Basics of Investments

Objectives Of Investment

Wealth Creation
Regular Income
Temporary Parking of Surplus

January 8, 20

Traditional Avenues
-Wealth
Creation

Gold
Real Estate
Shares

January 8, 20

Traditional Avenues
-Regular
Income

Bank FDs
Postal Schemes
Bonds/ Debentures
Company FDs

January 8, 20

Traditional Avenues
-Temporary
Parking

Savings Account
Current Account
Short Term FD

January 8, 20

Disadvantages of Traditional
Avenues

No Liquidity
No Tax Efficiency
Low Returns

January 8, 20

Life cycle of an individual

Childhood Stage
Young Unmarried Stage
Young Married Stage
Young Married with Children Stage
Married with older Children Stage
Post-Family /Pre-retirement Stage
Retirement Stage
Note:Each stage requires a unique investment plan

January 8, 20

Wealth Cycle of an Individual

The Accumulation Stage

The transition Stage
Reaping Stage
The Inter Generational Transfer Stage
The Sudden Wealth Stage
Affluent Investors

Wealth Creating
Wealth Preserving

January 8, 20

The Investment Pyramid

Investor Portfolio
Composition
Capital Growth
Risk: Medium to High
Period: 3 to 5 years

Income
Risk: Medium to
Low
Period: 1 to 3 years

Stocks
Growth
Funds

Bonds
Debentures
Income/Bond Funds
Company Fixed Deposits

Capital Preservation
Risk: Low to Medium
Money Market Funds
Period: Less than 1 year Short-term Deposits /Government Paper

January 8, 20

The risk return trade-of

Risk

Equity
Fund
Balanced
Fund
Govt. Sec

Fund
Bond
Fund
Short Term
Fund
Liquid
Fund

January 8, 20

Returns

10

Process of financial planning

Set a goal

Prepare an investment plan

Implement the financial plan

Evaluate on a regular basis

January 8, 20

11

 The Power of Compounding

The more you save, makes a

diference
Growth rate of 7% p.a.

Total Amount
Saved

Value after
25 years

5,000

1,500,000

4,073,986

3,000

900,000

2,444,391

1,500

450,000

1,222,196

1,000

300,000

814,797

Amount saved per month

Past performance may or may not be sustained in future

January 8, 20

12

 The Power of Compounding

The sooner you start, makes a

diference
Rs. 1000 invested p.m. @
8% p.a. till the age of 60
Starting Age

Total Amount Value at the

Saved
age of 60

25

420,000

2,309,175

30

360,000

1,500,295

35

300,000

957,367

40

240,000

592,947

Past performance may or may not be sustained in future

January 8, 20

13

Asset Allocation

What is Asset Allocation?

Its about diversifying ones portfolio among asset

classes such as bonds, stocks, real estate, or cash.

Its 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.

Its the financial representation of an investors

personality: the ideal asset allocation is one that
best balances an investors profile and objectives

January 8, 20

15

What investment is
appropriate

Debt: PPF, Post Office Scheme, Fixed

Deposits, Debentures, Bonds, Income
Funds
Equity: Individual Stocks, Growth
Funds, Sectoral Funds
Banks: Bank Deposits, Liquid Funds
Or a mix of the above

January 8, 20

16

A good investment is one that helps you

maximise your total returns, net of taxes
and
inflation over the time period you invest
for!
January 8, 20

17

This is what Asset Allocation is all about!

You need to choose a mix that suits your needs and
risk taking capacity
Portfolio
Growth
(Equity) (Bonds)

Income
(Banks)

Aggressive

75%

15%

Balanced

50%

30%

20%

Moderate

35%

45%

20%

Conservative

January 8, 20

20%

Liquidity

10%

40%

40%

18

The Right Allocation

Financial Goals
Investment Strategy

Planning to purchase a house

in the next ten years
Creating long-term wealth for
retirement / house

January 8, 20

Aggressive Growth Portfolio

Short-term
10%

Stocks
75%

Bonds
15%

19

The Right Allocation

Financial Goals

Providing for children's education (5 - 8

years)

Investment Strategy
Balanced Portfolio

Planning for childs wedding (15 - 20

years)

Stocks
50%

Short-term
20%

Planning for retirement

Bonds
30%

January 8, 20

20

The Right Allocation

Financial Goals
Investment Strategy

Planning for retirement

(5 - 10 years)

Conservative Portfolio
Stocks
20%

Bank
Deposits
40%

Bonds
40%

January 8, 20

21

Making Asset Allocation Work

Periodic Rebalancing

Periodic Review

January 8, 20

22

Importance of Asset
Allocation

Control Portfolio Risk

Increase the predictability of
portfolio returns
Steer the portfolio towards ones
financial goals

January 8, 20

23

Your needs

Short-term

Banks / Liquid Funds

Medium-term

Debt or Debt related funds

(1 to 3 yrs.)

(3 to 5 yrs.)

Mix of Debt / Equity or funds

with appropriate mix

(Balance)

Long-term

January 8, 20

Equity or Equity related funds

24

Equities are the Best Long Term Bet

Cumulative Annualized Returns (1980-98)
20.16%
14.47%
9.19%

INFLATION

7.62%

GOLD

9.47%

BANK FD

CO. FD

EQUITIES

Source:RBI Report on Currency and finance (1997-98)

BSE sensitive Index of Equity Prices - BSE

January 8, 20

25

Key for success in equities

Invest only after ensuring adequate liquidity have a

minimum of 3-6 months of monthly expenses in liquid
debt products

Diversity

Average out timing is difficult

Be realistic in expectations of return (sustaining high

returns is difficult probably impossible!)

Invest for the long-term

Patience is the key

January 8, 20

26

Risks in Fixed Income

Investing

Default risk

Interest rate risk

Re-investment risk

Call risk

Inflation risk

Liquidity risk

January 8, 20

27

Why investment decisions are

difficult?

Selection of appropriate investments

What if I need the money before the

targeted date?

What paper work is needed?

How often do I monitor these

investments?

How do I ensure safety?

January 8, 20

28

Mutual Funds as
Investment Avenue

What is a Mutual Fund

Mutual fund is an investment vehicle

that pools the money of many investors
and invests them in a diversified
portfolio of securities

January 8, 20

30

Investors

Income/Dividend/
Total Return

Professional
Manager
Stock Market

January 8, 20

Debt market
Money
Market

31

Mutual Fund - Framework

January 8, 20

32

Types of Mutual Fund

Mutual funds come in three basic types.

Equity or stock funds Wealth Creation

Bond or income funds Regular Income

Money market /Liquid funds Parking surplus Funds

January 8, 20

33

January 8, 20

34

How Does NAV appreciate ?

Equity Funds

Income from Dividend

This is income earned from Dividend paid by companies
in the portfolio.

Mark to Market gain /loss

Gain / Loss made due to changes in the prices of securities
on the stock market

January 8, 20

35

How Does NAV appreciate ?

Debt Funds

Income from Interest

This is the coupon rate on the security/bond that the
debt fund invests in

Mark to Market gain /loss

Security/bond prices rise when interest rates decline
Security/bond prices decline when interest rates rise

January 8, 20

36

10 YEAR G-SEC YIELD

Movement for Last One Year

January 8, 20

37

Taxation

Capital Gains tax benefits.

Dividends from equity funds are

charged to tax @10%

January 8, 20

38

Capital Gains tax

benefits

Mutual fund units ( and equity shares ) qualify

as a Long Term Capital Asset if the holding
period is more than 1 year.

Gain / Loss on sale of units held

for less than one year
Gain / Loss on sale of units held
for more than one year

January 8, 20

Short - Term
Capital Gain /
Loss
Long - Term
Capital Gain /
Loss

39

Capital Gains tax

benefits

Short Term Capital Gain is taxed on the

same lines as any other normal income
like salary , interest , business profits
etc.

January 8, 20

40

Capital Gains tax

benefits

Long Term Capital Gain is taxed as under

20% after factoring indexation in the cost

10% without factoring indexation in the

cost

NOTE : Any Capital Loss whether short-term or long-term can be set off against any capital gain
whether short-term or long-term. Any such Capital Loss, which is not set off, either partly or fully
can be carried forward to the subsequent year/years for upto 8 years.

January 8, 20

41

Tax Benefit.
COMPARISON OF INCOME FUNDS V/S FIXED
DEPOSITES
INVESTMENT MADE (RS.)
RATE OF RETURN
RETURNS AFTER 1 YEAR (RS.)

FIXED
DEPOSITS
100,000.00

8.00%
8,000.00

INCOME FUNDS
100,000.00
8.00%
8,000.00

INVESTORS TAX BRACKET

30.00%

30.00%

TAX PAYABLE (%)

30.00%

10.00%

TAX PAYABLE (RS.)

2400.00

800.00

NET INCOME RECEIVED

EFFECTIVE YEILD (%)

January 8, 20

5,600.00
5.60%

7,200.00
7.20%

42

Indexation
Indexation of cost means that the cost of the capital
asset is adjusted (upwards) by the factor of inflation
between the year of purchase and year of sale. It is
known as the Cost Inflation Index (CII).

Note : The Finance Ministry by a Press Note officially notifies, around September each
financial year Index figure for the purpose of computation of Long Term capital gains
tax. The year 1981 is taken @ 100 as the base year.

January 8, 20

43

Single Indexation
Portfolio return for a year (a)

10%

(net of expenses)
Less Indexation for a Year

(6.0%)

Net Taxable Return

4.0%

Long Term Capital Gains Tax @ 20% (b)

Post-tax Return

(a)-(b)

Equivalent Pre-Tax return @ 30.6% tax

January 8, 20

(0.80%)
9.20 %
13.26%

44

Double Indexation
Portfolio return for a year

(a)

10%

(net of expenses)
Less Indexation for a Year 1

(6.0%)

Less Indexation for a Year 2

(6.0%)

Net Taxable Return (Loss)

-2.0%

Long Term Capital Gains Tax @ 20% (b)

Post-tax Return

(a) - (b)

Equivalent Pre-Tax return @ 30.6% tax

January 8, 20

( 0.00%)
10.00 %
14.41%
45

Systematic Investing

What is Systematic
Investing?

The term systematic investing,

applies to the process of investing
regularly i.e. at fixed intervals, say,
monthly or quarterly.

January 8, 20

47

Why should one systematically

invest?

When chasing a financial goal, the

simplest form of planning is to
invest regularly

Most of us calculate our earnings,

expenses and savings monthly. The
easiest way to plan our investments,
therefore, is on a monthly basis

January 8, 20

48

Why Systematic Investment Plan

Power of compounding
Develops Saving Habits
Rupee cost averaging
Regular investment
Avoids timing the market

January 8, 20

49

 The Power of Compounding

The more you save, makes a

diference
Growth rate of 7% p.a.

Total Amount
Saved

Value after
25 years

5,000

1,500,000

4,073,986

3,000

900,000

2,444,391

1,500

450,000

1,222,196

1,000

300,000

814,797

Amount saved per month

Past performance may or may not be sustained in future

January 8, 20

50

 The Power of Compounding

The sooner you start, makes a

diference
Rs. 1000 invested p.m. @
8% p.a. till the age of 60
Starting Age

Total Amount Value at the

Saved
age of 60

25

420,000

2,309,175

30

360,000

1,500,295

35

300,000

957,367

40

240,000

592,947

Past performance may or may not be sustained in future

January 8, 20

51

Systematic Investment Plan

Rupee Cost Averaging

(RCA)

RCA is a strategy involving

investing a fixed amount of money
at regular intervals, irrespective of
market conditions.
It enables investors to buy less
when prices are high and buy more
when prices are low.

January 8, 20

52

Rupee Cost Averaging

Making Volatility Work for you

AMT. INVESTED SALE PRICE
MONTH
(RS)
(RS)

NO. OF UNITS
PURCHSED

1000

12

83.33

1000

15

66.67

1000

111.11

1000

12

83.33

4000

48

344.44

TOTAL

Average Sales Price of Units

: Rs. 12 ( i.e. Rs. 48/4
months)
Average Purchase Cost of Units : Rs 11.61 ( i.e. Rs.
4000/344.44
units)
January 8, 20
53

Systematic Investment Plan

The real experience..

Monthly
Investment
Rs.1,000
Number of
Investment
Periods*

If you had invested in Franklin India

Bluechip Fund.....

35 months

BLUECHIP FUND

J un-0 2

D e c -0 1

J un-0 1

D e c -0 0

J un-0 0

D e c -9 9

J un-9 9

D e c -9 8

J un-9 8

D e c -9 7

J un-9 7

D e c -9 6

J un-9 6

D e c -9 5

J un-9 5

D e c -9 4

J un-9 4

Total investment
made
D e c -9 3

80
70
60
50
40
30
20
10
0

BSE SENSEX

This example is provided for illustrative purposes only and

returns are computed on XIRR basis. Calculations are based on
NAV of Growth Plan. Load is taken into consideration in the
calculations.
*The Investment is considered to be made from Jan 1999

Rs.35,000
Value of
investment as on
Nov 30th , 2002
Rs. 47862.5
Annualized Return

Past performance may or may not be sustained in future

January 8, 20

12.60%

54

Systematic Investment Plan

The real experience

SCHEME NAME
ALLIANCE EQUIT Y FUND

RETURNS
4.11%

FRANKLIN BLUECHIP FUND

12.60%

FRANKLIN PRIMA PLUS

12.94%

FRANKLIN PRIMA FUND

13.06%

PRU ICICI GROWT H FUND

3.97%

T EMPLET ON GROWT H FUND

12.81%

ZURICH EQUIT Y FUND

20.20%

NIFTY

- 0.29%

Past performance may or may not be sustained in future

January 8, 20

55

Why One Should Invest.

Reason. 1

Earning To Save

January 8, 20

Savings To Earn

57

Reason. 2

Power of Compounding

January 8, 20

58

Reason. 3
Thief Called

Inflation

January 8, 20

59

Thank You