ANSHUL BHURIAAAYUSH SINGLA AMIT SHARMA AMIT MITTALBALRAM CHOUDHARY

Group members

Forming an efficient portfolio and client

education

Client goal

Investment Risk

Portfolio Management

Time bound goals

Intermediate Goals

Lifetime goals

Client Goals

Risk

Low Risk Neutral High Risk

Investment Risk

Before portfolio: start at the beginning

Time horizon, usually more than a few years is considered long term

Rate of return required or desired

Ability to handle uncertain results

CLIENT EDUCATION

“Education is not only a ladder of opportunity

but also an investment in one’s future - ED

Markey

INTRODUCTION The ultimate success with any client

relationship comes with the appropriate education of client

The importance of educating client about the process of wealth management and various building blocks cannot be overemphasized.

Client should to be made aware of- Investment process Risk-Return relationship Importance of diversification Relevance of assets allocation

INVESTMENT PROCESS

An understanding of investment process is critical for every investor and advisors should communicate the functions of the process.

There are four stages in investment process

Understanding Needs, limitations And risk preferences

planning for investment Implementing the investment plan Performance evaluation

The investment process starts with the investor. For an individual investor creating a personal portfolio, the first step of understanding one’s needs, financial limitations , and risk appetite is just as imperative as it for a portfolio manager

The most critical component of this stage is risk assessment . Willingness and capacity to bear risk vary widely among investors and each portfolio should reflect the owner’s risk preference

Needs limitations and risk preferences

Planning an investment strategy

investment planning deals with the selection of investment strategy that takes advantages of opportunities afforded by each location and meets the goals and needs of the investor

Implementing the plan

Implementing investment plan is principally concerned with manager selection and management . It involves many issues like, market – timing, initial portfolio funding and etc. And investor may have to exchange transaction cost against transaction speed .

Performance evolutions Performance evaluation is the final stage of

the investment management process. The measurement of portfolio performance allows the investors to determine the success of the portfolio management process and of the portfolio manager. Its enable investors to evaluate the risks that are being taken.

RETURN ON INVESTMENT

The objective of investors is to maximize expected returns ,although high return come with risks.Return is an reward an investor gets for taking risks and investing in certain classes of assets.Return is an inspirinf force behind every investment decisions.

Return OR Investment

Return on a typical investment consists of two components:

YIELD. The fundamental component that one can think of when discussing investment returns is the income on investments ,either investment or dividends.

Unique feature: Issuer makes the payments in cash to the holder of the asset

Relate cash flows to a price for the security

Return ON Investment Capital gain(loss).It is not only for common

stocks and long term bonds and other fixed income securities.

Appreciation or depriciation in the asset price Price change There are 2 cases: Long position- difference between the

purchase price and and the price at which the asset can be or is sold

Short position-difference between the sale price and the subsequent price at which the short position is closed out. In either case a gain or loss occur.

Risks We know that different clients have different risk profiles. Some are conservative, some are moderate, and other may be more aggressive

Types of risks

Systematic RiskUnsystematic risk

Systematic riskThis risk occurs due to changes in the economic factors such as interest rates , unemployment , etc. systematic risk effects all corporates , thus all investments; it is a system-wide risk that cannot be diversified away. Thus risk is also known as non-diversifiable risk or market risk.

Unsystematic risk These risks are firm-specific , i.e., an

unsystematic risk does not impact the entire economic environment. Actions by a firm such as management decisions , labor characteristics ,and so forth are the major causes of unsystematic risk.

Systematic risk Interest risk = when interest fall in the

market then it effects the market are it brought some changes in market

Inflation risk = the higher the inflation rate, the faster the money loses its value

Maturity risk = the greater the maturity of an investment , greater the change in price for the given change in interest rates

Liquidity risk = liquidity refers to the ability of an assets to convert into cash in a short span of time through buying and selling without a major movement in price

Exchange risk = this is an uncertainty associated with possible change in the value of a currency

There are two types of FER. Translation risk Transaction risk

Unsystematic risk Business risk = the uncertainty associated

with a firm's operating environment and reflected in the variation of earning before interest and taxes

Financial risk = it is also associated with a firm’s financing methods and reflected in the variability of EBT

Cont. Default risk = In simple words, default risk

is the risk of non payment of any financial dues.

DIVERSIFICATION The basic tenet of good portfolio

management is to diversify the portfolio. By holding an array of assets ,the wealth

manager can lower the risk without necessarily having to reduce the returns.

Clients do not need to calculate the SD of the return of their assets.

Diversification across investments is a way to reduce the portfolio risk.

DIVERSIFICATION EXAMPLE: There are two securities P and Q having

a potential return of 10% each and a SD of 20% each .Further the returns of both these securities are independent of each others performance.

Let us assume that the wealth manager inverse equally in both of these securities .the weighted potential return (0.5*10%+ 0.5*10%) will be equal to 10% ;which is same as debt of the individual securities. But since the risk is now spread over to uncorrelated securities,The SD (i.e. ,risk ) of your portfolio will be 14.1% (lower than 20% for each individual assets)

To be contd.... In the above example explained ,the wealth

manager was able to lower the risk profile keeping the returns same by diversifying into a couple of assets whose returns are independents like say stock P, a banking company and stock Q, an engineering company. Here care should be taken that diversification is into stocks that are not corelated.

To b contd...

To be precise ,there are two crucial aspects to keep in mind while investing:

Every asset has a risk attached to it. The higher the risk ,the higher should be its expected returns and vice versa.

Do not put all the eggs in one basket. To minimize risk through diversification ,spread the portfolio across different assets classes like fixed income ,equity,gold,commodities real estate etc. Whose returns are not corelated.

ASSET ALLOCATIONAsset allocation is the art of creating a portfolio of assets to meet the financial objectives of an investor.It involves holding a diversified portfolio which are spread or allocated across different types of investments such as equitiesi. Sharesii. Bonds iii. Cash

To be contd…..

Studies indicate that around 90% of the difference in returns between portfolios is due to assets allocation decisions

Constructing a portfolio without an appropriate asset allocation strategy is a bit like having a business chart without a business plan

Once assets have been purchased as per the client’s financial objectives and a sound portfolio has been created , it need not be reviewed every day. Such a portfolio does not require high frequency rebalancing

To be contd….. The importance of asset allocation as

opposed to the selection of individual equities. But it does not mean that the selection of the underlying assets is unimportant, rather that the investment process needs to be balanced

Assets allocation not only facilitates in calculating the expected returns from a portfolio but also govern a portfolio’s risk levels

To be contd….. The assets allocation decision starts with

determining the relative importance of income and capital appreciation to the investor

The four conventional asset classes i.e. equities fixed income real estate cash or cash equivalentsDiffer in their total income and capital growth

return.

BALANCING RISK AND RETURN Assets allocation is an intricate process of

selecting investment assets so that their income and return characteristics are in sync with an investor’s risk tolerance

The major mistake an investor undertakes during assets allocation is to take on more risk then required to accomplish a desired return

For instance, an investor may hold more equities than necessary to achieve his/her desired return and may be increased risk unnecessarily, and hence the need for balancing the risk with expected return from the portfolio.