue
 Bonus issue

Secondary markets- these are markets where the above securities are traded by investors like New York
Stock exchange, Nasdaq etc. The defining characteristic of the secondary market is that investor’s trade
among themselves.
That is, in the secondary market, investor’s trade previously issued securities without the issuing
companies' involvement. For example, if you go to buy Tata steel stock, you are dealing only with
another investor who owns shares in Tata steel. Tata steel is not directly involved with the transaction.

In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity, this date
is often many years down the road. Instead, bondholders can sell bonds on the secondary market for a
tidy profit if interest rates have decreased since the issuance of their bond, making it more valuable to
other investors due to its relatively higher coupon rate.

I will recommend my client to first open the demat account with other documents related with it and as
mentioned about all products earlier so that he is ready to go with it. I would suggest him current IPO’s
and also ask him about where he wants to invest and suggest him stock accordingly. I would recommend
him to track the performances and news as well. I would also help him understand Fundamental analysis
and technical analysis and its use and where can he invest. He can even check money control application
and value research online website.

Q3) Prepare a return attribution note for your client who has invested Rs. 10 crores in a land 5 years
back and has sold the land for Rs. 13 crores today. Over the 5 years he received annual rental yield of
6% on his initial cost and incurred an annual maintenance cost of 20% of rental income. Calculate the
total returns he made and attribute the source of the return. (4 marks)

Initial investment in land for the client is Rs. 10 crores and he had it for 5 years and then he sold it for 13
crores today. Making a profit on the sale of land of about 3 Crores. He received other incomes in form of
rent 6 % and also had expenses like maintenance cost of 20% which were on an annual basis. Total
return he made for the land for 5 years are as follows-

Initial cost of land- Rs 10 crores

Annual Rental yield = 6% of initial cost (6% *10 crores = 60 lakhs) yearly

Annual Maintenance cost = 20% of rental income (20% *60 lakhs = 12 lakhs) yearly
Net yield for 1 year = Annual Rental yield income – Annual Maintenance cost (60 lakhs – 12 lakhs = 48
lakhs) per year net amount

Total net yield for 5 years = 5 years *48 lakhs = 2.4 crores

Income on sale of land after 5 years (selling cost – original cost) 13 crores – 10 crores = 3 crores

Total net yield after sale of land = Total net yield for 5 years (rental income-maintenance cost*5) +
income on sale of land = 2.4 crores + 3 crores = 5.4 crores

The source of return is-

 Rental income = 2.4 crores

 Land sale = 3 crores
 Total profit= 5.4 crores
Q4) Explain the possible business MOATs of a Dairy company e.g.: AMUL? Explain the areas where
MOAT could be present? (4 marks)

Before we begin, I would first explain what a moat is! Moat is basically like 2/3 or maybe more factors
that distinguish you from competitors over a long term or on a sustainable basis. Competitors find it
difficult to imitate that and you have the key competitive advantage.

Amul is an Indian dairy cooperative society based in the Indian state of Gujarat and is the top most
brand of India in mostly all dairy products. So being at top for so many years is not an easy thing, Amul
must have some moats that keep them at top!

There are 4 major competitive advantages of Amul over other brands:

 First and foremost is the supply chain because of the large numbers of dairy suppliers, Amul has
a tremendous strength and reliability in its supply chain. Hence it is able to produce such high
volumes. Even rural areas are covered by their distribution
 The second competitive advantage is the wide product portfolio due to which it can run Amul
shops and also have its products present in retail. Products like – biscuits, milk, butter, cheese,
ice creams, spreads etc. They have huge number of flavors in each segment
 The third competitive advantage is their brand equity- Everyone in the country uses Amul and
that’s why it’s called the taste of India. The ads are also very interesting that engages customers
a lot. Hardly there are complaints regarding their products.
 Fourth is the quality of taste and management which has not at all changed in so many years
and people use butter synonym to Amul. They keep the same taste while they enter into
segments with new flavors and ideas.

Q5) Mr. Mallya runs a casino and is 48 years old. His income is very volatile and has no other stable
source of income. However, he has recently sold a residential property which was gifted to him by his
parents few years back. He received Rs. 7 crores as sales consideration. He intends to invest this
amount in a manner that generates returns sufficient to meet his annual expenses of Rs. 25 lakhs and
also retain the real value of the investment. Assume inflation rate to be 6%. Prepare Investment
policy statement. (5 marks)

Assuming Mr. Mallya is old and is currently 48, we get to know that his income is very volatile and has
no other income options. He needs a stable source of income and something that can survive him
through his retirement plans. He would need at least 9.5 % or more returns on initial investment which
is around 3.5% * 7 Cr will give approx. 24.5 lakhs and inflation is 6% so a need of at least 9.5 % return is a
must!

He would invest in liquid assets more as he needs regular income and he also has his casino business
that provides volatile income so investing in other investment products is a safer bet to secure his
future.
 OPTIONS PERCENTAGE AMOUNT RISK AVERAGE EXPECTED TAX
RETURN

MUTUAL 20% 1.4 Crores Low- 20-30% 15-18%

FUNDS Medium

EQUITY 20% 1.4 Crores High 20-25% Dividends

are tax free

GOLD 15% 1.05 Crores Low 10-12% 20% + cess+

surcharge

LAND 25% 1.75 Crores Medium 10-12% 20%

PPF/ BANK FD 10% 0.7 crores Low 6-7% 18 to 20%

NCD 10% 0.7 Crores Low 8-10% 30%

We can also suggest our client about other products for example Index funds which has a 15 to 20 %( 5
years returns). It’s liquid as well as beats inflation in long runs!

Thank you!!