Wealth: Monetary value of all assets

Wealth management: Creation and preservation of wealth

Classification of Assets:

Personal / nonfinancial / Tangible : Personal Assets: This represents the tangible

assets that may or may not have been acquired for the purpose of investments.
However they are marketable and carry a monetary value that can be realized
and converted to money when required. Examples are: Real estate, Jewelry,
antiques, vehicles etc

Financial / Intangible: Financial assets: This represents the intangible assets that
are represented in monetary terms. The purpose of acquiring and holding these
assets primarily is for investments and savings. Examples are: Equity shares,
Mutual fund units, Fixed deposits, Bonds etc.

Investment Avenues:

Equity: This represents the group of investment avenues that participate in the
profitability generated on the underlining. The asset class carries with it a High
Risk High return profile where in both the volatility and loss of capital which
represents Risk can be at higher levels and returns or growth in value can also be
reasonable higher when compared to other asset classes. The various types of
Instruments under this asset class are: Equity shares, Equity oriented Mutual
funds, Preference shares, PMSs based of equity strategies.
The participation in this asset class can be either directly by the investor or
through a managed platform. Investing directly is represented by direct equity
trading through cash market or F&O market. This would also represent the
participation through the secondary market. Similarly investing directly through
primary market would comprise of buying of equity shares in a IPO, FPO, Rights
Issue, Preference share issue etc. The other way of participating is through a
managed platform like that of a PMS or Mutual fund.

Debt: This represents the group of investment avenues that participate in the
lending and borrowing market. The consideration can either be interest / Dividend
income or Gains through trading activities. The Risk-Return profile for this asset
class falls between Low to Moderate. When compared to Equity the level of risk
both in terms of volatility of return and risk of capital loss is low. Similarly the
return generated is also low compared to equity on the higher side. The various
types of instruments under this asset class are: FDs (Bank FDs and Corporate
FDs), RDs, Post Office Deposits, Bonds and Debentures (Corporate Bonds, Tax
saving bonds, Tax free bonds etc.), Debt oriented Mutual Funds Etc.

Commodities / Bullion: This asset class represents the class of avenues where the
underlining is various commodities. The returns are majorly generated through
trading activities and hence the Risk Return profile is similar to that of Equities
though it is more cyclical in case of commodities when compared to Equities. The
participation is this segment can be done directly through the markets or through
managed platforms like Mutual Funds/ ETFs. Although there are innumerable

commodities that are available for trading the most popular ones are Gold, Silver
and Oil.
With respect to gold two important points to be noted are

Alternatives: This Asset class includes all avenues that do not form a part of the
above three. Where there is an established and regulated market which provides
opportunities for buyers and sellers to transact. This asset class carries with it the
highest Risk Return characteristics. Examples of Alternatives are :
Real Estate: Real estate is also considered as an important investment avenue.
Here the Liquidity is comparatively lower based on the type of participation. In
other words direct participation where the investor buys real estate would have a
lower liquidity profile when compared to a managed platform. The risk return
profile here again is similar to that of equity but the liquidity profile is low. The
various avenues here are: Buying land and buildings on a direct participation
mode and through manage platforms like Real estate funds, REITS Etc.
Private Equity / Venture capital / Hedge Funds: This is an avenue where in the
investments though are done in the nature of equity do not have an established
and regulated platform that is available in equities.
Structured Products: These are avenues that are custom made. Here based on
any of the above asset class as the underlining various structures are created that
is intended to meet the investors specific requirement and expectations.
Examples of various structures are NLDs, Real estate structures; Bullion based
structures, ITMs, PP, PR+Coupon etc.

Three characteristics of Debt:

Interest Rate
Maturity
Principal repayment

Life stages:
Stages of Wealth Cycle
1. Foundation
2. Accumulation
3. Preservation
4. Distribution
Grid:
FOUNDATION
AGE
RESPONSIBILITIE
S
RISK

25 35
LOW

ACCUMULATIO
N
35-45
HIGH V.HIGH

HIGH

HIGH

PRESERVATION

DISTRIBUTION

45-60
MODERATE
HIGH
MODERATE

60 <
LOW
LOW

EARNING YEARS

V.HIGH

MODERATE
HIGH

OBJECTIVE

WEALTH
CREATION
NO

WEALTH
CREATION
NO

LOW
MODERATE LOW
WEALTH
PRESERVATION
YES

LOW
LOW
LOW

HIGH
LOW
HIGH

HIGH
MODERATE
HIGH

ALTERNATIVE
INCOME
LIABILITY
MEDICAL EXPS
SAVINGS

LOW NIL
WEALTH
PRESERVATION
YES
LOW
HIGH
LOW

Types of Risk:

Volatility of return
Loss of capital

Equity risk:
Market risk can lead to high volatility of return and also probability of loss of capital is
high
Debt Risk:
Credit Risk and Re-investment risk: volatility is lower compared to equity and loss of
capital is also lower.
Risk return: Higher the risk higher the return

Click to add title

Return

Risk

Extended time reduces risk for the same return.

Financial planning:

Financial planning is the process of determining whether and how an individual can
meet life goals through the proper management of financial resources
Steps:
1. Goal setting: Goal should be Realistic, clear with no ambiguity, time bound and
in monetary terms. Goals can be classified into Short, medium and long term and
also on basis of priority as high medium and low.
2. Collection of information: The three important information to be collected are
Risk, net worth and cash flow.
a. Risk profiling aspects: Risk attitude, Risk capacity and risk requirement
Risk attitude: through interview or questionnaire
Risk capacity: Earning, liability and time horizon
Risk requirement: based on goal and time to achieve goal
Three key components comprise an individuals true risk profile:
Psychological willingness to take risk, sometimes called risk attitude
Financial ability to take risk, or risk capacity
Need to take risk, including the need to accept risk to meet an objective, avoid
falling short of a goal or having wealth eroded by inflation.
Ability to take risk relates to financial circumstances and investment goals.
Generally speaking, the higher the level of wealth relative to liabilities, and the
longer the investment horizon, then the greater the ability to take risk. The
financial planning process should consider all of these issues carefully.
Willingness, or risk attitude, on the other hand, relates to psychology, rather
than to financial circumstances. Some individuals find the prospect of investment
volatility and the chance of losses distressing. Others are more relaxed about
those issues. Financial advisers should try to fully understand the psychological
willingness of each client to take risk. This is what risk profiling questionnaires
focus on.
The need to take risk is the third component of a true client risk profle. Willingness
and ability need to be evaluated in the context of an individuals need to take risk
to achieve a goal. If they have a very low risk profile with a very demanding
investment objective, something will have to give.
b. Networth : Assets liabilities and networth projection based on growth rate of
assets and reduction rate of liabilities.
c. Cash flow: Income expenses. Cash flow projection for net 3yrs, 5yrs or long
term based on rate of growth of income and rate of growth of expenses
(inflation) is very important.
3. Creation of plan: most important aspect is Asset Allocation
Asset allocation: process of distribution of investments across different asset
classes.
Asset Allocation Strategies:
a. Strategic Asset allocation: Strategic asset allocation is a traditional approach to
determining how much of your money should be where in order to achieve your
long term investing goals. It starts with assessing your tolerance for risk, and your
investing time frame.

Once your risk tolerance and time frame are understood, a recommended
allocation is devised by creating an allocation of investments that, when
combined, should match the long term returns and risk tolerance that you desire.
The asset allocation is done based on a thumb rule of based on efficient frontier.
This is fixed asset allocation from a long term perspective.
b. Tactical asset allocation is a more active approach than strategic asset allocation.
With tactical asset allocation, rather than following a static allocation and
rebalancing on a periodic basis, you choose to overweight or underweight asset
classes based on an analytical assessment of the value of the asset.
With tactical asset allocation you start with a base allocation, such as 60%
stocks/30% bonds/10% cash, but with a range of plus or minus ten or twenty
percent. If calculations show that stock valuations are high, you would choose to
underweight stocks and your allocation may be at 40% stocks/30% bonds/30%
cash. Or, if stocks seem undervalued you may be up to 80% stocks with only 20%
in bonds and cash.Tactical allocation follows a defined process of appraising an
asset class based on numerous factors such as price to earnings ratios, price to
book ratios, the macro economic outlook, consumer spending, interest rates, and
much, much more.
c. Goal Based asset allocation: The idea behind goal-based investing is that
investors should set specific, personal goals that they want to achieve, and
structure their investment plans around those goals.A goal-based investing
approach would involve the investor setting up a number of investments
buckets attached to each goal, and then managing the money in each bucket in
such a way as to meet the goal it is attached to. Here the required rate of return
and the time period available to achieve the goal will determine the portfolio risk
and the allocation to asset class based on all of this.
Performance measurement:
Performance measurement
To assess how well your investments are doing, you'll need to consider several
different ways of measuring performance. The measures you choose will depend on
the exact information you're looking for and the types of investments you own. For
example, if you have a stock that you hope to sell in the short term at a profit, you
may be most interested in whether its market price is going up, has started to slide,
or seems to have reached a plateau. On the other hand, if you're a buy-and-hold
investor more concerned about the stock's value 15 or 20 years in the future, you're
likely to be more interested in whether it has a pattern of earnings growth and seems
to be well positioned for future expansion.
In contrast, if you're a conservative investor or you're approaching retirement, you
may be primarily interested in the income your investments provide. You may want to

examine the interest rate your bonds and certificates of deposit are paying in relation
to current market rates and evaluate the yield from stock and mutual funds you
bought for the income they provide. Of course, if market rates are down, you may be
disappointed with your reinvestment opportunities as your existing bonds mature. You
might even be tempted to buy investments with a lower rating in expectation of
getting a potentially higher return. In this case, you want to use a performance
measure that assesses the risk you take to get the results you want.
In measuring investment performance, you want to be sure to avoid comparing
apples to oranges. Finding and applying the right evaluation standards for your
investments is important. If you don't, you might end up drawing the wrong
conclusions. For example, there's little reason to compare yield from a growth mutual
fund with yield from a Treasury bond, since they don't fulfill the same role in your
portfolio. Instead, you want to measure performance for a growth fund by the
standards of other growth investments, such as a growth mutual fund index or an
appropriate market index.
Yield
Yield, which is typically expressed as a percentage, is a measure of the income an
investment pays during a specific period, typically a year, divided by the investment's
price

Return
(Change in value + Income) Investment amount = Percent return

Capital Gains and Losses

Investments are also known as capital assets. If you make money by selling one of
your capital assets for a higher price than you paid to buy it, you have a capital gain.
In contrast, if you lose money on the sale, you have a capital loss

Annualised returns
AR=(1+return)1/years- 1

All NPV, IRR, MIRR, XIRR and XMIRR are used to analyze investments and to
choose between 2 investments. These measures allow an investor to find
out the rate of return he is earning on his investment.
NPV is a number and all the others are rate of returns in percentage.
IRR is the rate of return at which NPV is zero or actual return of an
investment.
MIRR is the actual IRR when the reinvestment rate is not equal to IRR
XIRR is the IRR when the periodicity between cash flows is not equal
XMIRR is the MIRR when periodicity between cash flows is not equal

Net Present Value (NPV)

Net Present Value is the current value of a future series of payments and receipts
and a way to measure the time value of money. Basically, money today is worth
more than money tomorrow. And future money is discounted by the interest rate you
specify.
Assuming cash flows occur at the end of each period, an NPV with a 10% discount
rate would divide the cash flow of period 1 by (1 + 10%) then add the cash flow in
period 2 divided by (1 + 10%) ^2, etc. The NPV calculation ends with the last cash
flow. The formula for NPV is:

where N is the number of periods, n is a specific period, C is the cash flow for a
particular period and r is the discount rate for each period.
So in NPV we find the present value off all cash outflows i.e. all the money invested
and then we find the present value of all cash inflows i.e. returns generated by an
investment. The we subtract cash outflows from cash inflows. The resultant answer is
called as NPV or Net Present Value. The rate used to find the present value is called
as the Discount Rate and it is the opportunity cost the return which would be
generated if this investment is not chosen.
Suppose for an investment is Rs. 1500 at 10% discount rate this means that after
generating a return of 10% the money remaining is Rs. 1500 i.e. the return is more
than 10%.
Please remember to set the Discount Rate to Your Time Interval
The discount rate you enter must correspond to the period of time between each cash
flow. For periodic cash flow analysis, Total Access Statistics does not have date
information on when the events occur.
If its monthly, you should use 1/12th of your annual rate, for quarterly one-fourth,
etc. For most accurate results, take the nth root of your annual discount rate to
capture the compounding effect.
Internal Rate of Return (IRR)
The Internal Rate of Return is used to measure an investments attractiveness. It is
the interest rate that makes the NPV equal to zero for the series of cash flows. At
least one negative payment and one positive receipt are required to calculate IRR. If
this doesnt exist, the result is null.

IRR is sometimes called the discounted cash flow rate of return, rate of return,
and effective interest rate. The internal term signifies the rate is independent of
outside interest rates.

4. Implementation of plan
5. Monitoring of plan

Wealth management Industry

Key players
1. Manufacturers : Mutual funds, Insurance, Pension funds, Post office, Banks
2. Distributors : Banks, Stock brokers, Post office, Other distributors / advisors

Structure of Industry:
Manufacturer

Individuals

Corporate

IFAs (Indipendant Financial Advisors)

Banks

Non-Banks
National Distributors
Regional Distributors
Wealth management
firms

Regulators
Banks: RBI
Mutual Funds: Sebi, Professional body is AMFI
Insurance: IRDA
Pension Funds: PFRDA
Stock brokers etc of Capital markets: SEBI

Few important regulation of SEBI with respect to Mutual Funds

1. Abolished Entry Load
2. Direct plan introduction for investing without distributor with lower expense
ratio
3. Investment advisory regulation
CONCEPT OF MUTUAL FUNDS
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realised are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow
chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the organisational set
up of a mutual fund:

Organisation of a Mutual Fund

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are:

Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The history
of mutual funds in India can be broadly divided into four distinct phases
First Phase 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by
the Reserve Bank of India and functioned under the Regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of
India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),
Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund
(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual
fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was
the year in which the first Mutual Fund Regulations came into being, under which all
mutual funds, except UTI were to be registered and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain
other schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
Mutual Funds

Equity

Debt

Market Cap

Liquid / cash

Sector

Short / Medium

Thematic

Long term Funds

Hybrid
Equity based
Debt based