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Financial Planning is realising the investment objective thru disciplined investment practice
An investor, thus needs to have long term plan catering his/her financial needs
Why Financial Planning?
As a financial advisor, suggest MODEL PORTFOLIO
You need to know these facts... What ‘inflation’ could do to you.. Why it pays to start saving early in life … The difference between ‘income’ and ‘real
income’... How to prioritize your investments … Power of Compounding….. Why ‘equities’ are best in the long run …
Inflation robs your purchasing power
25,90067,000
174,000
452,000
10 years 20 years 30 years 40 years
Rs. 10,000 today
Assuming inflation rate of 10 %
Save early and keep investing regularly
Age 21 till 30 Age 31 till 60
2.40 L 7.20 L
1.67 Cr
0.71 Cr
AnuragAnuragNikhilNikhil
* Compounded @ 12% p.a.
2.38 Cr
Age 21 till 60
9.60 L
Real income is important for wealth creation
Real rate of return from an Investment
10%
6%
3%
1%
0%
2%
4%
6%
8%
10%
12%
Return Inflation Tax Real return
Cash in Hand Cash at Bank Credit Card / ATM card Life & Medical Insurance Emergency Liquidity Reserve Equity and Debt Products Tax Saving Products
Prioritize your investments…
5% 10% 15% 20% 25%
Rs. 80,80,000Rs. 80,80,000
Rs. 23,70,000Rs. 23,70,000
Rs. 6,60,000Rs. 6,60,000Rs. 1,70,000Rs. 1,70,000Rs. 40,000Rs. 40,000
Re. 10,000 invested for 30 years
Power of compounding…
Know where you are investing
Capital PreservationCapital Preservation
IncomeIncome
Capital GrowthCapital GrowthRisk: Medium to HighRisk: Medium to High
Risk: Medium to LowRisk: Medium to Low
Risk: Low to MediumRisk: Low to Medium
Period: 3 years and abovePeriod: 3 years and above
Period: 6 months to 3 yearsPeriod: 6 months to 3 years
Period: Less than 6 monthsPeriod: Less than 6 months
Growth Funds
Stocks
Income / Bond FundsIncome / Bond FundsCompany Fixed DepositsCompany Fixed Deposits
BondsBondsDebenturesDebentures
Money Market FundsShort-term deposits /Government Paper
Equities are the best long-term bet
Source : RBI Report on Currency and Finance (1980-97)BSE Sensitive Index of Equity Prices - BSE
Inflation Gold Bank FD Co FD Equities
9.54% 9.10%9.77%
14.40%
22.84%
Cumulative annualised returns (1980 - 96)
In nutshell... Establish clear objectives Create a plan for each investment objective Analyze how much you can save regularly Estimate your savings Estimate earnings from existing investments Understand your risk tolerance Make investments regularly Monitor progress
Buy and Hold Rupee cost averaging
Value averaging Combined approach - Jacob’s recommendation
Strategy to maximise Returns on Investment
Study shows that 94% of returns from fund comes from Asset allocation implying that Asset allocation decision based on market cycle is more important than deciding on the stocks/bonds to invest
Why Asset Allocation?
Benjamin Graham’s 50/50 Balance 50/50 Portfolio of Mutual Funds
A Basic Managed Portfolio A Basic Indexed Portfolio A Simple Managed Portfolio A Complex Managed Portfolio A Readymade Portfolio
Strategic Asset Allocation Age, financial circumstances and objectives Distribution & Accumulation phase Bogle’s rule of thumb
Tactical Asset Allocation Fixed v/s Flexible Asset Allocation
Asset Allocation Principles
Risk appetite of the Investor - Risk tolerance MF portfolios risks to be inline with investor’s
risk appetite From Asset Allocation to Fund category
selection Low risk funds Moderate risk funds High risk funds
Jacob’s recommendation of portfolio allocations Conservative portfolio Cautiously Aggressive portfolio Aggressive portfolio
Building risk into Financial Planning
Risk - Volatility of Earnings Equity funds
Kind of stocks in portfolio Degree of diversification of the portfolio Fund manager’s success of market timing
Equity price risks - Company, Sector & Market level Performance in market cycles Risk measures - SD, Beta, R- squared etc. Risk adjusted performance - Sharpe & Treynor ratios P/E multiple of the portfolio Debt funds
Credit risk Interest rate risk Liquidity risk
Evaluating the risks of Mutual Funds
Work with Investors to develop long-term goals Determine Asset Allocation of the Investment
Portfolio Determine the Sector distribution Select specific Fund Managers and their
schemes Model Portfolios
Developing a Model Portfolio
Equity funds Classify the available equity schemes Choose one of the two strategies - mainstream /
differentiated Review the salient features of the scheme
Fund size Fund age Portfolio Manager’s experience Costs of investing Portfolio characteristics
Cash Concentration Market cap Turnover Statistics - R-Squared, Beta, Gross dividend yield etc.
Fund Selection - The Bogle Approach
Debt funds Narrow down the choice Know investor objective Determine right selection criteria and select
Fund age Fund size Relative yields Costs Portfolio characteristics - Credit ratings Average maturity Tax implications Past returns
Money market funds Costs Quality Yields
Fund Selection - The Bogle Approach
Balanced funds Equity oriented v/s Income oriented Portfolio balance Debt portfolio character Costs Portfolio statistics Returns
Fund Selection - The Bogle Approach