basics of wealth and investment management

Saving &Investing…

What is investing? An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are Speculative - Benjamin Graham – The Intelligent Investor

Investing is the act of seeking value at least sufficient to justify the amount paid. Consciously paying more in the hope that it can soon be sold for a still higher price should be labeled as speculation- Warren Buffet – The Making of An American Capitalist

Investing ….

What is investing? Investing is a method of purchasing assets to gain profit in the form of reasonably predictable income (dividend, interest or rentals) and / or appreciation over the long term- Burton G Malkiel – A Random Walk Down Wall Street

Investing is a Act of faith, a willingness to postpone present consumption and save for the future. We entrust our capital to corporate stewards in the faith –at least with the hope that their efforts will generate high rates of return on our investments- John C. Bogle – Common Sense on Mutual Funds

Investing ….

Speculation…

There are two times in a man’s life when he should not speculate: when he can’t afford and when he can.

Mark Twain, Following the Equator

SpeculationInvestors “speculate" every time they commit money to something they don't understand.

Say you overhear your best friend’s uncle talking about a company called Frontier Industries at a cocktail party. "This thing is surely going to go through the roof in the next few months," he says. If you call your broker the first thing the next morning to place an order for 100 shares, you've just speculated.

Investing ….

SpeculationDo you know what Frontier Industries does? Are you familiar with its competition? What were its earnings last year / last quarter?

There are a lot of questions one should ask about a company before investing in a "hot" stock. There's nothing too hot about losing money in such speculative investments because the investor didn't take the time to understand what he was investing in.

Investing ….

SpeculationSpeculation can be compared to a lottery jackpot, wherein the odds of winning are abysmally low. Depending on the lottery it may be 1 in 7 million, or 1 in 18 million, or somewhere in between. The chances of dying from flesh eating bacteria (1 in a million) are far higher than that of winning a jackpot.

Remember: Every rupee that is used for speculation and lost is not working for the investor over the long-term to create wealth. Speculation promises to give everything one wants right now but rarely delivers; patience almost guarantees those goals down the road through the power of compounding.

Investing ….

Power of Compounding…

Power of Compounding? If you leave a small portfolio invested, its value will mushroom over time through the miracle of compounding. As you earn investment returns, your returns begin to gain returns as well, allowing you to turn a measly investment into thousands of rupees if you leave it invested long enough.The more money you save and invest today, the more you'll have in the future.

An amount of Rs. 100,000 which compounds @ 15% after 50 years is worth, hold your breath Rs. Eleven Crores.

The power of compounding can be expressed using the following time value of money expression

FV= (PV) *(1+k)^n

Investing ….

Power of Compounding?

FV = future valuePV = present valueK = rate of compoundingn = no. of years

Real wealth, the stuff of dreams, is in fact created almost magically through the most mundane and commonplace principles: patience, time, and the power of compounding.

Systematic Planning is an essential ingredient of a good investment programme.

Investing ….

Power of Compounding it works…

FMP Sensex Franklin India Blue Chip

MF Average

Years 6% 16% 27.9% 20.0%

0 100,000 100,000 100,000 100,0001 106,000 116,000 127,900 120,0002 112,360 134,560 163,584 144,0003 119,102 156,090 209,224 172,8004 126,248 181,064 267,598 207,3605 133,823 210,034 342,257 248,83210 179,085 441,144 1,171,401 619,17415 239,656 926,552 4,009,204 1,540,70220 320,714 1,946,076 13,721,794 3,833,76025 429,187 4,087,424 46,963,841 9,539,62230 574,349 8,584,988 160,737,176 23,737,63135 768,609 18,031,407 550,134,722 59,066,823

Planning & Setting Goals…

Human Life Cycle – Disciplined PlanningIncomeIncome

AgeAgeBirth & EducationBirth & Education Earning YearsEarning Years RetirementRetirement

Phase IPhase I Phase IIPhase II Phase IIIPhase III

22 yrs22 yrs 60 yrs60 yrs

MarriageMarriage

Child birthChild birth

Child’s EducationChild’s Education

Child’s MarriageChild’s Marriage

HousingHousing

22 yrs22 yrs 38 yrs38 yrs Over 25 - 30 yrsOver 25 - 30 yrs

Having a Financial Goal is primary to starting a Investment Plan.

Financial Planning is … To develop well defined goals Divide the goals into short term and long

term goals To look at the current income, expenses

and savings To map out well defined strategies to

turn the dreams into reality

Steps in Financial Planning Identifying the investment objectives Investment Objectives – needs and

requirements Determine the required returns to meet the

financial objectives Determine the risk tolerance of the

individual Design an asset allocation to meet the risk

and returns Modify the asset allocation based on any

change in needs or risk tolerance

Retirement Planning

Assessment of current financial status

Ascertain post retirement needs

Determine what you need to save and how

Find extra money for savings

Tax Planning

Incomes exempt from tax under sec. 10 Deductions under chapter VI A for amounts utilised

towards certain purposes qualifies as deduction from total income

Splitting income by creating several entities such as HUF or Trust.

Making gifts within specified limits Making investments which qualify for rebates Reducing taxable income by claiming expenses

Investing is like a long car trip…

A lot of planning needs to go into it.• How long is the trip? (What is the investors "time

horizon"?)• What should one pack? (What type of investments will

the investor make?)• How much petrol is required for the trip? (How much

money will the investor need to invest to reach his goals?)

• Will the trip require a stop over along the way? (Does the investor have short-term financial needs?)

• How long is the stay? (Will the investor need to live off the investment in later years?)

Planning and Setting Goals….

Running out of gas, stopping frequently to visit restrooms, and driving without sleep can ruin the trip. So can saving too little money or investing erratically

An investor must answer the following questions before he can successfully set about the savings / investing journey: What are the investors goals? Is the investment for retirement? A down payment on a house? Child's education? A second home? …. How much money can the investor devote to a regular investing plan?


Ask some more pointed questions:• How much will college cost (at the time the child needs to go)? • How much yearly income is reasonable for retirement?

The more specific the investor can be, the more likely he is to set and achieve reasonable goals.

Once the investor has a rough idea of how much money he will need and how much time he has to get there. He can start to think about what investment vehicles might be right for him and what kind of returns he can reasonably expect. He needs to understand his investment style in order to match it with the various available investment choices.


Financial Planning – Increasing complexity Indian markets opening up

Increased volatility in the debt and equity markets

Investment Options available with the individuals are increasing Equities, Bonds, Mutual Funds, Derivatives,

real estate There are now around 30 mutual funds in

India offering 400schemes Investment options expected to increase

going forward Commodities trading, forex

Tax Planning requires an expert

Financial Planner would provide… A comprehensive platform of tailor made

services Customised strategies and product

application The highest quality in advise Confidentiality Single Point contact and personalized service An experienced Investment Advisor Resources and capabilities to ensure timely

and accurate execution

Determining Investment Style…

Investment style can be compared to batting styles of different batsmen in a game of cricket.

A swinger-for-sixes & fours - takes big risks for big gains. Slow & steady - hitting singles and doubles. A spectator sitting in the stands, chatting with his companions and occasionally cheering his home team on. There are two major variables in figuring out ones investment style – the risk tolerance ( can you afford to get out ? ) and amount of time the investor can dedicate to investing ( One day or test match ? )

Determining Investment Style….

Risk ToleranceHow comfortable will you be seeing your investment decrease in the near term while waiting for it to increase over the long term?

How comfortable will you be to invest in something in which the price changes every day - sometimes adversely.

An investor X may be very comfortable with a downside of 25% in an investment whereas Investor Y could shy away from any downside in his investments.

Determining - Investment Style….

Risk Tolerance

There are various degrees of risk across the investment spectrum, from government savings bonds (carries only sovereign risk and credit risk), which are considered risk-free as they are guaranteed by the government, to equities, commodities and options, where one can lose significant amount of the invested money.

Remember : Though GOI savings bonds and bank fixed deposits are the safest, the safest road isn't always the best one.


The important thing to remember about stocks, though, is that an investor doesn't lose anything until he sells them.

What if you invested when the market was at a high, then comes a big crash?

If you don’t panic and sell during a crash ( eg May 2006 when the Sensex fell from 12000 to 9000 ), you would have done quite nicely as the market rebounded subsequently ( Sensex rose to 15000 in Aug 2007 ! ). Golden rule - when one is investing in the stock market, think long-term. Don’t invest any money in stocks that you will need in the short term.


The Second Factor – Time ….

How much time do you want to/are able to spend on investing? How active do you want to be in the management of money?

If an investor wants to spend 15 minutes a year on investing, then maybe one should consider using Passive Strategies.

If one is planning to set out eight hours a week, then you should consider researching companies and pouring over financial statements to pick individual stocks.


Another time factor is :

When does the investor need the money (time horizon) ? Whether the money is needed next week or in a hundred years will dramatically affect what investment vehicle to use.

Caution - Although stocks deliver great long-term returns, the returns over periods of three years or less can be downright scary.

Hence setting investment goals, planning the outlay of investment amount and time horizon and making appropriate investment choices in line with investor profiles is essential for the success of any investment programme.


Investment Avenues

High

Low

Don’t Invest here

RETURN

Equity

IndexFunds

Growth Funds

RISK

Balance Funds

Optimal

Aggressive Stance

## the size of the circle denotes the level of liquidity

Low

RBI

Comp FD

P.O.

Income Funds

GOI Sec

Liquid Fund

Gilt Funds

Sedate Zone Bank FD

High

Investment Products

Stocks-offer dividend & capital appreciation.

Bonds-offer safe return. Real estate-offers rent & capital

appreciation. Precious metals-appreciate over time and

are a hedge against uncertainties. Art work-appreciate over time. Insurance-used as security against risk of

uncertainties.

Portfolio Construction

- Matching investor profile with investment options …

Asset Allocation

An asset allocation is a strategy of dividing the portfolio among various asset classes so as to obtain the desired portfolio characteristics to suit distinct investor profiles.Bonds, Stocks and Cash equivalents are the most commonly used asset classes in any asset allocation. It is an organized and effective method of diversification

Stocks

Bonds

Cash

The asset allocation for an investor depends on the investors expectations of returns and the risk the investor is willing to take.

Investments : Key Determinants

Security Selection 4.6%

Market Timing 1.8%

Other Factors 2.1%

The most important determinant of portfolio return is asset allocation .

Asset Allocation 91.5%

Source: Brinson, Singer & Beebower ( 1991 )

Asset allocation

Asset Allocation encompasses the following:

Selection of the asset classes Proper blending of these asset classes in a

portfolio Managing the asset mix over time.

Lifecycle Investment Guide

Mid Twenties

10%

5%

20%

65%

REAL ESTATE

CASH

BONDS

STOCKS

Late Thirties to Early Forties

10%

5%

30%55%

REAL ESTATE

CASH

BONDS

STOCKS

Mid Fifties

13%

5%

38%

44%REAL ESTATE

CASH

BONDS

STOCKS

Late Sixties and beyond

15%

10%

50%

25%REAL ESTATE

CASH

BONDS

STOCKS

Asset Allocation Principles

Risk and return are related Risk depends on the length of time one

holds the investment Rupee Cost Averaging can reduce the

risks of investing Risks that an investor can take depends

on the investor’s capacity to take risks and his attitude to take risks.

Asset Allocation drivers

Asset allocation must take into account 2 factors:

Time horizon: the number of years you have to invest

Risk tolerance: your ability or willingness to endure short-term declines in the value of your investments as you pursue your long-term investment goal

Asset Allocation Styles-Strategic Asset Allocation

Strategic asset allocation is a method that establishes and adheres to what is called a 'base policy mix'. This is a proportional mix of assets based on expected rates of return for each asset class

E.g. If stocks have historically returned 10% per annum and bonds have returned 5% per annum, a mix of 50% stocks and 50% bonds would be expected to return 7.5% per year

Asset Allocation Styles-Tactical Asset Allocation

In the short term, the investor may occasionally engage in tactical deviations from the mix in order to capitalize on unusual or exceptional investment opportunities

This flexibility adds a component of market timing to the portfolio, allowing investors to participate in economic conditions that are more favourable for the performance of one asset class than for others

Asset Allocation Styles-Tactical Asset Allocation

Tactical asset allocation can be described as a moderately active strategy, since the overall strategic asset mix is returned to when desired short-term profits are achieved

This demands some discipline from the investor or portfolio manager, as he or she must first be able to recognize when short-term opportunities have run their course, and then rebalance the portfolio to the long-term asset position

Asset Allocation Styles-Dynamic Asset Allocation

Dynamic asset allocation is when the mix of assets is constantly adjusted as markets rise and fall and the economy strengthens and weakens

E.g. In a dynamic portfolio, if the stock market is showing weakness, stocks are sold in anticipation of further decreases in stock values, and if the market is strong, stocks are purchased in anticipation of continued market gains

Which Asset Allocation style is best ?

Asset allocation can be an active process in varying degrees or strictly passive in nature.

Choice of a precise asset allocation strategy or a combination of different strategies depends on one’s goals, age and risk tolerance

These are only general guidelines on how investors may use asset allocation as a part of their core strategies

Allocation approaches involving anticipating and reacting to market movements require a great deal of expertise and talent in using particular tools for timing these movements.

Accurately timing the market is next to impossible, so make sure your strategy isn't too vulnerable to unforeseeable errors

Evaluate Investment Options…

Research Your Investments

Once you know HOW to invest.

It’s time to figure out where to put your money.

Research Your Investments

What do I need to know?

Research Your Investment

• Discover historical trends• Perform financial analysis • Compare with the peer group• Obtain relevant economic news• Forecast future performance • View recommendations of the experts

To....

Creating a portfolio:Once the asset allocation decision has been made the second step is to select individual securities and build a portfolios for each of the asset class under consideration.

The process begins with selecting securities from the investment options in the assets class and adding the selected securities to form a portfolio

The standard deviation (σp) of a portfolio decreases as securities are added, because they would not be perfectly correlated with the existing portfolio.

Expected return of the portfolio would remain relatively constant

Eventually the diversification benefits of adding more securities dissipates (after about 10 securities). For example in large equity portfolios, σp tends to converge to 20%.

Let us now create a portfolio of a stock A and a bond B. Stock A is expected to deliver a return of 20% per annum with a volatility of 25% and bond B is expected to deliver a return 6% per annum with a volatility of 5%.

In case if we allocate the assets in equal proportion 50% in A and 50% in B than the resultant portfolio is expected to deliver a return of

(0.5)*20% + (0.5)*6% = 13.0% with an approximate volatility of 15%

Creating a Portfolio

Now if we change the allocation to 25% in A and 75% in B than the resultant portfolio is expected to deliver a return of

(0.25)*20% + (0.75)*6% = 9.5% with an approximate volatility of 10%

It can be observed from the above that as one changes the asset allocation the returns as well as the risk profile of the portfolio changes considerably. Hence asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, debt and equity based on the risk profile and financial needs of the investor

Creating a Portfolio

Asset class characteristics

The purpose of using various risk categories in portfolios is to reduce risk through diversification thereby enhancing the risk/return ratio.

The proper allocation of assets in a portfolio begins with determining the proportion of the total portfolio to invest in each asset class.

Maximize returns, minimize risks

Risk / return characteristics of asset classesIt is useful to calculate returns and measure risk for asset classes over various past intervals

Helps to evaluate the behavior of the asset class over different economic cycles.

May be taken as representative of the returns that investors may have expected to earn over the period.

May in turn be useful in establishing benchmarks as to what returns investors might be expecting to earn in future.

Availability of realized return and risk measures can be used to compare the relative performance behavior across asset classes.

Asset class characteristics

Security Class Maturity of security

Form of return Risk

Cash Equivalents Short Interest Low

Fixed Deposits Long Interest Medium

Govt Securities Long Interest Medium

Corporate Bonds Long Interest Medium

Preference Shares Perpetual Dividend Moderately high

Equity Shares Perpetual Dividend and capital gains

High

Tracking Your Portfolio

Follow market trends Read the financial news Monitor your selected investments Share information with others

Follow the performance of your selections

Do’s and Don’ts

Do keep informed of your investments once you purchase them.

Do understand the advise of experts before you take it.

Do invest for the long term.

Don’t be discouraged. An investment in your future is worth the effort.

Don’t buy what you don’t understand.

Understanding Risk & Returns …

Investment returns

The rate of return on an investment can be calculated as follows:

(Amount received – Amount invested)

Return = _________________________________

Amount invested

For example, if Rs.1,000 is invested and Rs.1,100 is returned after one year, the rate of return for this investment is:

(Rs.1,100 – Rs.1,000) / Rs.1,000 = 10%.

In case if we adjust the return obtained from above for inflation we arrive at the real return in the investment

Return Variability

A B C

Investment A: noreturn variation,no risk

Investment B: some return variation, somerisk

Investment C:wide returnvariation, muchrisk

4.0% 2.5%

6.00%

15%

-8%

Nature of Risk

The more variable an investment’s return, the greater its risk

A highly variable return could lead to investment losses if the investment needs to be sold

However, the longer the investment is held, the greater the chances of earning the long-run rate of return

What is investment risk?

Investment risk is related to the probability of earning a low or negative actual return.

The greater the chance of lower than expected or negative returns, the riskier the investment.

Two types of investment risk Stand-alone risk Portfolio risk

Breaking down sources of risk

Stand-alone risk = Market risk + Firm-specific risk

Market risk – portion of a security’s stand-alone risk that cannot be eliminated through diversification. Measured by beta.

Firm-specific risk – portion of a security’s stand-alone risk that can be eliminated through proper diversification.

Standard Deviation

In investments risk is measured in terms of standard deviation

Most important measure of variation Shows variation about the mean Has the same units as the original data

Standard Deviation:

Xi=Observation= MeanN = Total No. of observation

2

1

N

ii

X

N

Comparing Standard Deviations

Mean = 15.5 s = 3.338 11 12 13 14 15 16 17 18 19

20 21

11 12 13 14 15 16 17 18 19 20 21

Data B

Data A

Mean = 15.5 s = .9258

11 12 13 14 15 16 17 18 19 20 21

Mean = 15.5 s = 4.57

Data C

It can be seen from above that data sets with same means could have widely different standard deviations depending on the variance from the mean

What is the market risk premium?

Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.

Its size depends on the perceived risk of the stock market and investors’ degree of risk aversion.

Varies from year to year, but most estimates suggest that it ranges between 4% and 8% per year.

The difference between the return on a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities is known as Risk premium. The risk premium is one of the basis for any asset allocation decision.

Risk and Return are related

Average Annual Return (1926 – 97)

Risk Index

Small company common stocks

12.7% 33.9%

Common stocks in general

11.0% 20.3%

Long Term bonds 5.7% 8.7%

Treasury bills 3.8% 3.2%

Inflation Rate 3.1%

Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook

Risk depends on the length of time one holds the investment

Range of Annual Returns on Common Stocks for Various Time Periods, 1950-97

52.62%

23.92%

19.35% 17.52% 16.65%13.10%

-26.47%

7.90%5.53%4.31%1.24%-2.36%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1 Year 5 Years 10 Years 15 Years 20 Years 25 Years

Maximum

Minimum

Sensex Returns Analysis -1979 to 2004

Equities deliver superior risk adjusted returns over the long term

-50-25

0255075

100125150175200225250275

1 3 5 7 10 15

Time Horizon (years)

Retu

rns

(%)

Average Return (%)Highest Return (%)Lowest Return (%)

Market Timing is Dangerous…

The opportunity loss incurred when attempting to time the market could be exceptionally high

Patience and discipline are required to avoid a wrong move

Annual Return of Sensex over last 24 years

15.90%

5.54%

0.65% -16.93%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Always Invested

Missed 10 best

Missed 20 best

Missed 72 best

Rupee Cost Averaging can reduce the risks of investing-buy less when price is high & more when price is low.

Period Investment amount

Price per Share

Qty of Shares Purchased

1 Rs.150 Rs. 75 2

2 Rs.150 Rs.25 6

3 Rs.150 Rs.50 3

Total Cost Rs.450

Average Price Rs.50

Total Shares owned

11

Weighted Average Cost: Rs. 40.91 ( 450 / 11)

Measurement of Risk

Risks can be classified as Systematic risks and Unsystematic risks.Unsystematic risks:These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio.

Systematic risks:These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.

What is Beta?

The degree to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (Nifty, Mid-cap etc.), since the index is a good reflector of the market.

Beta is calculated as :

where ra measures the rate of return of the asset, rp measures the rate of return of the portfolio of which the asset is a part and Cov(ra,rp) is the covariance between the rates of return. In the CAPM formulation, the portfolio is the market portfolio that contains all risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market.

Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk or market risk.

Covariance measures how two variables co-vary, and is given by :Sum (x- mean(x)) (y-mean(y)) / N-1

Where, N denotes the total number of observations.

In order to calculate the beta of a portfolio, multiply the weightage of each stock in the portfolio with its beta value to arrive at the weighted average beta of the portfolio

Beta: Methodology / Formula

Understanding Historical Trends is the key to success in

Asset Allocation…

Investing is a lot of numbers. One needs to get used to that, and quickly.

An investor can see exactly what he needs to get to his destination, and can be accountable to himself along the way.

Bonds and stocks are the two major asset classes that have been used by investors over the past century.

Knowing the total returns on each of these, and their associated volatility, is crucial to deciding where an investor should put his money.

Looking through the rear view mirror makes the journey safer ….

InvestmentTerminology…

Asset Anything that has monetary value. Typical personal assets include stocks, real estate, jewelry, art, cars, and bank accounts.

Asset allocation Dividing investment dollars among various asset classes, typically among cash investments, bonds, and stocks.

Asset classes The three major asset classes are cash (also called cash reserves, money market instruments, etc.), bonds, and stocks.

Diversification Investing in separate asset classes (stocks, bonds, cash) and/or stocks of different companies in an attempt to lower overall investment risk.

Investing terminology ….

Portfolio All the securities held by an individual, institution, or mutual fund.

Compounding When an investment generates earnings on reinvested earnings.

Capital appreciation One of the two components of total return, capital appreciation is how much the underlying value of a security has increased. If you bought a stock at Rs.10 per share and it has risen to Rs.13, you have enjoyed a 30% return or appreciation on the original capital you invested. Dividend yield is the other component of total return.


Dividend A share of a company's earnings paid to each stockholder.

Dividend yield The annual percentage rate of return paid in dividends on a share of stock. To figure out the dividend yield (or just "yield"), divide the annual dividend by the current share price of the stock.

Inflation A rise in the prices of goods and services.

Real return The inflation-adjusted returns of an investment.


Risk-adjusted return A measure of how much risk a portfolio has employed to earn its returns.

Unrealized capital gain/loss An increase (or decrease) in the value of a stock or other security that is not "realized" because the security has not yet been sold for a gain or loss.

Annualize To make a period of less than a year apply to a full year to facilitate comparative analysis.

Volatility The degree of movement in the price of a stock or other security.


Risk tolerance The measurement of an investor's willingness to suffer a decline (or repeated declines) in the value of investments while waiting and hoping for them to increase in value.

Standard Deviation A measure of variation about the mean

Beta A measure of the relative volatility of a stock or other security as compared to the volatility of the entire market (usually measured by the S&P 500 index). A beta above 1.0 shows greater volatility than the overall market, and a beta below 1.0 is less volatile.


Broker One who sells financial products. Whether in insurance, real estate, or stocks, most brokers work under compensation structures that are at direct odds with the best interests of their clients. When using a broker, you should always find out how he or she is compensated.

Order A request from a client to a broker to buy or sell stock, either at the market price or at a specific price.

Bear A person with a generally pessimistic market outlook or a pessimistic view on a sector or specific stock.


Bear market When the overall market loses value over an extended period of time.

Bull A person with a positive or optimistic outlook for the general market, a market segment or industry, or for particular stocks

Bull market A market that has been gaining value over a prolonged period.


Buy-and-hold A strategy that employs buying shares of companies with the intention of keeping those holdings for a long time, preferably indefinitely, and participating in the long-term success of being a partial owner of the business underlying the stock.

Market timing An investment strategy based on predicting short-term price changes in securities, which is virtually impossible to do.

Churn Churning is unconscious or conscious overtrading by a broker in a customer's account. Since brokers are most often compensated by the number of transactions made on a customer's behalf, there is temptation to trade too frequently, whether that's in stocks, bonds, or mutual funds with loads.


Capital gain/loss The difference between the price at which an asset is sold and its original purchase price (or "basis").

Long-term capital gain A profit on the sale of stock, mutual fund shares, or other securities that have been held for more than one year. Taxes owed on long-term capital gains are lower than those on short-term capital gains.

Short-term capital gain A profit on the sale of a security that has been held for one year or less. Short-term capital gains are taxed as ordinary income.


Bond An interest bearing or discounted debt security issued by corporations and governments. Bonds are essentially loans by the investor to the issuer in return for interest payments.

Common stock A security representing partial ownership in a public or private corporation.

Blue-chip stocks Really good, large companies -- often INDEX components -- that have been around long enough to have a solid history of rewarding shareholders.


Index An unmanaged selection of securities whose collective performance is used as a standard to measure investment results.

Mutual fund The pooled cash of many unitholders that is invested according to a stated objective, as defined by the fund's prospectus.

Open-end fund A mutual fund that has an unlimited number of units available for purchase. Most mutual funds are open-ended.


Net asset value (NAV) The net asset value is the price of each unit of a mutual fund. It is calculated by subtracting the fund's liabilities from its total assets, and dividing that figure by the number of units outstanding. The NAV is the amount of money that an investor would receive for each unit if the mutual fund sold all of its assets, paid off all of its outstanding debts, and distributed the proceeds to unit holders.


OPT 4 MORE

OPT 4 More is a tool to identify the risk return profile of an individual and suggests investments in a basket of Short term & Hybrid MF Income Plans, Equity MF and sacred assets like Bank FD and GOI bonds to suit each profile.

Ret

urn

s

R i s k

Bank FDs / GOI Bonds

Short Term Plans

Hybrid Income Plans

Equity Plans

OPT 4 MORE - Asset Allocation based on risk profile• OPT 4 MORE is a asset allocation product based on the risk

profile of the investor.

• Asset allocation is a disciplined, long-term financial strategy

for investing money into various asset classes based on the

investment goals, time horizon, and risk tolerance.

• Asset Allocation is an investment portfolio technique that

aims to balance risk and create diversification by dividing

assets among major categories such as cash, debt and

equity based on the risk profile and financial needs of the

investor

Know your Risk Profile Risk profiling is a well-established scientific and robust

way of profiling risk among investors

Research has established clear relationships between

demographic attributes of investors and their

investment risk appetite

OPT 4 MORE has a detailed client profiling form

which would help the client in under standing his risk

profile. This helps the investor to invest in the right

asset allocation based on his needs.

Conservative Risk Profile This profile is suitable for investors who prefer to

preserve capital and do not intend to taking any exposure to high risk investments. This investment profile aims to obtain marginally higher return predominantly through bank fixed deposits and a mix of debt schemes and does not invest in equity or related instruments.

Moderate Risk Profile This profile is suitable for investors who are willing to

take an exposure of upto 30% in higher risk investments like equity related products with a medium term horizon in mind. This moderate equity exposure is to enhance the returns on the portfolio.

Aggressive Risk Profile This profile is suitable for aggressive investors who are

willing to invest upto 50% of their portfolio in equity related products and clearly are well informed about the potential downside that could arise in case of a sharp fall in the markets. Over the long term period of upto 5 years this portfolio has the potential to outperform and deliver above average returns.

Opt 4 More – Current Asset AllocationScheme Conservative

Allocation (%) 1

Moderate Allocation (%)

2

Aggressive Allocation (%)

3

Equity PlansHSBC Equity Fund - - 10Franklin India Bluechip - - 10DSPML Opportunities Fund - 10 10Reliance Vision Fund - 10 10Prudential ICICI Power - 10 10Sub Total - 30 50Short Term PlansPrudential ICICI Short Term Plan 10 10 10Sub Total 10 10 10Floating Rate PlansGrindlays Floating Rate Fund - LT 15 10 10Prudential ICICI Floating Rate Fund- LT 15 10 10Sub Total 30 20 20Long Term BondsGOI Savings Bonds - 8%(taxable) 20 10 10Sub Total 20 10 10Fixed DepositsICICI Bank Deposits 40 30 10Sub Total 40 30 10Grand Total 100 100 100

Opt 4 More – Performance

Actual Performance

Conservative Allocation (%)

Moderate Allocation (%)

Aggressive Allocation (%)

One Year Returns 4.5% 17.6% 22.9%

Volatility 0.4% 7.8% 11.8%Sharpe Ratio 0.0 1.7 1.6

What is Systematic Investment Planning (SIP) ?

Systematic Investment Planning (SIP) Disciplined way of investing fixed amount at a

regular frequency…. A time tested investment approach

Reduces the market risk by using the concept of rupee cost of averaging

Allows power of compounding help create wealth over a long term

Disciplined investing in equity funds over longer time frames helps generate superior returns

Rupee Cost Averaging

An investor would have lost 26% if he made a one time investment in March’00 as compared to the SIP loss of 7.6%

Average cost – INR 56.60

Month NAV SIP Units

Mar-00 70.87 1000 14

Apr-00 64.55 1000 30

May-00 56.79 1000 47

J un-00 56.28 1000 65

J ul-00 61.66 1000 81

Aug-00 53.99 1000 100

Sep-00 58.72 1000 117

Oct-00 51.63 1000 136

Nov-00 49.72 1000 156

Dec-00 53.01 1000 175

J an-01 52.28 1000 194

In a falling market, SIP results in a better downside Protection

Rupee Cost Averaging…

Month NAV SIP Units

Mar-03 55.86 1000 18

Apr-03 53.84 1000 36

May-03 54.77 1000 55

J un-03 60.86 1000 71

J ul-03 67.31 1000 86

Aug-03 73.91 1000 100

Sep-03 84.70 1000 111

Oct-03 87.62 1000 123

Nov-03 100.83 1000 133

Dec-03 106.23 1000 142

J an-04 124.22 1000 150

Feb-04 120.38 1000 158

Mar-04 129.35 1000 166

In the backdrop of a sharp rally , a SIP may under- perform a single entry strategy for a short period of time.

Average cost – INR 78.22

Systematic Investment Planning (SIP)The value of INR 1000 invested every month for the last 2 year period in a systematic investments plan in the following equity funds would be….

Equity FundValue of Invested

Amount

Reliance Growth Fund 46,280DSPML Opportunities Fund 40,570HSBC Equity Fund 38,072Templeton India Growth 38,050Prudential ICICI Power 37,860Prudential ICICI Growth 33,680

Equity Fund Return(%)

Reliance Growth Fund 77.9DSPML Opportunities Fund 59.6HSBC Equity Fund 72.0Templeton India Growth 51.2Pru-ICICI Power 50.6Pru-ICICI Growth 36.2

Systematic Investment Planning (SIP)

Investing INR 1000 per month from January’97 toDecember’04 in Franklin India Bluechip Fund would have generated return of 36% over the the past eight years

A Savings corpus of INR 4.24 lakhs could have been built in eight years by saving INR 1000 per month through an SIP in an equity fund by investing INR 96,000

Examples (Ten Year SIP)

Examples (Five Year SIP)

Investing INR 1000 per month from January’99 to over the last December’04 in Pru-ICICI Power would have generated return of 37% p.a. over the last five years

A Savings corpus of INR 1.46 lakhs could have been built over a five year time period by saving INR 1000 per month through an SIP in an equity fund by investing a sum of INR 60,000

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