planning for investments

8/14/2019 Planning for Investments

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An asset or item that is purchased with the hope that itwill generate income or appreciate in the future.

In an economic sense, an investment is the purchase of

goods that are not consumed today but are used in thefuture to create wealth.

In finance, an investment is a monetary asset purchasedwith the idea that the asset will provide income in thefuture or appreciate and be sold at a higher price.


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Higher current income

Saving money for majorpurchases

Planning for the retirement

Shelter for taxes


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BASIS INVESTMENT SPECULATION

Time frame Long Term Short Term

Nature of Reward Interest or

Dividends

Speculative gains

Commonly usedinstruments forinvestments

Stock , Bonds,Mutual Funds

Commodities oroptions

Risk involved Less risk High risk involvedAnalysis/Information

Trading is doneafter thoroughstudy(fundamentalanalysis), past

Trading is usuallydone on Rumors,Hot tips, Insidedopes etc.


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Equities

Bonds

Mutual Funds Real Estate

Gold ETFs

Commodities, Futures and Options Insurance


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Risk Market risk Interest Rate risk

Default risk Purchasing power risk Foreign Exchange Risk Political Risk

Marketability and Liquidity Tax consideration


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An instrument of loan raisedby the government or acompany, against a specifiedinterest rate and a promiseddate of repayment.


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Bonds, while a more conservativeinvestment than stocks, can offercertain investors some very attractive

features:Safety

Reliable income

Potential for capital gains

Diversification (especially for an otherwiseall-equity portfolio)

Tax advantages


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Secured and unsecured loans.

Senior and subordinate bonds.

Convertible and non-convertible bonds.

Treasury bonds and corporate bonds

Junk bonds


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One Period Rate of Return

Current Yield

Yield to Maturity ( YTM )

Capital Gain ( Loss )

Realized Yield


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Rate of return over a single holding period

Rate of return earned if the bond is purchased atcurrent market price and if coupon interest is paid


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Market Value at the end of t years =

C * PVIFA r, ( n t ) + F * PVIF r, (n t )

Where

C = Coupon

r = Reinvestment Rate

n = Term to maturity

t = Holding Period

F = Redemption Price


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Rate of return earned by an investor who holds the

bond till maturity .

YTM = kd in the formula

YTM equates the present value of cash flows to the

current market price


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YTM = Couponbond is selling at par

(P0= P

N)

YTM > Couponbond is at a discount

(P0< P

N)

YTM < Couponbond is at apremium

(P0> P

N)


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1. All coupon and principal payments are made

as per the schedule.

2. The bond is held to maturity.

3. The coupon payments are fully and

immediately reinvested at precisely the same

interest rate as the promised YTM.


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It is the rate that equates the future value of the

purchase price to the total cash flow realized on

the bond.

P * FVIF r, n = Total returns + Purchase price


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Default riskInterest rate risk (price risk)

Reinvestment risk

Call risk

Inflation risk

Foreign exchange risk

Liquidity risk


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Matching strategy

Laddered strategy

Barbell strategy

Interest rate strategy


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More popularly known as the Indian Stock MarketMarket capitalization of nearly $600 billion

Third biggest after China($2,347.4 billion) and HongKong($1,293.7 billion) in the Asian region

Supervised by SEBI (Securities Exchange Board ofIndia)


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Contd..

The Indian equity market depends on three factors :

1) Funding into equity from all over the world

2) Corporate houses performance

3) Monsoons23 stock exchanges BSE and NSE major ones


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Capital AppreciationBonus shares

Dividend earnings

Portfolio

Long term benefits and return on investment

Simple method

Easily cashable

Liquidity


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No guaranteed return

Last to get paid

Volatility in stock prices

Do not enjoy all the rights


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1. Get a Broker2. Get a Demat Account

o With banks, financial institutions,broking firms, NBFC, etc

1. Get a PAN

2. Check if you need a UIN


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ETF is an investment vehicle traded on a stockexchanges, much like stocks.

ETF are securities that tracks an index, acommodity or a basket of assets like an Index

fund.ETF does not have its NAV calculated everyday

like a Mutual Fund.

It is attractive coz: Stock like features

Diversification of index Low cost

Tax efficiency

Demat form


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Gold backed Exchange Traded Funds (ETFs) are securitiesdesigned accurately to track the gold price.

It tracks the performance of Gold Bullion

It provides investors a means of participating in the goldbullion market without the necessity of taking physical deliveryof gold, and to buy and sell that participation through thetrading of a security on stock exchange.

While investing in Gold, few points need to be considered:

Volatility

Entry time matters

Other selection factors


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Requirements for trading:Trading account with a stock exchange broker

Demat account as Gold ETF can be traded only in dematform

Load Structure:Entry Load: Nil

Exit Load: Nil

Tax treatment:Is taxed as per non equity mutual fund taxation rules.

Need not pay Wealth tax.


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No worry on adulteration

Gold provides diversification to the portfolio

Gold is considered as a Global Asset Class

Gold is used as a Hedge against Inflation

Gold is considered to be less volatile comparedto equities

Held in Electronic Form

Store of valueExtremely Liquid


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Parameters Jeweller Bank Gold ETF

FORM Bar or Coin Bar or Coin Demat form

SECURITY Investorsconcern

Investorsconcern

Fund house takesthe responsibility

PRICING Neither standardnor transparent

Differs from bankto bank. Notstandard

Transparent. Willbe traded at NSE

WEALTH TAX Yes Yes No

LONG TERMCAPITAL GAINTAX

Only after 3years Only after 3years After 1 year

RESALE Conditional andUneconomical

Banks do not buyback

At secondarymarket prices

IMPURITY RISK High Nil Nil


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SafetyBrings diversification and stability to a

portfolio

Highly liquid and portable

Tool against inflation

Less regulatory intervention


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Are subject to market risks. As with any investment in securities, the NAV of the units

issued under the Scheme can go up or down depending on thefactors and forces affecting the Bullion Market, Capital Marketand Money Market.

The Past Performance of the fund house issuing the ETF shouldnot be construed for the future performance of the fund.

ETFs are a new concept in India compared to other parts of theworld.

The sponsor of the mutual fund is not responsible or liable forany loss or shortfall resulting from the operation of the fundbeyond the initial contribution made by it of an amount of Rs 1Lac towards setting up of the Mutual Fund.

Investors are not offered any guaranteed or assured returns


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Benchmark Mutual Fund - Gold BenchmarkExchange Traded Scheme (NSE Symbol:GOLDBEES)

Kotak Mutual Fund - Gold Exchange Traded Fund

(NSE Symbol: KOTAKGOLD)UTI Mutual Fund - UTI Gold Exchange Traded

Fund (NSE Symbol: GOLDSHARE)

Reliance Mutual Fund - Gold Exchange TradedFund (NSE Symbol: RELGOLD)

Quantum Gold Fund - Exchange Traded Fund(ETF) (NSE Symbol: QGOLDHALF)


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Commodities are any goods that are common and unbranded.

Gold, Silver, Rubber, Pepper, Jute, Wheat, Sugar and cotton are a few popular

commodities. Commodity market represents a formal system for the interplay of demand for

and supply of commodities.

These markets are classified into spot market and future market.

Due to erratic weather changes and uncertain economic environment acommodity shortage (or oversupply) in a particular season lead to increase

(decrease) in the price of the commodity. Farmers and merchant could not predict what the prices would be on a given day

or season.

It was in this context, the farmers and food grains merchants in Chicago startednegotiating for future supplies of grains in exchange for cash at a mutuallyagreeable price.

Thus the farmer could lock in his price in advance thereby securing his income. This effectively started the system of commodity market forward contract which

subsequently led to the development of future markets.


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Hedging Process :

Examples :

A copper wire manufacturer has 100 tones of copper in his inventory

and there may be a threat of inventory revaluation due to decrease in

copper prices.

In such a scenario he is better off going short (Sell) on copper

futures contracts to protect this against any possible decline in

prices. This method is called Short Hedge If a copper wire manufacturer has to sell copper wires to a telecom

company at a predetermined price, and if the delivery needs to

made after four months he can take a long (Buy) position in the

futures market to hedge against risk of increase in copper prices.

This method is called Long Hedge.


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Indian Commodity Exchanges

There were 23 regional commodity future exchanges active in the

country prior to 2003 when the Govt. open the field for nationawise

electronic exchanges.The growth of futures trading after that was tupendous and the total

turnover crossed Rs.50 lacs crores in 2008.

The three national commodity exchanges

Of this, Rs.35,05,137 crore was contributed solely by MCX and

NCDEX.

The increasing awareness and popularity of commodity futures in

India and the slowdown in equity markets have contributed

spectacularly to the turnover in the market. The turnover of the MCX

and NCDEX reached Rs.63,62,603 crore for the period January 2008until March 2009.


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The economic survey for 2008-2009 has recommended certainreforms in the commodity markets

1. Bring commodity future regulations under SEBI Since commodity futures are part of the financial market bringing

all financial market regulations under SEBI is better. At present commodity futures are regulated by FMC2. Lift ban on futures trading in rice, tur, urad

Futures trading of rice, tur, urad were banned in early 2007 astrading in these commodities was perceived to be causingpressure on inflation.

Lifting of ban on these commodities will restore pricediscovery and price risk management.

Futures in wheat was also banned but the curve was lifted in

May this year. Sugar has been put on the suspended list till December this

year. FMC had recommended to the Govt. to lift the ban on all

commodities as there were no direct evidence to suggest thatfutures trading caused price spiral.


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Insurance is a contract whereby, in return for the payment ofpremium by the insured, the insurers pay the financial lossessuffered by the insured as a result of the occurrence ofunforeseen events.

Commercial mechanism for transferring risk and spreading loss.


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EngineeringProperty & Casualty

Accident & Health

Liability

Specialised

Individual & Group


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Economic Concept of Insurance:1. Insurer offers policy to cover specifiedrisks

2. Insurer collects policy premiums fromcustomers

3. Insurer invests premiums

4. Insurer pays money to insured customersin the event of losses covered by policy.

Opportunities in life


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Opportunities in lifeinsurance

Life insurance premium as % of G

10.7%

8.9% 8.7%

5.7%

4.4%

3.4%

2.3% 2.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

UK J apan Ko rea A ustrlia US M alaysia India China

Opportunities in non life


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Opportunities in non-lifeinsurance

Non-life insurance premium as %

4.6

3.5% 3.4% 3.4%

2.2%

1.8%

0.9%0.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

US U K A ustralia Ko rea J apan M alaysia China Ind ia


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AS A FULLER PRODUCT LIST COME ON OFFERLATENT DEMAND WILL GET RELEASED

50

Pre 2000

Endowment and moneyback policy - ~98% to totalpremium income

Products with guaranteedreturns, limited, if any term

Products viewed asnecessary evil for tax-breaks

Personal non-life insurance

products (except motor)virtually nil

Corporates buying Non life

Today

Variety of products withriders coveringdisability,critical illness,accidents etc.

Increasing acceptance ofvariable returns and pureterm products

Unit linked products

New products emerging to

cater to personal needs:HealthTravel

(overseas/domestic)Household articlesBuilding

(structure/content)Mobile insuranceCredit insurance

Tomorrow

Pension scheme

Annuity scheme

Income protection

Increased term

Home building structureand contents (penetration

in India~1% v/s ~70% in UK)

Health insurance(penetration in India 1-2%v/s 10% in UK)

Corporate and professionalliability

Life

NonLife


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Real estate is a legal term that encompasses land along withimprovements to the land, such as buildings, fences, wells and othersite improvements that are fixed in location immovable

According to The Economist, "developed economies'" assets at theend of 2009 were the following:

Residential property: $108 trillion;

Commercial property: $84 trillion; Equities: $40 trillion; Government bonds: $45 trillion; Corporate bonds: $31 trillion;Total: $268 trillion.

That makes real estate assets 60% and financial assets 40% oftotal stocks, bonds, and real estate assets. Assets not counted here

are bank deposits, insurance "reserve" assets, natural resources, andhuman assets. It is not clear if all debt and equity investments arecounted in the categories equities and bonds.


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Liquidity Risk: It is the risk that a given security or asset cannot betradedquickly enough in the market to prevent a loss (or make the required profit)

Types of Liquidity Risk:

Asset liquidity - An asset cannot be sold due to lack of liquidity in the

market - essentially a sub-set of market risk. This can

be accounted for by:Widening bid/offer spread

Making explicit liquidity reserves

Lengthening holding period for VAR calculations

Funding liquidity - Risk that liabilities:

Cannot be met when they fall due

Can only be met at an uneconomic price

Can be name-specific or systemic


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Market riskis the risk that the value of a portfolio,either an investment portfolio or a trading portfolio, willdecrease due to the change in value of the market riskfactors. The four standard market risk factors are stockprices, interest rates, foreign exchange rates, andcommodity prices. The associated market risk are:

Equity risk:The risk that stock prices and/or the impliedvolatility will change.

Interest rate risk: the risk that interest rates and/orthe implied volatility will change.

Currency risk: The risk that foreign exchange ratesand/or the implied volatility will change.

Commodity risk:The risk that commodity prices (e.g.corn, copper, crude oil) and/or implied volatility willchange.


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VOLATILITY RISK: In financial markets it is the likelihood offluctuations in the exchange rate of currencies. Therefore, itis a probability measure of the threat that an exchange ratemovement poses to an investor's portfolio in a foreigncurrency. The volatility of the exchange rate is measured asstandard deviation over a dataset of exchange rate

movements. A far more sophisticated extension of thismodel is the Value at Risk method, which helps to determinethe actual risk exposure to a portfolio of several currencies.

SETTLEMENT RISK: It is the risk that a counterparty does

not deliver a security or its value in cash as per agreementwhen the security was traded after the other counterparty orcounterparties have already delivered security or cash valueas per the trade agreement.


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Sovereign riskis the risk of a government becomingunwilling or unable to meet its loan obligations, or renegingon loans it guarantees. The existence of sovereign riskmeans that creditors should take a two-stage decisionprocess when deciding to lend to a firm based in a foreigncountry. Firstly one should consider the sovereign riskquality of the country and then consider the firm's credit

quality.Five macroeconomic variables that affect the probabilityof sovereign debt rescheduling are:

Debt service ratio Import ratio

Investment ratioVariance of export revenueDomestic money supply growth


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Three factors have contributed much toglobal real estate opportunities :

Rapid Economic Growth

Changing Demographics

Phenomenon of off-shoring


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First, the Advisory Board determines the broader framework of thereal estate investment strategy and oversees the InvestmentCommittee and Fund Management team with annual reviews ofportfolio performance and approval of large transactions that areover a preset amount or percent of total portfolio.

Investment Committee oversees and approves Portfolio Setupframework, as well as Asset and Portfolio Management operations.

Within this context the Investment Committee reviews semi-annuallyasset and portfolio performances, current and projected, for thewhole portfolio and by category, such as property type, location,tenant industry etc.; reviews portfolio optimization recommendationsand makes decisions regarding changes in portfolio mix in terms ofproperty types and locations in order to maximize portfolio return

prospects and minimize risk; sets and reviews risk mitigationprocesses both at the portfolio and at the asset level. Ideally,portfolio optimization recommendations should be based on theresults of advanced portfolio analysis using reliable return and riskprojections by property type and location (derived through advancedeconometric and forecasting techniques) and modeling frameworksthat draw from the modern portfolio theory

CONTD.


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The Implementation Committee executes the portfolio setup and structure, asdetermined by the Advisory Board and the Investment Committee. The acquisitiondepartment executes the portfolio build up process by screening properties availablein the market to identify those that fit the Funds investment strategy, performing

preliminary screening to select assets that will go through more detailed marketanalysis and feasibility study, negotiating transaction terms and financial structuring,preparing project documentation and analysis package to be presented toInvestment Committee for final approval.

Return and risk analysis by asset should take into account each asset's cash flowprospects, given current leases, stipulated rental rates, annual rent increases,

expiration dates, probabilities of renewing, probabilities and time duration for findingnew tenants for non-renewed leases, and projected market rents at which newleases will be signed and renewed leases will rollover. Lease renewal probabilities,time for finding new tenants and rental rate projections should be based on marketvacancy rate projections, which provide a very good indicator of market tightness.

Transaction closing, post-acquisition management and liquidation of the property inorder to realize capital gains will complete the real estate investment process for aparticular asset.


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A mutual fund is a professionally managed type ofcollective investment scheme that pools money frommany investors and invests it in stocks, bonds, short-term money market instruments, and/orother securities

Investors

Fund Managers

Securities

Returns

Mutual Funds Operations Flow Chart


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Diversification benefitsLow transaction costAvailability of various schemesProfessional ManagementLiquidityTax benefitFlexibilityWell regulated

Convenient AdministrationReturn PotentialTransparencyAffordability


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RisksInstrument RiskMarket RiskPortfolio Risk

Business RiskFinancial RiskRisk in Money Market FundsRisk in Bond FundsRisk in Stock Funds

Strategies for risk reductionDiversification by investment styleDiversification by investment objective


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Novice uninformed investors

Ordinary small investors

Risk averse investors

RetireesInvestors with time constraint

Investors on the look out for liquidity


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Clarity of objective

Collect information from sources like Funds'prospectus and advisors

Do not be swayed by peripheralsGo through the Investment Mix carefully

Past record is not always reliable

Know your Fund Manager


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Standard Deviation allows you to evaluate the volatility of the fund

Beta indicates the level of volatility associated with the fund as compared to thebenchmark

R squared measuring the correlation of a fund's movements to that of an index,R-squared describes the level of association between the fund's volatility and

market risk

Alpha is the difference between the returns one would expect from a fund, givenits beta, and the return it actually produces. An alpha of -1.0 means the fundproduced a return 1% higher than its beta would predict. An alpha of 1.0 meansthe fund produced a return 1% lower.

Sharpe Ratio = Fund return in excess of risk free return/ Standard deviation ofFund

The higher the Sharpe ratio, the better a funds returns relative to the amountof risk taken. Sharpe ratios are ideal for comparing funds that have a mixedasset classes


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Rank Scheme Name Date NAV(Rs.)

Last 1Week %

1 SBI Magnum Midcap Fund -Growth

Jan 11 ,2010

23.12 4.7576

2 Birla Sun Life CommodityEquities Fund - Gbl Pre

Metals - Retail - Growth

Jan 11 ,2010

12.9365 4.6659

3 Birla Sun Life CommodityEquities Fund - Gbl MultiComm - Retail - Growth

Jan 11 ,2010

13.3829 4.6054

4 JM Agri & Infra Fund-Growth

Jan 11 ,2010

3.4109 4.3504

5 Reliance Media &Entertainment Fund -Growth

Jan 11 ,2010

27.5008 4.2495

*Note:- Returns calculated for less than 1 year are Absolutereturns and returns calculated for more than 1 year arecompounded annualized.

Source: ICRA Online (www.mutualfundsindia.c

Rank Scheme Name Date NAV (Rs.) Last 1Month %

1 JM Basic Fund - Growth Jan 11 ,2010

20.2104 10.4798

2 Sundaram BNP Paribas

Select Small Cap Fund -Growth

Jan 11 ,

2010

12.5118 9.8008

3 Escorts Power and EnergyFund - Growth

Jan 11 ,2010

18.0001 9.7192

4 Religare Mid N Small CapFund - Growth

Jan 11 ,2010

11.66 9.2784

5 JM Mid Cap Fund - Growth Jan 11 ,2010

27.6654 9.2449

*Note:- Returns calculated for less than 1 year are Absolutereturns and returns calculated for more than 1 year arecompounded annualized.

Last one Week Last one Month


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