Principles of Financial Planning

and Investment Advisory

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

Risks in Mutual Fund Investing

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

Recommending Strategies for

Investors

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

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