Financial Planning and Asset Allocation

Published on December 2016 | Categories: Documents | Downloads: 22 | Comments: 0 | Views: 295
of 119
Download PDF   Embed   Report

Comments

Content

Presentation Title

Financial Planning and Asset Allocation
*Tarakki does not mean guaranteed future returns.

Agenda
Financial Planning concepts Wealth creation principles Mutual Funds – nuts and bolts Mutual fund – myths vs. realities Mutual fund – Sales pitch

2

What is Financial Planning?
Financial Planning is the process of meeting life’s goals through proper management of one’s finances. It is:realizing the investment objective through disciplined investment practice

An investor, thus needs to have
long term plan Catering to his/her financial needs

3

Financial Planning & the Planner
“It is an exercise aimed at identifying all the financial needs of an individual, translating the needs into monetarily measurable goals at different times in the future and planning the financial investments that will allow the individual to provide for and satisfy his future financial need and achieve his life goals.” Who is a financial planner? Is a person who uses the financial planning process to help another person determine how to meet his or her life goals Key functions of a FP is to help people identify their financial planning needs, priorities and the products that are most suitable to meet their needs.

4

Why do we invest?

Investing for maximizing returns; driven by Greed

Investing for Preserving Wealth; driven by Fear

5

Why should we invest ?
Returns generated through investments on its own do not serve any purpose unless they help the investor to : Enhance Standard of living. Own assets like property, car etc. Provide for children’s education. Maintain same standard of living post retirement. Meeting any unexpected expenses due to any emergencies. Financial planning can go a long away in achieving the above.

6

Steps in Financial Planning Process Goal Setting based on data gathered. Asset Allocation. Implement and Monitor. Review and Rebalance.

7

How much is enough?

Ram at, 30

I am well prepared for my retirement: when I retire, my retirement savings will total Rs. 80 lakhs which gives me about Rs. 40000 p.m.(@0.5%p.m) to meet my household expenses. This is more than sufficient

8

30 years later…

Ram at, 60

I now have Rs. 40,000 p.m. to meet my household expenses, but it buys less than Rs. 10,000 of what it used to buy 30 years ago. To lead the same quality of life, I need over Rs. 2.3

lakhs per month!

9

The problem?
Ram failed to factor in inflation into his calculations.

Consider: To buy Rs. 40,000 worth of goods and services when he was 30 years old, John would need Rs. 2,30,000 at 60.

10

Inflation robs your purchasing power
Rs. 10,000 today 452,000

174,000 67,000 25,900

10 years

20 years

30 years

40 years

Assuming inflation rate of 10 % on the goods purchased by you regularly

11

Basics of Investing
When it comes to financial planning, we normally think of accumulating a certain amount first and investing the savings in a lump sum. This however may not be feasible since certain expenses assume priority over savings. For example, it is not possible to plan overnight for a child´s education or marriage. These are heavy expenses which require adequate time and planning, without feeling the pinch at the time of expense.

12

Benefits of Financial Planning
To client Provides direction and meaning to financial decisions Helps understand how decision in one area effects other areas Helps evaluate short and long term effects of decisions on one’s life goals To Planner Ability to establish long term relationships Ability to build a profitable business.

13

Important factors
Set Measurable Financial Goals Set Measurable Financial Goals Understand the Effect of Each Decision Understand the Effect of Each Decision Re-evaluate Financial Situation Periodically Re-evaluate Financial Situation Periodically Start Planning ASAP Start Planning ASAP Set realistic expectations Set realistic expectations You are in-Charge of the process You are in-Charge of the process

14

Foundation of Financial Planning
Earn-Spend-Save Financial Disappointment Earn-Save-Spend Financial Dependence Earn-Protect-Save-Spend Financial Security Earn-Protect-Save-Invest-Spend Financial Independence.

15

Why Save?

Human Life Cycle-Importance of Wealth Management
Income Phase I Phase II
Child’s Marriage Child’s Education

Phase III

Accumulation Housing of Wealth
Child birth Marriage 22 yrs 38 yrs

Distribution of Wealth

Over 25 - 30 yrs

Birth & Education
22 yrs
17

Earning Years
60 yrs

Retirement

Age

Savings Vs Investing Why Save? Consider this: HUMAN LIFE CYCLE Age 23.yrs. Starts off career (100% dependent on Job) Age 40 yrs. Builds a House Age 45 yrs. Pay for Son’s/Daughters Professional Degree Age 50 yrs. Arrange for Daughters Marriage Age 60 yrs. Retirement (100% dependent on earnings from Investments) And What are the factors underlying expenses? Expenses are a factor of:Inflation Higher Life Expectancy New Products/ alternatives available Change in Income and Consumption Levels

18

Luxury OR Necessity?
To maintain a standard of living & to also meet future goals

Items
Mobile Phones Colour T. V. Telephone Washing Machine Microwave Two-wheeler / Car

Luxury in 1987 Necessity today!

19

Cost of Future Goals
Estimate of marriage expenses At an average annual inflation of 6% p.a.
Year 2010 Rs. 5.0 lacs Rs. 10.0 lacs Rs. 20.0 lacs Rs. 25.0 lacs Year 2020 Rs. 8.9 lacs Rs. 18.0 lacs Rs. 35.8 lacs Rs. 44.8 lacs Year 2030 Rs. 16.0 lacs Rs. 32.0 lacs Rs. 64.1 lacs Rs 80.1 lacs

20

Cost of Future Goals
It is evident from the table that You need to plan well in time to accumulate considerable sum of money for your child’s marriage as inflation will rob your purchasing power. So, for a marriage which has Rs 5 lac budget today will be worth Rs 8.9 lac after 10 years, considering an average inflation of 6 %. Marriage budget of Rs 10 lac today would be equivalent to 18 lac after 10 years and so on. If You save and invest regularly in good performing funds for long term basis, You can target your amount more comfortably than a person who does not believe in regular investments and is likely to be in trouble when these needs arise.

21

Child’s Education
Climb High, Climb Far, Your Aim the Sky, Your Goal, the Star
As human beings, every parent/s vision is to facilitate the best potential upbringing for their child/Children. As a parent, the dream would be to plan for your child in such a way that all their future necessities are properly taken care of and there is no running around at the time when actual necessity arises. And for a proper plan to be in place we need to take into account all the realities of the times we are living in. Have You planned for it?

22

Points to Ponder Over
Even 15 years’ ago, in early nineties, the per year education cost was very low, affordable. Today, providing good education, establishing a good career is extremely expensive If You wish to send your child to a good school in a metro or any other city which has good schools for all round development of your child, You have to shell out at least 50000/- per year as tuition fee. Higher education has become so expensive that managing education for two kids is so difficult to manage without proper plans and corpus in place. Professional courses like Engineering, Medical, Business Schools, Mass Communication, Fashion Designing or any other professional education fee has skyrocketed. Imagine the times, when your kids go to college? Need to protect from Inflation – “The invisible thief’’. Need to meet their short-term as well as long-term goals is a must. So, prepare yourself for it. Traditional investments too becoming volatile…no one solution to all needs of an individual –Returns on these products are miniscule beyond inflation & taxes

23

Why Goal Based approach?
Goal based investing is the process of meeting life goals through a proper planning and management of finances to translate our dreams and aspirations into reality. Gone are the days when there were limited choices in the field of education and the parents used to not plan much ahead for the education of their children. In those days, inflation was not high and everything used to be so cheap. In today’s time, cost of living is becoming expensive day by day and education cost has been rising at a faster pace. There are a number of opportunities available in India and abroad and the child can pick up and choose a career of his liking.

24

Cost of Future Goals
Escalating costs of Higher Education YEAR 2010
ENGINEERING MEDICINE MBA

3.5 lacs 5.0 lacs 2.0 lacs 6.3 lacs 8.9 lacs 3.6 lacs 11.2 lacs 16.0 lacs 6.4 lacs

ENGINEERING

YEAR 2020

MEDICINE MBA

YEAR 2030

ENGINEERING MEDICINE MBA

* At an average annual inflation of 6% p.a.
25

Escalating costs of Higher Education
The picture in the previous slide indicates that as the professional education becomes more expensive, the investors need to plan ahead for their children’s future education needs. This can also be considered as one of the goals to attain. If You plan and start early, You will always have an early mover advantage in investments and your child’s future, as far as money matters is concerned, will be safe. In the example, we have considered increasing cost of professional education. Sending your children to Engineering, Medical College or a Management Institute, taking inflation rate @6 % would be an increasingly difficult exercise if You do not have sufficient money for the same. Needless to say, regular savings and disciplined investments in child care plans or any of the good performing diversified equity funds can be considered. If M.B.A Education in a reasonably good business school is costing Rs 2 lac in 2010, it would be 3.6 lac 10 years hence and 6.4 lac after 20 years, with inflation growing at 6 %. Inflation increase can be more in certain areas than others.

26

Why Invest?

Why Invest?
To beat Inflation i.e. preserve existing wealth To fund future needs To meet contingencies To maintain same standard of living after retirement.
Many of us do not realize how inflation keeps on eating into our purchasing power. If you had a monthly expenditure of Rs 10,000 today, what would you need to have the same standard of living in different years, considering the fact that prices keep going up at the current rate ? Yes we are talking about the impact of inflation ! Let us look at the impact of inflation.

28

Inflation Robs Purchasing Power
Rs. 10,000 today
(assuming inflation @ 6% p.a.)

102,800

57,400 32,000 17,900

10 years

20 years

30 years

40 years

29

Why Invest?
Emergencies????
Kid 2’s 2’ Marriage Kid 1’s 1’ Marriage House

Retirement

????

Income

Car Kid 1’s 1’ College Kid 1 Kid 2

Kid 2’s 2’ College

Marriage

Savings / Investing
0
Birth and Education

25

Age

Working Life

60

Retired Life

75 +

30

So how do you create wealth? By saving or…by Investing?

Long-Term Wealth is created by early and regular investments

There are two ways we make money: • Through our Profession • Through our Investments.

32

How do people invest, normally?

How do People invest normally?
Product Oriented Approach Tip about the hot investment option/opportunity On Hot Tip:If stock market experts were so expert, they would be buying stock, not selling advice.” ~ Norman Augustine Get a thrill out of making money Decisions based on emotions

34

Investor’s Psyche
The cy cl e o f fea r, g re ed a nd ho pe
Wrong emotions at the wrong time!

Fear

Greed

Ho p e

Have a fine balancing between fear, greed andInhope.u a lFu nd Zu rich d i Mu t a

35

Different Objectives

36

Different Risk appetites

37

We all view risks in our own way
There is a risk to investing There is a risk to not investing as well! There is no such thing as a ‘risk-free’ investment It is important that you are comfortable with the risks associated with whatever investment avenue you choose.

38

Spreading risks

39

What do we invest for?
INVESTMENTS INVESTMENTS

INCOME INCOME

40

Three factors that determine returns…
When you invest Where you invest

How you invest?

Which of these do you think is most important?

41

When, Where and How You Invest?
Always remember the three factors (When, Where and How You invest) that determine returns… Start Early in Equity Mutual Funds investments by investing in good performing Equity MFs, with consistent performance track record, suiting your risk return profile. Have discipline in your investment approach, set & define your goals and monitor your portfolio regularly & seek advice from the experts. Do Asset Allocation by having right mix of Equity and Debt in your portfolio to benefit from both.

42

Theoretically, market timing is the single most powerful factor.

Getting one’s timing right is a different story altogether. It is very difficult to time the market

43

Cycle of Market Emotions
21.00 EUPHORIA 20.00 EXCITEMENT 19.00 "Seems to be a temporary correction" "I can withstand this, I'm a long term investor…" ANXIETY "How long will this correction last?" "I've finally recovered my principal. But should I exit now?"

18.00 OPTIMISM 17.00

16.00 FEAR 15.00

"Once I recover my principal I'll exit" RELIEF

"I should have exited when I was making money"

14.00

PANIC DEPRESSION

HOPE

13.00

Have long term view in Equity Investments to tide over Cycle of Market Emotions: The above graph is only for illustration purpose. It does not suggest or indicate investors’ behaviour at different market levels.

44

Wealth Creation Principles & Considerations for Wealth Creation

Rupee saved is rupee earned

They say, wealth creation is not a function of income; it is not a function of investment expertise …Its a matter of Regular Savings!

46

Assuming 7% p.a.

47

Illustration
The illustration in the previous slide on two different investment periods 40 years and 25 years clearly indicates that if an investment is started at an early stage on a regular basis, good amount can be accumulated to ensure a comfortable living. If you start at a later stage in life, then the amount would be considerably less. To catch up with the person who has started early, You will have to either save and invest much larger amount per month and /or your investment should also earn very high rate of return, assuming 7% p.a.

48

The Power of Compounding

FV = PV(1 + r)n
FV = Future Value PV = Present Value r = Rate of Return/ Coupon Rate n = No. of compounding periods Applications aside, what do you think this equation really signifies? The essence of how to create wealth!

49

Enhancing Future Value
The Wealth Creation Mantra

FV = PV (1 + r)n SAVE MORE EARN MORE START EARLY

50

The more you save, makes a difference
Growth rate of 7% p.a. Amount saved per month 5,000 3,000 1,500 1,000 Total Amount Saved 1,500,000 900,000 450,000 300,000 Value after 25 years 4,073,986 2,444,391 1,222,196 814,797

Here's some food for thought: the more you save, makes a bigger difference than you could possibly imagine. For instance a nominal additional saving of Rs 500 a month, translates into an extra 1.5 lacs saved over 25 years. Compounded @ just 7% per annum, it would mean extra 4.07 lacs.

51

The sooner you start, makes a difference
Rs. 1000 invested p.m. @ 8% p.a. till the age of 60 Starting Age 25 30 35 40 Total Amount Saved 420,000 360,000 300,000 240,000 Value at the age of 60 2,309,175 1,500,295 957,367 592,947

Past performance may or may not be sustained in future And there's a cost for delaying, too

52

The more you earn, makes a difference
Rs. 1000 invested p.m. Growth Rate 5% 7% 10% 14% Value after 10 years 155,929 174,094 206,552 262,091 Value after 25 years 597,991 814,797 1,337,890 2,727,278

Finally, the more you earn, can make a huge difference, over time

53

Alternate Investment Options

Investment Options
Real Assets Property Gold & Precious Metals Commodities Arts & Collectibles.

55

Investment Options
Financial Assets Equity Debt Money Market instruments Commodity & Financial Derivatives Mutual Funds ULIP.

56

Comparison
Investment Objective Equity Cap Growth FI Bonds Income Corp. Deb Income Co. FD Income Bank FD Income PPF Cap Growth/Income Insurance Risk Cover Gold Inflation Hedge Real Estate Inflation Hedge Mutual Fund Cap.Growth,Income Products Risk Tolerance High Low H-M-Low H-M-Low Low Low Low Low Low H-M-Low Investment Horizon Long Term M - L Term M - L Term Medium Flexible Long Term Long Term Long Term Long Term Flexible

57

Mutual Funds

Investing Wisely

Direct vs. Indirect Investing

59

Direct vs. Indirect Investing
Feature Stock selection ability Focussed activity Diversification Professional management Liquidity Transaction cost Convenience Switches Cheque writing facilities Investing time, knowledge & resources required Direct Equity Low Low Low Low Low High Low Mutual Fund High High High High High Low High

High

Low

60

Investing Wisely

Individual vs. Collective Investing

61

What is a Mutual Fund?
A mutual fund pools the money of people with similar investment goals. Goal? Essentially the right amount at the right time! You start by buying units in a mutual fund scheme, and the money collected from the sale of these units is invested by the mutual fund

Investors
Contribute money Receive dividend/capital appreciation

Trust (pool of money)
Invest in markets Receive interest, dividend or capital growth

Markets (volatile, has fluctuation)

63

Where is the money invested?
Your money is invested in various securities depending on the objectives of the scheme you choose. Stocks Bonds Money Market When compared to investing directly in equities or debt, investing in a mutual fund is more convenient, less time consuming, and reduces your exposure to risk – here are some of the best reasons to invest through a mutual fund Show next Slide Conclusion : With crores of rupees under management, and a dedicated team of professionals with all the necessary infrastructure, a mutual fund house is better equipped to manage money than you would be on your own

64

What are the benefits of a mutual fund to an investor?

66

Type of Mutual Fund Schemes
By Structure
OPEN ENDED SCHEMES CLOSE ENDED SCHEMES

GROWTH SCHEMES

By Investment Objectives

INCOME SCHEMES BALANCED SCHEMES LIQUID/FLOATER SCHEMES TAX SAVING SCHEMES SPECIAL SCHEMES SECTOR SCHEMES

Other Schemes

Do not tax Aims to provide Offer issue Aims at Investors are Aims at This Units for capital Aims join providing easy rebates free to to providing category Sectoral Repurchase, appreciation provide liquidity, to fund the the includes both funds redemption Over & regularunder investorsthe preservation or Index& growth arewithdraw ideal On capitalto medium for steady income thea periodic offrom the& tax laws Schemes who income. investors that Basis. Units can long term. to investors. prescribed. moderate fund Ideal for Beattempt have Idealredeemed for retired Eg., Equity income. at any time Investors to Only & Ideal for already peopleon Linked Savings after an looking for replicate Termination investors to decided in Others, with Corporates & Schemes Initialalock-in the their thein theOf prime need for Individual (ELSS). investYou period. performance combination scheme, earning years, capital investors as a Idealbuy or scheme acanof a & particular Of Through who are stability & means to park for Sector sell at particular Income & Dealings in the seeking growth regular their surplus Investors or at unitssuch Index the moderate Secondary over income funds for short seeking Segment NAV related growth as term market long the tax rebates periods BSE or NSE 50

67

Equity Funds

ACTIVE

PASSIVE Index Funds

DIVERSIFIED

NON–DIVERSIFIED SECTORAL

GROWTH

VALUE

68

Investment Philosophy
Value Manager
Looks to buy companies they believe are undervalued in the current market, but whose worth (as estimated by the fund manager) eventually will be recognised by the market.

Growth Manager

Looks for companies with above average earnings growth and profits, which they believe could be even more valuable tomorrow in the stock market than today.

69

Growth Vs Value
Another dimension for looking at an equity fund is whether it's following a value or growth style of investing. Both growth- and value-oriented investments can be important components of a diversified portfolio. Value investing:- Value managers tend to look for companies trading below their intrinsic value, but whose true worth they believe will eventually be recognized. These securities typically have low prices relative to earnings or book value, and often have a higher dividend yield. For example, these companies are found in out-of-favor industries. Growth investing. Growth managers look for companies with aboveaverage earnings growth and profits which they believe will be even more valuable in the future. They also look for companies that are well position to capitalize on long-term growth trends that may drive earnings higher. Because these companies tend to grow earnings at a fast pace, they typically have higher prices relative to earnings.

70

Equity Funds (Min 65% in domestic equity) Capital Gain Dividend
Investor NIL DDT NIL Short-Term (not exceeding 12 months) 15% + SC + EC Long-Term (exceeding 12 months) NIL

71

Other than Equity Funds
Dividend
Investor NIL DDT As per grid below
Liquid Individual/H UF Others Other than Liquid 12.5% + SC + EC 20.0% + SC + EC

Capital Gain
Short-Term (not exceeding 12 months) Marginal Tax Rate

Long-Term (exceeding 12 months) Indexed Tax Rate

25% + SC + EC

72

INVESTMENT HORIZION
RETURN
SECTORAL FUNDS INDEX FUNDS EQUITY FUNDS

HYBRID FUNDS GILT FUNDS

LIQUID FUNDS
73

ST DEBT FUNDS

BOND FUNDS

RISK

How do I make money from a mutual fund?
There are two ways in which you can make money from a mutual fund:-

Capital Appreciation
As the value of securities in the fund increases, the fund's unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought

Income Distribution
The fund passes on the profits it has earned in the form of dividends

74

Investment Options
Funds offer 3 options: • Dividend – income is distributed to unit-holders • Dividend re-investment – income is reinvested at prevailing NAV; this leads to increase in no of units • Growth – the investment income is ploughed back into more investments; no of units remains same and value increases Both Dividend re-investment and Growth options allow compounding; automatic reinvestment plans can be used for the purpose.



75

Investment Strategies
• • • • • •

Buy and Hold Rupee Cost Averaging Value Averaging Combined Approach Active Switching Triggers

76

Buy and Hold
Buy and hold strategy may not be a beneficial strategy because investors may not weed out poor performing companies and invest in better performing companies.

77

Rupee Cost Averaging
Rupee Cost Averaging (RCA) is a technique that involves: Fixed amount invested at regular intervals When NAV is down, more units are bought and when price is high, fewer units are bought Over a period of time, the average purchase price of the investor’s holding will be lower Investors use the SIP or AIP to implement RCA Disadvantage: RCA does not tell when to sell or switch from one scheme to another.

78

Rupee Cost Averaging
The Markets are volatile: they move up and down in an unpredictable manner Invest a fixed amount, at regular, predetermined intervals and use the market fluctuations to your benefit How does it help you: You buy more more when the market is down You buy less when the market is up Over time the market fluctuations are averaged Most likely you will realise a saving on the cost per unit This leads to HIGHER RETURNS The Goal of Most Investors it to Buy when the prices are Low, and Sell when the prices are High Sounds simple, but trying to time the market like this is: Time Consuming Risky and Almost Impossible A more successful strategy is to adopt Rupee Cost Averaging

79

Rupee Cost Averaging
Month # 1 2 3 4 5 6 7 8 9 10 11 12 Amount Invested 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 Average Cost NAV (Rs) 10.00 12.50 14.25 11.75 10.50 9.00 8.50 7.65 8.80 9.25 12.00 15.00 No of units bought 100.00 80.00 70.18 85.11 95.24 111.11 117.65 130.72 113.64 108.11 83.33 66.67 12000/1162= Cum No of units 100.00 180.00 250.18 335.28 430.52 541.63 659.28 790.00 903.63 1,011.74 1,095.07 1,161.74 10.33 Value of Holding 1,000.00 2,250.00 3,565.00 3,939.56 4,520.46 4,874.68 5,603.86 6,043.48 7,951.97 9,358.61 13,140.90 17,426.12

80

SIP – an application of RCA
Difficult to predict the market and know when to “Buy Low, Sell High”, hence invest Systematically Takes advantage of Rupee Cost Averaging: buy more when the price is low and buy less when its high Low maintenance, payments are made automatically Contribute small sums of monies every month Instills investing discipline: no temptation to time the market This term finds place in the literature of practically all mutual funds. What it basically implies is that a price risk at the entry level can be eliminated to some extent by buying units at various points of time. But this assumes that the NAV will rise eventually. If it does not, you are worse off than by not adopting this strategy.

81

Value Averaging
Value Averaging (VA) involves A fixed amount is targeted as desired portfolio value at regular intervals If market moves up, the units are sold and the target value is restored If market moves down, additional units are bought at the lower prices Over a period of time, the average purchase price of the investor’s holding will be lower than if one tries to guess the market highs and lows VA is superior to RCA because it enables the investor to book profits and rebalance the portfolio Investors can use the systematic withdrawal and automatic withdrawal plan to implement value averaging Investors can also use an equity and a money market mutual fund to implement value averaging.

82

Value Averaging
Month # 1 2 3 4 5 6 7 8 9 10 11 12 Target Value 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 NAV (Rs) 10.00 12.50 14.25 11.75 10.50 9.00 8.50 7.65 8.80 9.25 12.00 15.00 Value of Holding 100.00 1,250.00 2,280.00 2,473.68 3,574.47 4,285.71 5,666.67 6,300.00 9,202.61 9,460.23 12,972.97 13,750.00 Units to invest 100.00 60.00 50.53 129.90 135.76 190.48 156.86 222.22 (23.02) 58.35 (164.41) (116.67) Cum no of units 100.00 160.00 210.53 340.43 476.19 666.67 823.53 1,045.75 1,022.73 1,081.08 916.67 800.00

83

Asset Allocation

ACROSS ASSET CLASS
EQUITY DEBT

INSURANCE

REAL ESTATE
85

COMMODITY

ASSET ALLOCATION

SAFETY

LIQUIDITY

POST-TAX RETURNS PLUS CONVENIENCE
86

Asset Allocation
Diversifying portfolio among asset classes such as bonds, stocks, real estate, or cash


Referred to in terms of the target percentages for each asset class. For example, a portfolio could have a mix of “60 percent stocks, 30 percent bonds and 10 percent cash”.


Financial representation of an investor’s personality. The ideal asset allocation is one that best balances an investor’s profile and objectives


87

Asset Allocation
Distributing investments among various asset classes (e.g., stocks, bonds, real estate, art, gold). Referred to in terms of the target percentages for each asset class. A large part of financial planning is finding an asset allocation that is appropriate for a given person in terms of their appetite for and ability to shoulder risk.

88

Asset Allocation
Myth If you choose the best performing scheme without proper asset allocation you will unlikely generate optimum return. Reality 80% of optimum portfolio return is generate through proper asset allocation. Rest is dependent on other factors such as scheme selection etc.

89

Many Asset classes to choose from
Real Assets Property Gold Luxury collectibles like Art, Automobiles. Financial Assets Equity Debt Cash Establishing a well-diversified portfolio may allow you to avoid the risk associated with putting all your Eggs in one basket.

90

The Right Allocation

RISK PROFILE

ASSET ALLOCATION

FINANCIAL GOALS

91

Asset Allocation
Asset allocation differs from investor to investor and depends upon their situation, their financial goals and risk appetite • The asset allocation for an investor depends upon his life and wealth cycle stage • A model portfolio creates an ideal approach for an investor’ situation and is a sensible way to invest.


92

Varying goals - Making the right choice

Buying your own Bungalow Setting up a self funded business
Long Term Goals Short Term Temptations

Dream vacation in Europe or an exotic location Buying a BMW Buying Rolex watches or any lifestyle products

93

Varying Risk Appetites based on life stage
Extremely High – Early years of career. High – Just married. Moderate – Married with children. Low – Fag end of career, nearing retirement age. No Risk - Post retirement.

94

Investor Profile A newly married couple Rahul & Deepshikha Gupta
Financial Goals
Aggressive Growth Portfolio

Investment Strategy
Short-term 10% Bonds 15%

• Planning to purchase a

house in the next ten years • Creating long-term wealth for retirement / house
Stocks 75%

Asset allocation - based on life cycle. This is just for illustration purpose This does not suggest any ideal allocation .
95

The Right Allocation
Investor Profile:-A married couple with 8 year old child.

Akash & Ritu Bajaj with Akshat (8 years)
Financial Goals

Balanced Portfolio

Investment Strategy
Short-term 20%

Stocks education (5 - 8 years) • Planning for child’s wedding 50% (15 - 20 years) • Planning for retirement
Asset allocation - based on life cycle. This is just for illustration purpose This does not suggest any ideal allocation .
96

• Providing for child’s

Bonds 30%

Investor Profile:-An elderly couple with 5 years to retirement.
Mrinal and Jagriti Roy Chowdhary
Conservative Portfolio

Financial Goals retirement (5 – 10 years)
Bonds 40%

Investment Strategy
Stocks 20% Bank Deposits 40%

• Planning for

Asset allocation - based on life cycle. This is just for illustration purpose .This does not suggest any ideal allocation .
97

Monitor and Rebalance Portfolio
Asset allocation plans change with time. It's important to review your portfolio every 6-12 months to assess your progress and make sure that you stay on track to meet your goals. Your financial advisor can provide you with expert help in determining the best way to allocate your assets.

98

Asset Allocation Approaches
Fixed asset allocation • Re-balancing the portfolio in a disciplined manner • If value of equity component increases, book profits • Flexible asset allocation • Allowing the portfolio profits to run, without booking them • If equity market appreciates, it results in higher proportion in equity than debt • Tactical Asset Allocation • Increased Return without increased Risk • Hold a fund that has lower expense ratio and hold less risky assets.


99

Mutual funds – Myths v/s. Realities

Myth 1: ‘Are Mutual Funds Safe?’
Mutual Funds can never run away with investors’ money Pick a good fund house that has a track record and accountability Build a portfolio with the right mix of equity and income funds Watch your portfolio progress towards your goals

101

Myth 2: “Now is not the right time” …
‘Now’ will always appear to be the wrong time market has fallen, not the right time market is drifting, not the right time market has risen sharply, not the right time Now is the right time because “It’s time in the markets, not timing the market that matters”

102

Myth 3: “I want my principal to be safe at all times”
For principal safety at any cost, recognize there is a cost …. You give up growth and inflation eats into your returns Principal is safe, in theory, only when you lend money. In real life, it depends on the borrower’s ability and willingness to pay you back.

103

Myth 4: “I want to know what returns I’ll get”
Yes, if you want guaranteed returns …. You’ll get it …. guaranteed, mediocre returns. In equity funds, no one can tell you beforehand “X returns”. But over time, equities have outperformed all other major asset classes.

104

Myth 5: “Shouldn’t I buy a scheme with a low NAV?”
It is immaterial whether the NAV of a scheme is high or low v/s. other schemes The NAV of a scheme on a given day reflects the market prices of the scheme’s investments on that day The growth in the market prices of the investments will result in the growth of the scheme’s NAV

105

Myth 6: “Investing is too involved”
“It’s really much easier than you’d think. ICICI Prudential Mutual Fund offers simple but comprehensive solutions to your requirements whatever they may be.”

106

Myth 7: The Diversification Myth
If you own at least 10 different mutual funds you’ll have a diversified portfolio. Owning 10 mutual funds won’t assure you of anything but a lot of work trying to stay on top of them all In fact, you can have a well diversified portfolio with just 4 to 6 funds or you can have a portfolio of 15 funds with very little diversification In past, we have seen investors buying into 5 different Tech funds and then claiming that they have diversified

107

Myth 8: The Momentum Myth
The easiest way to beat the market is to buy last year’s topperforming funds The fact is that last year’s best funds are just as likely to be this year’s laggards. Blindly following this strategy is very dangerous for most investors. The very top-performing funds are usually those that took a lot of risk

108

Myth 9: The Market Timing Myth
The safest strategy is to move everything into money market funds when the market is declining and switch everything back into stock funds when the market is rising This is a loser’s game. It has been proven over and over that investors are incapable of timing the market or identifying major bull or bear markets.

109

Mutual Funds: Finally, what are they???

• A Mutual fund is not an Equity fund in the first place….
•A
Mutual fund is a common pool of money into which investors place their contribution, invested in accordance with stated objectives investors

• The ownership of the Mutual Fund is thus joint or “mutual”; the fund belongs to all •A single investor’s ownership of the fund is in the same proportion as the amount

of contribution made by him or her bears to the total amount of the fund • A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objectives, e.g. Equity fund buys equity assets, Debt funds buys debt instruments, etc. Professional management - Expertise has become key as the dynamics of the capital markets in India has undergone sea change over the past few years. Service - Over time the differentiation would come down to servicing Diversification - helps reduce risks Affordability - potential for reaching out to a large populace

110

Mutual Fund Sales Pitch…

While Selecting Equity Funds
Classify the available Equity Schemes into Growth, Value, Concentrated, thematic, diversified etc. Either Select main stream Growth or Value Fund providing broad diversification. Evaluate past returns of available funds Review salient feature of a scheme Fund size, Fund age, Portfolio Manager’s experience, Cost of investing, Portfolio characteristics (cash position, portfolio concentration, Market Capitalization), Portfolio Turnover, Portfolio Statistics like ExMarks, Beta, Gross Dividend yield.

112

While Selecting Debt Funds
Investor must know the objectives, investment horizon etc Determine the right selection criteria Fund Age, Fund Size, Relative yields, Relative Costs, Portfolio Characteristics, Average Maturity, Tax implication, Past Returns and Expense performance

113

Sales Pitch
There are a wide range of good performing funds available and based on the investment horizon and risk-return profile of the investors, they can select from amongst large cap, flexi-cap, thematic funds to capitalize on the growth opportunities available. Portfolio allocation to Equity through Systematic Investment Plan in good performing diversified equity funds for a long term investment horizon of at least 3 years, Systematic transfer plans from debt to equity at dips in equity markets, disciplined approach of investments by investing early and regularly to benefit from the power of compounding, regular booking of profits and systematically transferring gains to debt (STP from Equity to debt) should be the ways . Conservative investors too can start building equity gradually in the portfolio by investing in blended products, specially the MIPs . Look at consistency in terms of dividend paying record. Short-term debt plans & dynamically managed debt funds, which invest across maturities and volatilities and gradually look to transfer the monies in good performing equity funds are also the options available to invest. In this way investors can participate in both debt and equity allocation.

114

Investment Fundamentals
So, Pl remember, to :Save Regularly Invest Regularly for a long term basis Invest in good performing funds, with proven track record, on systematic basis Start investing early in life with goal based/target based investment approach Benefit from the power of compounding on a long term basis Investors need to be realistically optimistic, have investment horizon of at least 3-5 years and make use of every dip in market as an investment opportunity to build equity portfolio, skip fear and sentiment based motive of investment, focus on consistent past performance of the funds and benefit from the diversification through Mutual Funds investing. Yes, its that SIMPLE!

115

LONG TERM WEALTH IS BUILT BY EARLY AND REGULAR INVESTMENT

MUTUAL FUNDS CAN PLAY AN IMPORTANT PART

116

Thank You Happy Bonding and Relationship Building!

117

This document is prepared by ICICI Prudential Asset Management Company Limited for general information and educational purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of ICICI Prudential Mutual Fund.The contents are based on publicly available information and are not intended to provide professional advice and should not be relied upon in that regard. Statutory Details: ICICI Prudential Mutual Fund (the Fund) was set up as a Trust sponsored by Prudential plc (through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) and ICICI Bank Ltd. ICICI Prudential Trust Limited (the Trust Company), a company incorporated under the Companies Act, 1956, is the Trustee to the Fund. ICICI Prudential Asset Management Company Ltd (the AMC), a company incorporated under the Companies Act, 1956, is the Investment Manager to the Fund. ICICI Bank Ltd and Prudential Plc (acting through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) are the promoters of the AMC and the Trust Company. Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market and there can be no assurance that the fund's objectives will be achieved.. Past performance of the Sponsors, AMC/Fund does not indicate the future performance of the Schemes of the Fund. The Sponsors are not responsible or liable for any loss resulting from the operation of the Schemes beyond the contribution of an amount of Rs.22.2 lacs, collectively made by them towards setting up the Fund and such other accretions and additions to the corpus set up by the Sponsors. All figures and other data given in this document is dated. The same may or may not be relevant at a future date. Prospective investors are therefore advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.



118

• Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/are liable for any decision taken on this material.

119

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close