Professional Documents
Culture Documents
FINANCE
DOCTOR
Course objectives
FINANCE
DOCTOR
WEALTH
FINANCE
DOCTOR
Identifying Values → Goals
n Retirement
n Education
n Housing
n Protection
FINANCE
DOCTOR
Quantifying Needs
RETIREMENT
Visualize retirement expenses in relation to current expenses
FINANCE
TOTAL EXPENSES 35000 30000 D O C T O R
Quantifying Needs
TOTAL RETIREMENT MONTHLY EXPENSES 30,000
TOTAL RETIREMENT ANNUAL EXPENSES 360000
Inflation rate assumption 6%
no of years 20
inflation factor 3.21
Taxation assumption 10%
Inflation adjusted retirement requirement 1155600
Inflation & tax adjusted retirement requirement 1284000
FINANCE
DOCTOR
Organizing Information-
Score card
INCOME ASSETS
EXPENSES LIABILITIES
FINANCE
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Income
INCOME
Active sources
employment salary
professional income
business income
Passive sources
rent from property
investment income
royalties
any other
COMBINED INCOME
Deductions
Taxation
Pension Contribution
any other
NET INCOME
FINANCE
DOCTOR
Expenses – Latte factor
EXPENSES
Food
Clothing
Housing
Children related
Health & Insurance
Transportation
Appliances
Discretionary
any other
TOTAL EXPENSES
FINANCE
DOCTOR
Liabilities – Debt management
LIABILITIES
Short term
credit card loan
borrowings on life insurance
personal loan installment
accrued income taxes
other obligations
Long term
home loan principal yet to be repayed
loans to purchase investmnt assets
loans to purchase personal assets
TOTAL LIABILITIES
FINANCE
DOCTOR
Assets –Most powerful
ASSETS
Liquidity 12 mths basic expense
short term deposits
liquid funds
Safety current income
bonds
saving schemes
real estate on rent
long term
provident fund,pension plans
rbi bonds
real estate for own usage
fixed term deposits
gold, jewellery
Yield Enhancing
stocks-direct equity
stocks-mutual funds
bonds
bond funds
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS FINANCE
DOCTOR
As Is
SCORE CARD
INCOME Monthly in Rs. ASSETS
Active sources Liquidity 12 mths basic expense amount present return
employment salary short term deposits 50000 3%
professional income liquid funds 0
business income Safety current income generating
Passive sources bonds 0
rent from property saving schemes 150000 7%
investment income real estate on rent 0
royalties long term
any other provident fund,pension plans 1250000 8%
rbi bonds 0
Deductions real estate for own usage 0
Taxation fixed term deposits 150000 5%
COMBINED INCOME post taxn. 55000 gold, jewellery 300000 3%
Provident Fund Contribution 15000 Yield Enhancing
stocks-direct equity 150000 15%
stocks-mutual funds 0
bonds 0
bond funds 0 6%
real estate for investment 0
commodities 0
art,antique 0
investible part of insurance policy 100000 4%
NET INCOME 40000 TOTAL ASSETS 2150000
EXPENSES LIABILITIES
Food 7000 Short term
Clothing 4000 credit card loan 0
Housing 3000 borrowings on life insurance 0
Children related 8000 personal loan installment 0
Health & Insurance 2000 accrued income taxes 0
Transportation 3000 other obligations 0
Appliances 3000 Long term
Discretionary 5000 home loan principal yet to be repayed 0
any other 0 loans to purchase investmnt assets 0
loans to purchase personal assets 0
FINANCE
TOTAL EXPENSES 35000 TOTAL LIABILITIES 0
DOCTOR
If ‘As Is’ continues
FINANCE
DOCTOR
Things can be different
n Higher returns are possible at
minimal risk and make significant
difference
FINANCE
DOCTOR
Power of Compounding
n For example, if 12 lakhs is
required for children s education in
10 years:
Rate of Return Monthly saving
6% Rs. 7322
15% Rs. 4367
18% Rs. 3622
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DOCTOR
Power of Compounding
Time / 8% 15%
Annualized
returns
15 years 29 lakhs 56 lakhs
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Inter Relationships
INCOME Monthly in Rs. ASSETS
Active sources Liquidity 12 mths basic expense amount present return
employment salary short term deposits
professional income liquid funds
business income Safety current income generating
Passive sources bonds
rent from property saving schemes
investment income real estate on rent
royalties long term
any other provident fund,pension plans
rbi bonds
Deductions real estate for own usage
Taxation fixed term deposits
COMBINED INCOME post taxn. gold, jewellery
Pension Contribution Yield Enhancing
stocks-direct equity
stocks-mutual funds
bonds
bond funds
real estate for investment
commodities
art,antique
investible part of insurance policy
NET INCOME TOTAL ASSETS
EXPENSES LIABILITIES
Food Short term
Clothing credit card loan
Housing borrowings on life insurance
Children related personal loan installment
Health & Insurance accrued income taxes
Transportation other obligations
Appliances Long term
Discretionary home loan principal yet to be repayed
any other loans to purchase investmnt assets
loans to purchase personal assets
FINANCE
TOTAL EXPENSES TOTAL LIABILITIES
DOCTOR
Asset Quadrant-
Allocation is the key
decision
FINANCE
DOCTOR
Personal Cycle
n Accumulation stage
n Transition stage
n Reaping stage
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DOCTOR
Personal Constraints
n Liquidity
n Safety
n Current income
FINANCE
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Assets –Most powerful
ASSETS
Liquidity 12 mths basic expense
short term deposits
liquid funds
Safety current income
bonds
saving schemes
real estate on rent
long term
provident fund,pension plans
rbi bonds
real estate for own usage
fixed term deposits
gold, jewellery
Yield Enhancing
stocks-direct equity
stocks-mutual funds
bonds
bond funds
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS FINANCE
DOCTOR
Business Cycle
Consists of economic
expansions followed by
contractions and revivals which
merge into the expansion stage
of the next cycle
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Business Cycle Stage &
Asset Allocation
FINANCE
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What is stock?
n Stocks – Ownership
FINANCE
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STOCKS
FINANCE
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Total Nominal Return
Stocks
Indexes, 1801 – 2001
$8,800,000
Bonds
$13,975
Gold
$14.38
1801 2001
FINANCE
DOCTOR
Comparative Indian Returns
(As of 30-06-2005)
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Low Risk
Price
Time
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International Experience for Stocks
n USA
n Germany
n Japan
FINANCE
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What explains the consistency of
worldwide stock returns?
FINANCE
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Risk Profiling
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Market Timing
Should we be always
invested in stocks?
FINANCE
DOCTOR
Yes, except when stocks are
severely over valued and
when personal constraints are
present
FINANCE
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Bluechip fund
FINANCE
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Returns
n Dividends
n Capital gains
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Risks
n Company specific
n Sector specific
n Market level risk
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Valuation
n P/E
n P/B
n Dividend Yield
n Market Value/GDP
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DOCTOR
Valuation Example
FINANCE
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Indian Equity Markets
Strong long term potential
FINANCE
DOCTOR
Advantage Asia
Mixed economic data out of US, Europe and Japan. Concerns
remain on structural imbalances, especially in a high oil price and
inflation scenario
Multiple growth engines are likely to emerge with the Asian region
in particular leading the way
FINANCE
DOCTOR
Global Scenario- Growth in Brics
Goldman Sachs: Over the next 50 years, Brazil, Russia, India
and China (BRICs) could together be larger than the G6 countries
by 2039.
China and India offer an unique advantage of low cost outsourcing and a vast
domestic market in a world of scarce growth FINANCE
DOCTOR
2010 - 2030 : Favourable
Demographic Bulge
India Demographic Profile China Demographic Profile France Demographic Profile
(2020) (2020) (2025)
Age group
80+ 80+ 80+
75-79 75-79 75-79
70-74 70-74 70-74
65-69 65-69 65-69
60-64 60-64 60-64
55-59 55-59 55-59
50-54 50-54 50-54
45-49 45-49 45-49
40-44 40-44 40-44
35-39 35-39 35-39
30-34 30-34 30-34
25-29 25-29 25-29
20-24 20-24 20-24
15-19 15-19 15-19
10-14 10-14 10-14
5-9 5-9 5-9
0-4 0-4 0-4
-60
60 -40
40 -20
20 0 20 40 60 -60
60 -40
40
40 -20
20 0 20 40 60 -3
3 -2
2 1
-1 0 1 2 3
Mn people Mn people Mn people
Demand growth in consumer items over the next few years to remain strong
FINANCE
DOCTOR
The growth surge
70 C onsumer loans to GDP
62 62
60
Economic reform has raised product 53
52
affordability through price stability 49
50
Phil.
Taiwan
Thailand
Malaysia
India
Indonesia
Korea
Singapore
HK
Source: CLSA
FINANCE
DOCTOR
Services India s strength
14
Indian IT Software & Services Exports (US$bn)
12.2
12
2.6
IT explosion creating traction in real
estate of over 1 million square feet per 2 1.8
FINANCE
DOCTOR
Indian equities offer sustainable
growth paradigm
India An economic superpower in the making as demographics
and consumerism play out
FINANCE
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Industry leaders are now
24
(%) value creators
22
Return on equity
20
18
Value created
16
14
Current c ost of Equity
12
10 Cost of Equity
8
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 05CL 06CL
Source: CLSA
Capex phase in the late nineties sets foundation for value creation
FINANCE
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Favourable indicators for
investment cycle
4500
Outstanding mfg. investments (Rsbn)
15
10
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Tax changes support rise
in equity ownership
120
Distribution of financial savings by households (%)
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
Currency Deposits
Claims on Govt Insurance funds
Providend and pension funds Shares and debentures
FINAN CE
DOCTOR
India The bottom line
Economic future is bright
Per capita income expected to double by 2010 will have cascading effect on
companies across sectors
India and China together expected to become a market 5 times the size of today s
United States in purchasing power terms in 25 years
Under ownership of equity assets will lead to higher allocation in future as risk
perceptions change FINANCE
DOCTOR
How to invest in stocks?
n Current valuation
n Comparative yields
n Time horizon
n Diversification
n When to take profits?
FINANCE
DOCTOR
Mutual fund Vs Direct equity
n Debate redundant
n Personal choice of control vs
convenience
n Basic principles of
diversification and time
horizon should be followed
FINANCE
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What is a mutual fund?
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Equity Fund Style
Large
Mid
Small
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Types of Mutual Funds
n Diversified equity
n Index
n Tax planning
n Sectoral
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RANKINGS
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Active Vs Passive
FINANCE
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Bluechip Composition
Franklin India Bluechip fund jan 31, 2005
no. name % P/E
1 Grasim 6.5 13
2 Infosys 6.19 36
3 SBI 5.9 9.3
4 ITC 5.5 19
5 HPCL 5.4 9
6 Hindalco 5.3 14
7 Reliance 5.2 12.3
8 BPCL 4.6 12
9 Satyam 4.5 19.5
10 TISCO 4.2 7.6
Weighted P/E 15.5
FINANCE
DOCTOR
Prima Composition
Franklin Prima jan 31,2005
no. name % P/E
1 Indian rayon 7.5 26
2 LIC housing fin. 6.5 13.3
3 IPCA labs 5.5 11.2
4 eicher motors 4.4 17
5 MICO 3.9 17.4
6 goodlass nerolac 3.8 14
7 amtek auto 3.4 25
8 birla corp. 3.2 18.5
9 GE shipping 3.1 4.6
10 raymond 2.9 10
Weighted P/E 16.4
FINANCE
DOCTOR
INVESTMENT TAXATION
10 lakhs to be invested:
Franklin Bluechip 2 lakhs
Fidelity Fund 2 lakhs
HDFC Equity 3 lakhs
Franklin Prima 4 lakhs
FINANCE
DOCTOR
Conclusion
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Debt
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Debt
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Fixed Income Securities
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Bond
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Characteristics
n Steady instruments
n Moderate returns
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Unique proposition
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Types of bonds
worthiness
n Maturity
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Types of bonds
n Government bonds
n Corporate bonds
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Yield to maturity
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Price Yield Relationship
Inversely Related
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Return
n Coupon payment
n Capital gain
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Risk
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Risk
n Credit Risk
n Interest Rate Risk
n Reinvestment Risk
n Liquidity Risk
FINANCE
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What should be counted
as Debt in portfolio?
n Debt Funds
n Bonds bought directly
n Bank deposits
n Small saving schemes
n Provident funds
FINANCE
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Debt & Personal Cycle
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Debt Fund Style
Credit Quality
High
Medium
Low
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Types of debt funds
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INVESTMENT TAXATION
Debt Funds
n Long term capital gains tax = 10%
FINANCE
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Insurance
n Financial protection against
unexpected event
n A risk management tool, a risk
transferring product
n Similar to option
FINANCE
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Low insurance
penetration in India
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Protection & Investment
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Premium
n Dependent on probability
distributions and individual factors
(actuarial studies)
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Types of Policies
n Term insurance
n Endowment
n Money back
n Whole life
n Pension policies
n Unit linked
n Children s plans
n Riders
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Term insurance=pure protection
All other policies=term insurance+investment
FINANCE
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Calculation of ‘Rate of Return’ on
‘Insurance Investment”
FINANCE
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With Profit Endowment
n Annual premium=Rs. 22,617
n Payment period=20 years
n Expected payback=Rs. 9.4 lakhs
n Term premium=Rs. 1500
n PMT= Rs. 21,117
n Rate=7.75%
FINANCE
DOCTOR
Money Back
n Annual premium=Rs. 34,123
n Payment period=20 years
n Expected payback=Rs. 1 lakh at
5,10,15 years and 6.4 lakhs at 20
years
n Term premium=Rs. 1500
n PMT= Rs. 32,623
n Rate=5.15%
FINANCE
DOCTOR
Calculation of Rate
money back
FINANCE
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Pension Plans
n Accumulation phase
n Vesting
n Generation of annuity returns
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Taxation
n Payment-exempt
n Accumulation-exempt
n Maturity-exempt
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Taxation of ELSS
n Payment-exempt
n Accumulation-exempt
n Maturity-exempt
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Overall Comparison
n Return-inferior
n Risk-same
n Costs-higher
n Taxation-same
n Liquidity-inferior
FINANCE
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Conclusion
n Insurance is tremendously
beneficial product for protection
n But investment performance and
costs are inferior to those of
mutual fund
n Conclusion only term insurance
policy should be bought till the
investment performance comes up
FINANCE
DOCTOR
Estimating Appropriate
Cover
FINANCE
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Derivatives
n A derivative security derives its
value from an underlying
n Underlying can be stocks,
commodities, bullion, currency &
many others
FINANCE
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Basic Types
n Futures
n Options
FINANCE
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Rationale
n Actual transaction not happening
today
n Instead, there is an intent or
commitment
n Origin lies in both buyers and
sellers benefiting
FINANCE
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Oil Prices
An example of usefulness of
derivatives
FINANCE
DOCTOR
Futures
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Terms
n Expiration date
n Initial margin
n MTM margin
n Cash settled vs delivery settled
FINANCE
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Options
n Options are deferred delivery
contracts that give the buyers
the right, but not the obligation,
to buy or sell an asset at a pre-
specified price and on or before a
specified date
Note that this is a right
FINANCE
DOCTOR
Option Terminology
n Call Option
n Right to buy
n Put Option
n Right to sell
n Option Buyer
n has the right but not the obligation
n Option Writer/Seller
n has the obligation but not the right
FINANCE
DOCTOR
Option Terminology
n Option Premium
n Price paid by the buyer to acquire the right
n Strike Price OR Exercise Price
n Price at which the underlying may be
purchased or sold
n Expiration Date
n Last date for exercising the option
n Exercise Date
n Date on which the option is actually
exercised
FINANCE
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Derivatives in Investment
Management
n Hedging
n Portfolio rebalancing
n Capital protection
FINANCE
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Taxation
n For an investor short term & long
term capital gains taxation
n For a business loss can be set off
against other business income
FINANCE
DOCTOR
Real Estate
FINANCE
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Real Estate
Characteristics
n Dominant role in total wealth
n Housing one of the biggest expenses
n For most people, biggest & one of the
best investment decisions
n Decision making not based on financial
aspect alone
n Need for shelter & prestige also gets
fulfilled
n Bungalow occupies an important place
in an individual s psyche Deewar s
Maa comparison FINANCE
DOCTOR
Real Estate
Characteristics
n Fall back asset in unfavourable times
like in rampant inflation
n Important role in multi asset portfolio
n Low correlation with bonds and stocks
n Versatile and multifaceted liquidity,
safety & yield enhancing
n Holding a physically visible asset is
good
n Financial leverage
n Taxation benefits FINANCE
DOCTOR
Historical Return/ Risk
Investment statistics from Real Estate and other categories of Assets 1973-1984
(USA statistics-but provide an indication about comparative return & risk)
Investment Average rate of return Risk-Std. Deviation
Residential Real estate 10.53% 4.44%
Farmland 14.03 11.06
Business real estate 10.78 2.77
Common stocks 9.62 19.71
Corporate bonds 7.51 13.92
Small stocks 21.96 28.11
FINANCE
DOCTOR
Risks
n Market Risk
n Property destruction & cost of
replacement
n Developer Risk, Title deeds
n Tenants refusing to vacate
n Structural flaws
FINANCE
DOCTOR
Risks
n Changes in neighborhood quality
n Liquidity risk
n High transaction costs
n Loan rate risk
n Landlord s duties onerous
FINANCE
DOCTOR
Distinctiveness of
Real Estate
n Psychological value
n Concentration rather than
diversification
n Each unit is distinct
n Liquidity less, transaction cost much
higher
n Ideal time horizon longer than stocks
n There is no exchange for uniform price
discovery
FINANCE
DOCTOR
Placing Real Estate in
Portfolio
PORTFOLIO
NEEDS INSTRUMENTS PERCENTAGE RETURN
LIQUIDITY
FINANCE
DOCTOR
Valuation of Real Estate
n Physical
n Land
n Labor
n Material
n Market sentiment
n Demand & Supply
When demand goes up supply might
follow at a sluggish pace
n Zoning/ Planning Laws
n Controlled Release of Land Stock
n Limited supply of suitable land in a city,
area or a compound FINANCE
DOCTOR
Valuation of Real Estate
n Like for any other asset, valuation
determined by income stream its
ability to generate rent is an
important determinant
n Rental yield R/P
n Potential for capital gain
FINANCE
DOCTOR
Financial Leverage Factor
FINANCE
DOCTOR
Gurgaon Example –
Story of a Township
First Phase 1988 to 1992
n South of South Delhi
n Billed as IT Park, residential,
commercial & self sufficient
township
n Attractive prices
n Early adopters, investors & NRIs
FINANCE
DOCTOR
Gurgaon Example –
Story of a Township
Second Phase 1992 to 1996
n Slow release of land stock
n Hype about investment potential
n Post reforms 1992 economy
n Powerful real estate cycle started
kicking in
n Low occupancy, rents remained low
n R/P ratio very low
FINANCE
DOCTOR
Gurgaon Example –
Story of a Township
Third Phase 1996 to 2003
n Investors taking profits by selling
houses
n Developers increased the supply,
looking at high prices
n Slow implementation of economic
reforms
n People (end users) started moving in
n House prices crashed, rents went up
n R/P ratio high FINANCE
DOCTOR
Gurgaon Example –
Story of a Township
Fourth Phase 2003 to to-date
n Economy growing at a healthy rate
n Township living up to its initial potential
FINANCE
DOCTOR
Understanding Real Estate Cycle
& Valuation is Beneficial
n Importance of negotiation
FINANCE
DOCTOR
Beneficial Role of Real
Estate in Portfolio
n Presently real estate positively
correlated to stocks and negatively to
bonds
n Flight to safety correlation with other
asset classes can break easily
n Analytical studies show that addition of
real estate to portfolio is very beneficial
returns increase while risks go down
FINANCE
DOCTOR
Buying Vs Renting
n Buying for own usage
n Buying for investment
FINANCE
DOCTOR
Buying for own usage
n Forced saving
n Yields as compared to other safety
instruments is much higher
n Reduces the portfolio risk
n Tremendous financial benefit with
taxation and leverage
FINANCE
DOCTOR
Buying for own usage
n Simulation example
n Buying entailed cash outflow of Rs.
9,450
n There was an inflow in terms of HRA
& Taxation benefit of Rs. 4,450
n With the present value of 20 lakhs &
a monthly outflow of Rs. 5,000 the
effective interest on home loan is less
than 2%
FINANCE
DOCTOR
Buying for Investment
n Concentration
n Illiquid
n High transaction cost
n Disputed titles
n Weak tenancy agreements
n Returns can be higher in other
asset classes
FINANCE
DOCTOR
General Principles
n Long horizon
n Valuation R/P & R/E
n Intensive macro & localized
research
n Comparison with other asset
classes
n Developer s track record
n Legal details to be sorted out
FINANCE
DOCTOR
Taxation
n Interest on home loan up to Rs.
1,50,000 tax deductible
n Payment of Rs. 1,00,000 for returning
home loan principal is also tax
deductible
n Long term capital gain (> 3 yrs) taxed
at 20% with inflation indexation
n This can be saved if gain invested in
property or specified bonds
FINANCE
DOCTOR
Fixed Vs Floating
n Precise placing of interest rate cycle is
difficult
n Estimate broadly whether we are at the
bottom, middle or at the top of the
cycle
n Presently we have just started moving
up from lowest point of the cycle
n Locking in a fixed rate might be
beneficial for a long term loan
FINANCE
DOCTOR
Fixed Vs Floating
n 9.25% floating rate-- Rs. 916 EMI per
lakh for 20 years
n 9.75% fixed rate -- Rs. 949 EMI per
lakh for 20 years
n Even if the floating interest rate goes
up to only 9.75% in next two years,
EMI will go up to Rs. 944, because the
loan amount has gone down only to Rs.
96,000
n Overall in 20 years in floating, the
borrower might end up paying a lot
more FINANCE
DOCTOR
Conclusion
n Versatile & favoured asset class
n For own usage, owning it under more
circumstances is the correct decision
n Effective long term investment
n Increases the return while reducing the
risk of the portfolio
n Does well under unfavourable
circumstances
FINANCE
DOCTOR
Conclusion
n However, when bought for enhancing
yield, investor should be very careful
n Return could be less than other assets
n Illiquid with high transaction costs
n Concentrated
n Local factors need intensive research
this prevents glaring mistakes while
facilitating tremendous investment
opportunities
FINANCE
DOCTOR
Behavioural Finance
FINANCE
DOCTOR
Rationality and Emotion
n Every investment involves a
financial commitment and an
emotional commitment
n Rational advice, even if supported
by lots of data, is much easier to
take in theory than to put in
practice
FINANCE
DOCTOR
Behavioural Finance
n Psychological Factors can thwart
rational analysis and prevent
investors from achieving the best
results for their portfolios
n Volatility of markets cannot be
FINANCE
DOCTOR
Nobel Prize for
Behavioural Finance
n Daniel Kahneman
n Prospect theory, how individuals
actually behave and make decisions
when faced with uncertainty
n Replacing theories that assumed
investors maximized their expected
utility or well-being and always acted
rationally
FINANCE
DOCTOR
Mismatch between great
opportunities & actual results
FINANCE
DOCTOR
Follow the Crowd &
Asset Bubbles
n Herding instinct
n Disbelief that a large group of people
could be wrong
n Hard to remain separate from a crowd
n Information cascade
FINANCE
DOCTOR
Representative Bias
n Too many parallels between events
that seem the same but are
remarkably different
n Example: Sensex at 6000 in year
2000 & at 6000 in year 2005
FINANCE
DOCTOR
Reluctance to accept
randomness
FINANCE
DOCTOR
Cognitive Dissonance
n Predisposition to disregard news
that does not correspond to your
view
n Shutting out bad news
FINANCE
DOCTOR
Reference Point for
Judging Performance
n Mental accounting with purchase
price as the reference point
n Loss aversion, much more upset
about losing from this reference
point
n Holding on to losses
FINANCE
DOCTOR
Anchoring
n Prospect theory predicts that investors
rather than realize loss, will increase
their position, since stock is now
cheaper than their reference point
n Anchoring in their mind more important
than future prospects
n Investors sell their stocks much more
frequently for a gain rather than a loss
They run their losses and take early
profits rather than the other way round
FINANCE
DOCTOR
Myopic Loss Aversion &
Portfolio Monitoring
n Tendency to base decisions on the
short term fluctuations in the
market
n Frequent portfolio changes
FINANCE
DOCTOR
Applications
n Basic factors generating returns change
far less than we think
n Asset allocation should be based on
broad factors
n Investment discipline adhering to
asset allocation based on long term
factors
n Getting rid of temptation to trade
stocks & other volatile assets in the
short term
FINANCE
DOCTOR
Applications
n Diversified portfolio
n Looking at future prospects rather than
reference point/ anchoring
n Avoiding averaging if future prospects
are dim
n Non-participation in asset bubbles (by
curbing herding instinct)
n To buy in undervalued markets even if
everybody else is selling
FINANCE
DOCTOR
Putting it all together
FINANCE
DOCTOR
As Is
SCORE CARD
INCOME Monthly in Rs. ASSETS
Active sources Liquidity 12 mths basic expense amount present return
employment salary short term deposits 50000 3%
professional income liquid funds 0
business income Safety current income generating
Passive sources bonds 0
rent from property saving schemes 150000 7%
investment income real estate on rent 0
royalties long term
any other provident fund,pension plans 1250000 8%
rbi bonds 0
Deductions real estate for own usage 0
Taxation fixed term deposits 150000 5%
COMBINED INCOME post taxn. 55000 gold, jewellery 300000 3%
Provident Fund Contribution 15000 Yield Enhancing
stocks-direct equity 150000 15%
stocks-mutual funds 0
bonds 0
bond funds 0 6%
real estate for investment 0
commodities 0
art,antique 0
investible part of insurance policy 100000 4%
NET INCOME 40000 TOTAL ASSETS 2150000
EXPENSES LIABILITIES
Food 7000 Short term
Clothing 4000 credit card loan 0
Housing 3000 borrowings on life insurance 0
Children related 8000 personal loan installment 0
Health & Insurance 2000 accrued income taxes 0
Transportation 3000 other obligations 0
Appliances 3000 Long term
Discretionary 5000 home loan principal yet to be repayed 0
any other 0 loans to purchase investmnt assets 0
loans to purchase personal assets 0
FINANCE
TOTAL EXPENSES 35000 TOTAL LIABILITIES 0
DOCTOR
If ‘As Is’ continues
FINANCE
DOCTOR
Should Be
INCOME Monthly in Rs. ASSETS
Active sources Liquidity 6months basic expense amount present return
employment salary short term deposits
professional income liquid funds 200000 3%
business income Safety current income generating
Passive sources bonds 0
rent from property saving schemes 0
investment income real estate on rent 0
royalties long term
any other provident fund,pension plans 220000 8%
rbi bonds 0
Deductions real estate own usage(housing) 2500000
Taxation fixed term deposits 0 5%
COMBINED INCOME post taxn. 55000 gold, jewellery 300000 3%
Provident Fund Contribution 3000 Yield Enhancing
HRA & Taxation Benefit 4450 stocks-direct equity 30000 15%
stocks-mutual funds(Education) 900000 15%
bonds 0
bond funds 0 6%
real estate for investment 0
commodities 0
art,antique 0
investible part of insurance policy 0 4%
NET INCOME 56500 TOTAL ASSETS 4150000
EXPENSES LIABILITIES
Food 7000 Short term
Clothing 4000 credit card loan 0
Housing 3000 borrowings on life insurance 0
Children related 8000 personal loan installment 0
Health & Insurance 2000 accrued income taxes 0
Transportation 3000 other obligations 0
Appliances 3000 Long term
Discretionary 5000 home loan principal yet to be repayed 2000000
Housing Loan EMI 9450 loans to purchase investmnt assets 0
Term Ins. premium(protection) 2000 loans to purchase personal assets 0
DOCTOR
‘Should Be’
Adjustments
n Home for own usage bought with 5 lakhs down
payment, 10 lakhs soft loan from the company and 10
lakhs as home loan from the bank
n Term insurance of 50 lakhs cover bought with a
premium of Rs. 2000 per month
n Monthly savings of Rs. 13,000 now being channelized
into stock funds except for the mandatory requirement
for Provident Fund, both for Retirement
n Investible money earmarked for children s education
moved to stock mutual funds
n Minimal money in Existing Provident Fund Account, in
keeping with whatever is required by rules
n Liquidity component now has amount equivalent to 6
months expenses
n Gold & Jewellery totally as before for marital insurance
FINANCE
DOCTOR
If ‘Should Be’ Implemented
EDUCATION
1 Education 2013 -----14.32 lakhs
5 lakhs at 15% for 8 years 15.3 lakhs
2 Education 2016 ------17.04 lakhs
4 lakhs at 15% for 11 years 18.60 lakhs
RETIREMENT 2025- 1.6 crores
Rs. 10,000 every month at 15 % for 20 years 1.5 crores
Rs. 3000 every month at 8% for 20 years 17.6 lakhs
HOUSING 2025-----97 lakhs
House worth 25 lakhs bought today
5 lakhs down payment
Soft loan of 10 lakhs to be returned after 20 years,
present lump sum in PF earmarked .
Net outflow of Rs. 5000 every month
PROTECTION
FINANCE
insurance premium,monthly outflow of Rs. 2000 DOCTOR
‘Should Be’ Asset Allocation
ASSETS
Liquidity 6months basic expense amount allocation %
short term deposits
liquid funds 200000 5%
Safety current income generating
bonds 0
saving schemes 0
real estate on rent 0
long term
provident fund,pension plans 220000 5%
rbi bonds 0
real estate own usage(housing) 2500000 60%
fixed term deposits 0
gold, jewellery 300000 7%
Yield Enhancing
stocks-direct equity 30000
stocks-mutual funds(Education) 900000 22%
bonds 0
bond funds 0
real estate for investment 0 0%
commodities 0
art,antique 0
investible part of insurance policy 0
TOTAL ASSETS 4150000 100%
art,antique 0
investible part of insurance policy 0
TOTAL ASSETS 4150000 100%
FINANCE
DOCTOR
After 5 Years
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating
bonds
saving schemes
real estate on rent
long term
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 40%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 30%
bonds
bond funds 20%
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS 100%F INANCE
DOCTOR
Asset Allocation
25 – 30 Years Old (Accumulator)
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating
bonds
saving schemes
real estate on rent
long term
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 10%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 75%
bonds
bond funds 5%
real estate for investment
commodities
art,antique
investible part of insurance policy FINANCE
TOTAL ASSETS 100% D O C T O R
Asset Allocation 40 – 45 Years Old
(Mid Life Accumulator/ Harvester)
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating
bonds
saving schemes
real estate on rent
long term
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 30%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 50%
bonds
bond funds 10%
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS 100%F INANCE
DOCTOR
Asset Allocation 40 – 45 Years Old
(Mid Life Accumulator/ Harvester)
Business Conditions Change – P/E at 24, Bond Yields at 10.5
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating
bonds
saving schemes
real estate on rent
long term
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 35%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 15%
bonds
bond funds 40%
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS 100%F INANCE
DOCTOR
Asset Allocation
55 – 60 Years Old (Harvester)
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating 50%
bonds
saving schemes
real estate on rent
long term 20%
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 70%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 10%
bonds
bond funds 10%
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS 100%F INANCE
DOCTOR
Asset Allocation
Double Income High Liquidity
ASSETS
Liquidity 12 mths basic expense amount allocation %
short term deposits 10%
liquid funds
Safety current income generating
bonds
saving schemes
real estate on rent
long term
provident fund
pension plans with fixed return
rbi bonds
short term debt funds
real estate for own usage-own equity
fixed term deposits
gold, jewellery
TOTAL Safety 15%
Yield Enhancing
stocks-direct equity
stocks-mutual funds 60%
bonds
bond funds 15%
real estate for investment
commodities
art,antique
investible part of insurance policy
TOTAL ASSETS 100%F INANCE
DOCTOR
Implementation
FINANCE
DOCTOR
Summary
n Everybody can be wealthy
n Achievable at minimal risk and with minimal
adjustments
§ Know values & specific goals
n Organize information & utilize score card
n Asset allocation is the key decision
n Know characteristics & general principles of
various asset classes
n Put together a plan consistent with your
objectives
n Automate your plan so that it gets
implemented FINANCE
DOCTOR