term report(2)
TRANSCRIPT
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INVESTMENT PORTFOLIO
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Financial Assets
PKR 20,000,000
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LETTER OF TRANSMITTAL
Date: December 6, 2011
To:
From:
Subject: PortfolioInvestment
Dear Maam,
We are pleased to present our term project on Portfolio Investment. This project strengthened
our understanding of the investment diversification.
Our project has been very productive, specially receiving first-hand knowledge & informationfrom various avenues for investment, considering the risk and investing thereof, which opened
new ways of learning for us & helped us in understanding & practical implementation of the
concepts we learnt in the course of Financial Institutions.
We would like to thank all the Sources who have cooperated with us and provided us with all the
information that we required to complete this report. And we express sincere gratitude to our
parents for their continuous support throughout the preparation of this report.We acknowledge
your help and support for this report and we look forward to discussing this report with you and
having your feedback.
This report is as per your instructions & contains all the relevant information. We would dearly
& sincerely like to thank you for the belief you showed in our capabilities and the support you
gave us throughout the semester & in assigning us the report which truly helped in our learning
process & also gave us first-hand experience regarding investment opportunities for portfolio
investment in Pakistan.
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Executive SummaryThe purpose of our project is to create a portfolio that includes multiple investments in order to
reduce risk. In the more general sense, it is aimed at splitting our investment in different assets
in orderto diversify the risk associated with each investment i.e.Not putting all our eggs in one
basket.
For our project, we were given Rs.20 million to make our investment for one year i.e. fromSeptember 2011 to September 2012, and determine the return thereof. We decided to invest this
amount in different financial products.
Firstly, we opened a Savings account in Habib Bank Limited Garden Brach for our transactions.
This is the account where we would also keep our decided liquidity of Rs. 1.5 million.
Among the financial products, we invested Rs. 1.5 million in RIF, Rs. 1.5 million in DSC, Rs. 1
million in BME cash fund, Rs. 6 millions in Alfalah Stock Funds, Rs. 1.25 million in NIT Income
Funds, Rs. 3 million in HMB- Izaafa Certficate, Rs. 1.25 million in HBL advantage account and
Rs.3 million in PIEF. The remaining Rs. 1.5 million has been kept aside for maintaining
liquidity.
The cost and profit analysis of all investments indicate that we get an average rate of return of
15% in one year. From this project, we concluded that risk is diversified and a reasonably
greater rate of average return is obtained by making investment in variety of assets. The reason
behind it is that if we diversify our portfolio, our investment performance fluctuates less because
losses from some investments are offset by gains in others. Therefore, we have less risk than if
we put all our money in one type of investment, such as stocks and bonds.
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Contents
Our Portfolio ................................................................................................................................... 5
Investment # 1 - Regular Income certificates ................................................................................. 6
Calculation of Profit .................................................................................................................... 6
Investment # 2 - Defense Saving Certificates: ................................................................................ 7
Calculation of Profit .................................................................................................................... 7
Investment # 3 - BMA Empress Cash Fund: .................................................................................. 8
Calculation of Profits: ................................................................................................................. 8
Investment # 4 - Al-Falah Stock Fund ............................................................................................ 9
Calculation of Profits: ................................................................................................................. 9
Investment # 5 - NIT Income Fund: ........................................................................................... 10
Calculation of Profits: ............................................................................................................... 10
Investment # 6: Habib Metropolitan Bank - HMB Izafa Certificate ........................................ 11
Calculation of Profits: ............................................................................................................... 11
Investment # 7: Habib Bank Limited - hbl advantage account............................................... 12
Calculation of Profits: ............................................................................................................... 13
Investment # 8 - Pakistan Income Enhancement Fund: .......................................................... 14
Calculation of Profits: ............................................................................................................... 14
Factors affecting Investment Decisions ........................................................................................ 15Rate of Return ........................................................................................................................... 15
Riskiness ................................................................................................................................... 16
Opportunity Cost ....................................................................................................................... 17
Inflation rate .............................................................................................................................. 17
Bibliography ................................................................................................................................. 18
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OUR PORTFOLIO:
We are given Rs. 20,000,000 which we first kept in Savings account in Habib Bank Limited
Garden Brach for our transactions. This is the account where we would also keep our decided
liquidity of Rs. 1.5 million. Our Portfolio has 8 different products consisting of government
bonds, mutual funds and banks. All these products have varying degree of risk and returnassociated.
1. Regular Income certificates2. Defense Saving Certificates3. BMA Empress Cash Fund4. Al-falah Stock Fund5. NIT Income Fund6. Habib Metropolitan Bank - HMB Izafa Certificate7. Habib Bank Limited - HBL Advantage Account8. Pakistan Income Enhancement Fund
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INVESTMENT #1-REGULAR INCOME CERTIFICATES
In order to facilitate the monthly requirements of the general public, and was launched on
2nd February, 1993. Profit is paid on monthly basis reckoned from the date of issue of
certificates.
Reasons for investing in Regular Income Certificates:
High rate of return as compared to Other certificates like Special SavingCertificates
Exemption of Zakat on these certificates as compared to Defense SavingCertificates and Special Saving Certificates
Regular inflow of profit on monthly basis.Denominations:Rs.50,000, Rs.100,000, Rs.500,000, Rs.1,000,000, Rs.5,000,000 &
Rs.10,000,000/=.
Rate of Return:12.60% p.a.
Amount investing: 1.5 million (we have bought two certificates worth Rs.1, 000,000 and
one worth Rs.500, 000, in order to invest a total amount of Rs.1.5 million). We do not intend toredeem our certificates before their maturity since it leads to a reduction in the face value of the
certificates as a penalty.
Risk: Lowest possible risk as it is a government security
Maturity: 5 years
Procedure: These certificates can be purchased from any National Savings Centre(NSCs) or from Pakistan Post Office (PPO) by filling in a prescribed form called SC-1, which is
available at the above mentioned offices free of cost. A copy of the Computerized National
Identity Card (CNIC) or in case of a foreign national, a copy of the Passport may be attachedwith the application form (SC-I). These certificates are purchased by depositing cash at the
issuing office or by presenting a cheque. The certificates are immediately issued on receipt of
cash. However, in case of deposit through cheque the certificates are issued from the date ofrealization of the cheque after receipt of the clearance advice.
CALCULATION OF PROFIT
Total value of certificates Rs.1,500,000
Rate of return per annum 12.60%
Total return Rs.189,000
Tax (10%) Rs.18,900
Return after Tax Rs. 170,100
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INVESTMENT #2-DEFENSE SAVING CERTIFICATES:
The Government of Pakistan introduced Defense Savings Certificate scheme in the year1966. The scheme has specifically been designed to meet the future requirements of the
depositors. This is 10 years' maturity scheme with built in feature of automatic reinvestment after
the maturity. We are investing in these certificates because they have a higher rate of return ascompared to other certificates like Special Saving Certificates and also offer a variety of maturitytime periods, i.e.: 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 years. In this scheme the profit is paid on
maturity or encashment for completed years.
Denominations: Rs.500, Rs.1000, Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000,
Rs.500,000 and Rs.1,000,000/=.
Rate of Return:12.68% p.a.
Risk: Lowest possible risk as it is a government security
Amount investing:1.5 million (we have bought one DSC worth Rs.1,000,000 and
another DSC worth Rs.500,000)
Maturity:1 year
Procedure:The way of purchasing Defense Saving Certificates is almost similar to that
of Regular Income Certificates. These certificates can be purchased from any National SavingsCentre (NSC), Pakistan Post Offices (PPO), Authorized branches of Scheduled Banks and State
Bank of Pakistan (SBP) by filling in a prescribed form calledSC-1, which is available at all theabove mentioned offices of issue free of cost. A copy of the Computerized National Identity
Card (CNIC) or in case of a foreign national, a copy of the Passport is required to be attachedwith the application form.These certificates can be purchased by depositing cash at the issuingoffice or by presenting a cheque. The certificates are issued on receipt of cash. However, in case
of deposit through cheque the certificates shall be issued from the date of realization of the
cheque after receipt of the clearance advice.
CALCULATION OF PROFIT
Total value of certificates: Rs.1,500,000
Rate of return per annum: 12.68%
Total return before tax: Rs.190,200
Less tax (10%): Rs.19,020
Less Zakat (2.5%): Rs.4,755Return after Tax and Zakat Rs. 166,425
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INVESTMENT #3-BMAEMPRESS CASH FUND:
BMA Empress Cash Fund is one of the most professionally managed cash funds in
Pakistan. It is considered as a very safe investment as it mostly contains government
securities, AA+ rated securities and AA securities.
Return:11.18%
Risk: Low
Amount investing: 1 million
CALCULATION OF PROFITS:
1,000,000*11.18% 111,800
Less: 1.5% management fee (1677)
Return after fee deduction 110,123
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INVESTMENT #4-AL-FALAH STOCKFUND
The Al-Falah Stock Fund offers one of the highest rates in the market. The managementfee however is a bit higher than others. CPT is collected on the fund in case of redemption on a
premature basis. The tax on redemption within six months of investment tends to be around 10%,
similarly, after 6 months, the CPT is 7% and on maturity the CPT is exempted. Lastly, the fundis considered to be highly volatile and lucrative and thus it is proposed that the investment shouldbe made for at least one to two years.Return: one of the highest in the market 18.5%
Risk: High
Management Fee: 1.75%
Entrance Fee: 5%The calculation for the NAV is as follows:
NET ASSET VALUE: Amount-Management fee / outstanding no. of stocks500000087500/ outstanding no. stocks
As we are investing 6 million in stock funds and we will get a return of 18 to 19%
depending on the stock market
CALCULATION OF PROFITS:
Total value of stock funds Rs.6,000,000
Rate of return per annum 18.5%
Total return before
deduction of management
cost
Rs.1,110,000
Less M.C (1.75% of thetotal)
Rs.19,425
Total return after M.C: Rs.1,090,575
Total monthly return
after M.C
Rs.9,0881.25
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INVESTMENT #5-NITINCOME FUND:
The objective of NIT Income Fund is to generate competitive stream of return with
moderate level of risk for its unit holders, by investing primarily in fixed income
Securities/instruments.
National Investment Trust Ltd. (NITL) is the first Asset Management Company of
Pakistan, formed in 1962. NITL is the largest asset management company of Pakistan
with approximately Rs. 73 billion assets under management. In order to cater to varied
needs of investors, NITL for the very first time in the 48 years history of the company,
ventured in to fixed income category by launching two Funds in the FY10. NIT
Government Bond Fund, a very low risk product was launched in Nov. 2009 followed by
NIT Income Fund which was introduced in Feb. 2010. With the launching of these two
funds the family of Funds of NIT has increased to six funds including 4 equity Funds and
2 fixed income Funds. NIT's distribution network comprises of 21 NIT branches, various
Authorized bank branches all over Pakistan and Arab Emirates Investment Bank (AEIB)in Dubai (UAE). The Board of Directors of NITL consists of representatives of leading
financial institutions, prominent industrialists and nominee of Govt. of Pakistan. All
Investment decisions are taken by the Investment Committee of NITL.
The fund experienced significant returns mainly due to its healthy exposure in TFCs and
Treasury Bills. The funds asset allocation at the end of the month has around 28% of its
total assets in TFCs. While around 66% of total assets are invested in Treasury Bills. 2%
of exposure is in Commercial paper and the remaining is in the form of cash and other
assets.
Risk: Moderate
Return: 15% p.a.
Amount investing: 1.25 million
CALCULATION OF PROFITS:
Total value of stock funds Rs.1,250,000
Rate of return per annum 15%
Total return beforededuction of management
cost
Rs.187,500
Less M.C (1.25%) Rs.2,343.75
Total return after M.C: Rs.185,156.25
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INVESTMENT #6:HABIB METROPOLITAN BANK-HMBIZAFA CERTIFICATE
Habib Metropolitan Bank was incorporated in Pakistan as a Public Listed Company in
1992 under the name, Metropolitan Bank Limited.On October 26, 2006 Habib Bank AG
Zurichs Pakistan Operations merged into Metropolitan Bank Limited and the merged
entity was named Habib Metropolitan Bank Limited (HMB). HBZ is the principalshareholder of HMB.
Denominations: Rs. 10,000/-, Rs. 25,000/-, Rs. 100,000/-, Rs. 250,000/-, Rs. 1,000,000/-
and Rs. 2,500,000/-.
Maturity:HMB Izafa certificates are offered as 6 years Deposits Certificate
Return:16.67 % p.a
Risk: High
Amount investing: 3000000
Advantages:
Investment doubles in Six years. Easy Loan Facility. Encashable any time. Your profit grows daily. Can be linked to any of the regular accounts.Comparison:
Habib bank limited was the other option for us but we chose HMB because HBL was
giving the same rate of return only if the investment was made for 10 years where as
HMB was giving this rate of return for the 6 year investment. As the inflation rate in
Pakistan is increasing drastically, according to us its better to invest in HMB and get the
same return within 6 years.
CALCULATION OF PROFITS:
Total value of stock funds Rs.3,000,000
Rate of return per annum 16.65%Total return Rs.499,500
Total return after
Tax(10%)
Rs.449,550
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INVESTMENT #7:HABIB BANKLIMITED - HBL ADVANTAGE ACCOUNT
Introduction
HBL was the first commercial bank to be established in Pakistan in 1947. Over the years,
HBL has grown its branch network and become the largest private sector bank with over1,450 branches across the country and a customer base exceeding five million
relationships.
HBL established operations in Pakistan in 1947 and moved its head office to Karachi.
Our first international branch was established in Colombo, Sri Lanka in 1951 and Habib
Bank Plaza was built in 1972 to commemorate the banks 25th Anniversary.
With a domestic market share of over 40%, HBL was nationalized in 1974 and it
continued to dominate the commercial banking sector with a major market share in
inward foreign remittances (55%) and loans to small industries, traders and farmers.International operations were expanded to include the USA, Singapore, Oman, Belgium,
Seychelles and Maldives and the Netherlands.
On December 29, 2003 Pakistan's Privatization Commission announced that the
Government of Pakistan had formally granted the Aga Khan Fund for Economic
Development (AKFED) rights to 51% of the shareholding in HBL, against an investment
of PKR 22.409 billion (USD 389 million). On February 26, 2004, management control
was handed over to AKFED. The Board of Directors was reconstituted to have four
AKFED nominees, including the Chairman and the President/CEO and three Government
of Pakistan nominees.
It offers the highest profit rate with the deposit for the period of 3 months, 6 months, one
year, three years, five years and ten years which offering a different profit rate. This form
of investment can increase our profits.
Procedure: For getting the account opened with HBL, it is necessary to get the
form filled specifying details like name of the accountholder, amount invested, NIC
number, terms of maturity, profit mentioned and so on. This account is subjected to
withholding tax and zakat. Withholding tax and zakat are paid on maturity. Zakat is paid
once a year.
Maturity: 5 years
Return: 13.5%
Risk: Moderate
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Comparison:We chose HBL because it was giving a better rate when compared to
other banks for example Bank Al Habib is giving us a rate of 9.07% for 5 years.
CALCULATION OF PROFITS:
Total value Rs.1,250,000
Rate of return per annum 13.5%
Total return Rs.168,750
Tax(10%) Rs.16,875
Return after Tax Rs. 151,875
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FACTORS AFFECTING INVESTMENT DECISIONS
RATE OF RETURN
The total rate of return that is being obtained via this portfolio excluding the management fees
and other taxes is as follows:
Total Return = 189,000 + 190,200 + 111,800 + 1,110,000 + 187,500 + 499,550 + 168,750 +
435,000
= 2,891,800
= 2,891,800 + 18,500,000
= Rs. 21,391,800
Portfolio Return Percentage = 21,391,800 - 18,500,000 / 18,500,000
= 15.63%
Total Cost = 18,900 + 4,755 + 15,000+ 19,425 + 15,625 + 49,955 + 16,875 + 6,525
=Rs. 147,060
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RISKINESS
A Portfolio should always be balanced with some products giving high yield and posing high
risk; whereas some giving low return and low risk. This is important so that the risk from higher
return avenues can be hedged. We have kept this in mind while making our investment portfolio.
The Risk analysis of our Portfolio is shown in the chart below:
20,000,000
Low Risk, Low Return
Defence Saving Certificates, 1ear maturity with a return of
12.68% p.a.
(Rs. 1.5 million)
Regualar Income Certificate,
maturity 5 years with a return
of 12.60% p.a.
(Rs. 1.5 million)
BMA Empress Cash Fund,return is 11.18% p.a.
(Rs. 1 million)
PIEF, maturity 3 years, 14.5%
return
(Rs. 3 million)
Moderate Risk,Moderate Return
HBL advantage
account, maturity
of 5 years, 13.5%
p.a.
(Rs. 1.25 million)
NIT Income Fund,
15% p.a.(Rs. 1.25 million)
High Risk, Highreturn
HMB Izafa Certificate,
maturity of 6 years
with a return of
16.67% p.a.
(Rs. 3 million)
Alfalah Stock Fund,
with return of 18.5%p.a.
(Rs. 6 million)
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OPPORTUNITY COST
There are always comparisons that are necessary to make as humans can possibly not make
accurate decisions because of incomplete information, knowledge, time and money constraints.
Similarly, we have forgone higher return investment avenues in order to avoid risk.
INFLATION RATE
High inflation rate decreases the overall return on investments. Therefore, it should be kept in
mind that the return is more than the prevailing interest rate. We have considered the interest rate
of September which is 10.5%.
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BIBLIOGRAPHY
http://www.savings.gov.pk/ric.asp
http://www.savings.gov.pk/dsc.asp
http://www.bmafunds.com/
www.alfalahghp.com/alfalahghp/blmfavf.asp#IP
http://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274
http://www.hmb.com.pk/HMBIzafaCertificates.htm
http://www.hbl.com/individual-customers-accounts-terms.php
http://www.mcbah.com/
http://www.savings.gov.pk/ric.asphttp://www.savings.gov.pk/ric.asphttp://www.savings.gov.pk/dsc.asphttp://www.savings.gov.pk/dsc.asphttp://www.bmafunds.com/http://www.bmafunds.com/http://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.hbl.com/individual-customers-accounts-terms.phphttp://www.hbl.com/individual-customers-accounts-terms.phphttp://www.mcbah.com/http://www.mcbah.com/http://www.mcbah.com/http://www.hbl.com/individual-customers-accounts-terms.phphttp://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.bmafunds.com/http://www.savings.gov.pk/dsc.asphttp://www.savings.gov.pk/ric.asp