project report

Wealth ManagementWhy it’s becoming quintessential and exigent today

Project Report - 5 January 2015

Submitted by: Shubham Mehta Bsc(H) Statistics Ramjas College

WEALTH MANAGEMENT �1

Wealth comes when you save, wealth grows when you are savvy.


Certificate This is to certify that Shubham Mehta has prepared the project report entitled: “Wealth Management-‐why it’s becoming quintessential and exigent today?”

This project is a part of the winter internship and has no commercial implications. The report being submitted is original and does not indulge in plagiarism of any sort.

Mr. Chirag Jain

Wealth Manager, Wealth Management

Aditya Birla Money Mart Limited


Acknowledgements

The internship opportunity I had with Aditya Birla Money Mart (ABMM) was a great chance for learning and professional development. Therefore, I consider myself as a very lucky individual as I was provided with an opportunity to be a part of it.

At ABMM, I was fortunate to have the opportunity to interact with our outstanding mentors and colleagues who made the learning a pleasure and challenge. This is how the present project has evolved.

In acknowledging the help I have received from others in the work presented here, I must begin by recording my greatest debt to Chirag Jain Sir, who inspired us to work in this area. He is also a marvellous mentor and his ideas continued to influence me throughout the internship. During the period of evolution of this work, I was fortunate to receive comments, suggestions, questions and dismissals and encouragement from myriad number of people, especially Shailendra Talwar Sir, who was motivating at every point during this internship.

It is impossible for me to express adequately my gratitude to the benefit I had received from him not only as a mentor but as a friend in general throughout the work. I will be failing in my duty if I miss out to articulate our earnest thanks to Rajesh Soni Sir, for if he won’t have provided me with this staggering chance, this project won’t have been successful. Lastly, the harmonious climate at office proved efficacious for preparing the project.

I perceive this opportunity as a big milestone in my career development. I will strive to capitalise the gained skills and knowledge in the best possible manner, and I will continue to work for their improvement.

Sincerely,

Shubham Mehta


Contents • Introduction

• Sources of Wealth

• Concept of Wealth Management

• Objectives

• Research Methodology

• State of Wealth Management Industry in India

• Opportunity for Local and Foreign Players

• Instruments of Wealth Management

• Bank Deposits v/s Equity v/s Mutual Funds

• Merits and Demerits of investing in Mutual funds

• The role of Finance Department in a company

• Conclusion

• Bibliography


Introduction Wealth usually refers to money and property or something which has economic value attached to it. It is the abundance of objects of value and also the state of having accumulated these objects. The use of the word itself assumes some socially-‐accepted means of identifying objects, land, or money as belonging to someone, i.e. a broadly accepted notion of property and a means of protection of that property that can be invoked with minimal (or, ideally, no) effort and expense on the part of the owner.

Concepts of wealth vary among societies. Anthropology characterises societies, in part, based on a society's concept of wealth, and the institutional structures and power used to protect this wealth. Several types are deXined below. They can be viewed as an evolutionary progression. Industrialisation emphasised the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialised. Labour specialisation became critical to economic success However, physical capital, as it came to be known, consisting of both the natural capital (raw materials from nature) and the infrastructural capital (facilitating technology), became the focus of the analysis of wealth.

SOURCES OF WEALTH • Wealth is created through several means. • Natural resources can be harvested and sold to those who want them. • Material can be changed into something more valuable through proper application of labour and equipment.

• Better methods also create wealth by allowing faster creation of wealth. • Ideas create wealth by allowing it to be created faster or with new methods.

THE CONCEPT OF WEALTH MANAGEMENT The concept of wealth management refers to management of both the sources and the facets of various forms of both tangible and non-‐tangible wealth. India has become a highly potential market for wealth management because wealth managers, both domestic and international, are able to establish the beginnings of a market with few obstacles, relative to the other emerging markets. Where there are regulatory restrictions, these are less problematic than those in China or the Middle East.


OBJECTIVES OF THIS REPORT • To analyse the evolution and growth of wealth management market in India. • To analyse whether Indian economic development is creating a broad and competitive wealth management market in India.

• To discuss the factors that have acted as facilitators and obstructions for the growth of wealth management market in India.

• From the above three objectives, to derive the potentiality and the future prospect of the wealth management industry in India.

• This project report also analyses both the onshore and offshore aspects of liquid wealth in India and sizes the mass afXluent and high net worth customers by onshore wealth.

RESEARCH METHODOLOGY

The present study is purely an exploratory study, dependent on both the primary and the secondary sources of data. The primary sources of data constitutes the interaction (both formal and informal) of the researcher with the managers and other ofXicials who are directly associated with the wealth management industry in India. The ofXicials were selected on the method of simple random sampling. The Annual Reports of the concerned agencies and the relevant literature and facts and Xigures available on the problem of the study in various books, journals and magazines constitutes the secondary sources of data.

• Macroeconomic and savings and investment data collected directly from governmental sources such as the Reserve Bank of India.

• Insight into the Indian Xinancial services market

SIGNIFICANCE OF THE STUDY: • Allows wealth managers to monitor threats and opportunities posed by their main competition.

• Helps plan products and services by giving key information on customers Xinancial services preferences.

• Looks at the onshore liquid wealth of mass afXluent and high net worth individuals in India and in India's largest and most afXluent states.

• Offers access to key statistics providing a clear picture of the scale, composition and direction of the developing landscape on a regional basis.

• Find out why India is an attractive market and its advantages over other emerging economies.


STATE OF WEALTH MANAGEMENT INDUSTRY IN INDIA

Wealth management is just emerging in India. The growth of the economy has already been widely showcased. Wealth management services have been getting more attention over the last two years. A booming economy, rising stock prices and an increase in salaries and spending power have turned the spotlight on this sector. The wealth management space was earlier the preserve of some foreign banks which offered these "exclusive services" to a select few. This was not a service you could apply for. The unsaid tagline was "Don't call us. We'll call you (if you are that wealthy)!" Today, a number of private banks and wealth management companies offer this service, though they can be choosy in terms of their clients as per company’s policy. Also entering this arena and carving a niche for themselves are standalone entities that offer the full range of services — investment advice, portfolio management, taxation advice etc.

A report published by independent market analyst, Datamonitor reveals the Indian wealth market is offering competitors enormous opportunities. In the last few years, afXluent wealth in India has grown at a rate of 17.6% with afXluent individuals totalling 618,000 at the end of 2007. Competitors are realising this fact and are beginning to bring their propositions to the table. Going forward, this is a trend that is likely to continue. The number of mass afXluent individuals in India has more than quadrupled since 1998. India is becoming an increasingly attractive market in many industries, and wealth management is no exception. India is attracting both foreign wealth managers and domestic banks to set up wealth management businesses. Driving the attractiveness of the market has been the country’s exceptional economic performance over the last decade. The economy has grown at an average of 7.6% since 1994, due to the continued development of the service industry and strong growth in the technology sector. The opportunities that have been created by a booming economy have in turn driven individual wealth growth. The wealth of India’s residents has grown from US$ 79 billions in 1998 to US$ 177 billions at the end of 2008. This amounts to an increase of 123% in just Xive years. This wealth is usually concentrated with a few individuals of the country as well as NRI’s. Another important fact delineates that the gross wealth concentrated with NRI’s, NRO’s and citizens of Indian origin exceeds the wealth with local HNI’s.


OPPORTUNITIES FOR LOCAL AND FOREIGN PLAYERS

The fact that afXluent wealth is growing at a rate of 17.6% compounded annually is attracting both foreign wealth managers to set up business and domestic banks to set up wealth management businesses. There are certainly opportunities to be had in the Indian wealth market. Whilst on the world stage, the Indian wealth market is underdeveloped and dormant, there are still a large number of afXluent individuals who are not being served by the current competitors and the pool of potential clients created each year is huge. Datamonitor forecasts that afXluent wealth in India will grow rapidly . India is still at a stage where the wealth manager is not necessarily a certiXied entity and the term itself is used rather loosely. With banks and distribution houses, insurance agents, mutual fund distributors and chartered accountants liberally calling themselves 'wealth managers', there is a mind boggling array of people to choose from. So, it becomes imperative to Xirst identify the type of people you can sign on as your wealth managers. There are wealth managers in banks and wealth management Xirms who will eagerly do your Xinancial planning if you fall in the HNI (high net worth individual) block. These Xirms assign a relationship manager (RM) to you, who is expected to manage the relationship with you by proactively using his knowledge to tailor unique and innovative Xinancial solutions that will create value. However, he is restricted by the number of distribution tie-‐ups he has -‐ not all of them can sell all products. Besides, as banks and distribution houses increasingly compete with each other with a similar set of products, an RM may end up just pushing his own brands instead of delivering long-‐term advice. The high churn among RM’s often leads to sudden breaks in relationship building and a whole lot of miscommunication between the customer and the Xinancial services Xirm ensues.

Then there is everyone else keen on getting a slice of your pie with assurances to make you richer than you are today. Your friendly neighbours who sell insurance and mutual funds may not always be the right source. After all, their interests in selling you a particular product is the commission that they earn through selling you a Xinancial product. Besides, your accountant or stockbroker may not adopt a holistic approach to all your Xinancial planning needs. If you strictly go by the book and look for a qualiXication that beXits a wealth manager, then you should go to the 150-‐odd certiXied Xinancial planners (CFPs) who have been certiXied by the Financial Planning Standards Board (FPSB), India. Remember that a true wealth manager uses the Xinancial planning process to help you Xigure out how to meet your life goals through the proper management of your Xinancial resources. Once you have identiXied the category of your wealth manager, it boils down to choosing one. Here are eight questions to ask before you hand over that cheque and remember to keep asking as you go along.

1. Wealth management requires hands-‐on experience and a strong technical understanding of topics such as personal tax planning, insurance, investments,


retirement planning and estate planning and, how a recommendation in one area can affect the others. 2. Ask the planner what his qualiXications are to offer Xinancial advice and if, in fact, he is a qualiXied planner. 3. Ask what training he has successfully completed. 4. Ask what steps he takes to keep up with changes and developments in the Xinancial planning Xield. 5. Ask whether he holds any professional credentials including the CertiXied Financial Planner certiXication, which is recognised internationally as the mark of a competent, ethical, professional Xinancial planner. 6. Find out how long the planner has been in practice and the number and types of companies with which he has been associated. 7. Ask about work experience and its relation to current practice. 8. Choose a Xinancial planner who has experience counselling individuals on their Xinancial needs.

Table: Ranking of Wealth Management Companies in the world

( in the year 2012-‐13)

Rank 2013 Company Rank 20121 UBS 2

2 Credit Suisse 1

3 JP Morgan 4

4 HSBC 3

5 Citi 5

6 Deutsche Bank 6

7 Merrill Lynch Wealth Management 9

8 Santander 8

9 BNP Paribas 7

10 Goldman Sachs 11


INSTRUMENTS OF WEALTH MANAGEMENT

Indian weddings have always been grand and festive affairs, as reXlected in Xilms like Monsoon Wedding and Bride and Prejudice. But India's burgeoning middle class -‐ now 300 million strong -‐ are turning weddings into showcases of their growing disposable incomes and newfound appetites for the goodies of the global marketplace. The minimum budget for a wedding ceremony is Rs 20 lacs while the upper-‐middle and rich classes are known to spend upward of Rs 12.4 crores (The average American wedding costs around Rs 16 lacs). This doesn't include cash and valuables given as part of a dowry. According to the National Council for Applied Economic Research (NCAER), the middle class are those making Rs 2.8 lacs to Rs 14.3 lacs a year. With the economy expected to maintain steady 6 percent annual growth, India is widely seen as one of the world's 10 largest emerging markets.

When it comes to the instruments of wealth management in India, instruments like the banking sector, stock market, mutual funds can be considered in this category.

Selecting Xinance In selecting the most appropriate type of Xinance for a business there are two main determinants: duration and cost.

Duration For how long is the funding required? The repayment of funding should match the proXile of the investment it is used to Xinance. For example, the purchase of property, which may have long-‐term use in the business, should be funded by long-‐term Xinance with repayments matching the revenue expectations. Potentially, these can be spread far into the future. This type of long-‐term funding would be inappropriate for a business that needed to cover a short-‐term funding requirement while waiting for a receivable to be paid.

Cost What is the cost of the funding? The greater the risks taken by the providers of funding, the higher is the rate of return they require. For example, if a provider of funds is promised that it would be the Xirst to be repaid if the business were in difXiculty and that it can take a charge over the physical assets (such as property that it could sell to clear the debt), it has a low risk of losing its money and thus the business would expect the cost of this funding to be relatively low.

However, lowering the risk to one provider of funds increases the risk to another. With the assets all used as security for one party, another will have no security that its money will be repaid in event of difXiculty. For this higher risk a higher return will be


required. The cost of funding is therefore determined by the level of risk to each type of funding.

Types of funding

There are three main types of funding:

Equity: This is capital put in by investors – the owners of business. They are the last to be repaid if the business is in trouble and have to accept the risk that they may lose all the money they put into the business (but no more than that). In return they are entitled to the proXits generated by the business, and to a potentially limitless return.

Debt instruments: These long-‐term borrowings are typically used to fund investments such as the purchase of property. The lenders will have priority if the business runs into trouble and may even have some protection by taking security on the asset funded. Their reward will be a predetermined rate of interest that is either Xixed or linked to a central bank index. Bank borrowing: This typically short-‐term funding is used to cover temporary shortfalls and timing differences. The borrowing may be unsecured and consequently carry an interest rate above that of a debt instrument. A business may organise a borrowing facility with a bank to enable it to draw on this type of funding at short notice without the need for further discussion with the bank.

BANK DEPOSITS

Independent research shows that customers prefer to deal with a local operator for management of his assets. The wealth management industry has begun to follow the trend set by the likes of shoe brand Nike and fashion retailer Gap in moving parts of its operations to cheaper environments. As ever, the back and middle ofXices are the bits that wealth managers want to ofXload. In India, it is both the public sector and the private sector banks who have demonstrated themselves in the assets management market to tap the growing potentiality of this sector. State Bank of India, the nation’s largest lender, plans to offer wealth management services to afXluent clients, seeking a share of a fast-‐growing market that is now worth $10 billion, and that may double every two years.

Wealth management has tremendous growth potential. Foreign banks with Indian collaborations are not also far from others. For example, Fidelity and Citibank have some operations in India, including call centres, processing and systems development. Citigroup, ABN AMRO Holding, Standard Chartered, Aditya Birla Money and ICICI Bank to name a few already offer wealth management services in the nation. DSP Merrill Lynch estimates that wealth under management in India totals about $30 billion. Now


government-‐controlled banks, including State Bank, are seeking wealth management business as economic growth, forecast by the government at an annual average pace of 7 percent, raises incomes and as Indians seek more ways to earn higher returns on their wealth. In the current interest rate, taxation and macroeconomic environment, with a positive corporate performance and GDP growth, more and more individuals are seeking professional management of their Xinances. Canara Bank, the third-‐biggest lender in India, who planed to open branches catering speciXically to afXluent individuals, initially offered Xinancial advice, mutual funds and insurance products.

Among several others to join this tempting rat race are Bank of India, Union Bank of India, ICICI has 500 Xinancial advisers for its clients, having expanded the number fourfold in the past three years. Citibank has a well-‐organised system of Wealth Management services in India that give you unparalleled advantage and opens up the opportunity to maximise wealth. For example, Citigold Wealth Management Scheme which offers exclusive privileges to its customers that comprises of:

• Tax and estate advisory services through a leading tax advisory Xirm in India. • Free for life Citibank International Gold Credit Card. • Updated information on treasury, currency markets. • Invites to seminars on capital markets, mutual funds, budget and taxation. • Free insurance beneXits -‐ upto Rs 30 lakh personal accident, and baggage and householder insurance.

• Free access to airport lounges at Domestic and International airports in India.

DBS Bank offers power packed Savings Account with convenient features and charge-‐free banking options. So now you can bank and transact without the stress of fees levied on transactions. No frills account is made to order, working to provide vital banking services with nominal average quarterly balance requirements. Saving Power Plus Account is tailored especially for individuals with an investible surplus of Rs. 5 to 25 lacs. In other words, the account is suited for individuals who are looking for exclusive banking services. Saving Power Plus operates in INR currency with a high balance and zero charge structure. With its features and beneXits, the accounts is a unique offering. The minimum balance per month is Rs. 100,000. Account holders receive free monthly and quarterly statements as well as personalised cheque books. Saving Power Plus offers all Banking Services without service charges. The Deposit Plus account is for individuals looking for a medium term investment option with an investible surplus of 15 lacs or more. This is a pure deposit relationship and is offered in INR currency. The difference with this account is the bundle of banking services and competitive interest rates.

Private banking is emerging as an important segment of business for some banks and non-‐banking Xinancial companies (NBFCs) in India. Banks and NBFCs say there has been an increase in the number of private banking or wealth management clients they are dealing with today. Foreign banks, which mostly cater to high net worth individuals, with Xinancial surplus or investible incomes of over Rs 2 crore per year, say that this segment is expected to grow by almost 20 per cent over the next couple of years. Wealth management is a fast evolving domain with tremendous growth


opportunity in India. In the current interest rate and taxation environment, more individuals are seeking professional management of their Xinances and prefer outsourcing in order to manage their assets.

ADVANTAGES: • Banks offer stability for the money put on investment. • The degree of vulnerability and risk is minimum in case of banks than in other instruments of wealth management.

• Free from market adversity. • Banks in India have a wider network covering the rural areas also which has a potential for wealth augmentation.

DRAWBACKS: • Interest rate offered by banks is less in comparison to other asset augmentation instruments.

MUTUAL FUNDS

A Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversiXied, professionally managed portfolio at a relatively low cost. Anybody with any surplus money that can be invested, even as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a deXined investment objective and strategy. The team undertakes this in the most professional manner.

Markets for equity shares, debentures, bonds and other Xixed income instruments; real estate, derivatives and other assets have reached their maturity and are driven by latest up-‐to-‐date information. A mutual fund is thus the ideal investment vehicle for today’s complex and modern Xinancial scenario. Price changes in these assets are driven by global events occurring every day, in-‐fact every minute in faraway places. It will be very difXicult, in-‐fact next to impossible for an ordinary individual to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also Xinds it difXicult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualiXied and experienced staff that manages each of these functions on a full time basis. The costs of hiring these professionals per investor are very low, as the pool of money invested is large. In effect, the mutual fund vehicle exploits economies of scale in all three areas -‐ research, investments and transaction processing.


DiversiXication of investments in mutual funds reduces the overall investment risks by spreading the risks across different assets. The investment of the mutual fund company depends on the objectives the company peruses. Some mutual funds invest exclusively in a particular sector while others might target growth opportunities in general. Although mutual funds have been around for a long time, dating back to the early 19th century, the Xirst modern American mutual fund opened in 1924 and it was only in the 1990s that mutual funds became a part of the mainstream investment. Today mutual funds collectively manage almost as such as or more money as compared to banks. The advantages of mutual funds include; high liquidity, choice of investment, low investment minimums, low transaction costs, government regulation, which assures safety of the fund and professional management of the fund, etc.

Mutual fund investment has also its own drawbacks like lack of insurance of the fund against losses, dilution of investment value and proXit thereof, high management and operating fees and sales commissions, lack of control of the investor over own investment portfolio and inefXiciency of cash reserves which reduces the investor’s potential return. The types of mutual funds are subject to large scale variation subject to investment objective, size strategy and style.

ADVANTAGES AND RISK IN MUTUAL FUND INVESTMENT

Mutual fund investment, particularly mid cap investment in India is very volatile in nature. There may be high returns and high risk.

ADVANTAGES: -‐

1. Diversi<ication of Funds: DiversiXication of Funds can reduce the overall investment risks by spreading the risk across different assets. When some assets are falling in price others are likely to be rising. Thus, diversiXication of funds lowers the risk than investment in just one or two funds.

2. Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector, while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. The key for an investor is to Xind the mutual funds which closely match his investment objectives.

3. Liquidity: This refers to the ease at which one can convert his assets into cash. In the case of mutual funds, it is as easy to sell a share of a mutual fund as it is to sell a share of stock.


4. Low Investment Minimums: An investor need not be very wealthy in order to invest in a mutual fund. Most mutual funds allows an investor to buy into the fund with as little as $ 1000 or $ 2000 or even allows a no minimum investment but on the terms of payment of regular monthly contributions.

5. Convenience: Purchasing and selling of mutual fund is very easy. Secondly, an investor of mutual funds need not to worry about tracking the various securities in which the funds invest rather all he needs to keep track of the funds performance.

6. Low Transaction Costs: Mutual are able to keep the transaction costs at the minimum because they beneXit from reduced brokerage commissions for buying and selling large quantities of investments at a single time.

7. Regulation: Mutual funds are regulated by the government through the Securities and Exchange Board of India (SEBI). It regulates the way the mutual funds approach the investors the way they conduct their internal operations. This provides some level of safety to the investors.

8. Professional Management and other additional services provided by the mutual funds.

9. If the fund house has very strong research and is able to really spot strong opportunities in a disciplined manner, the fund should be a great long-‐term investment.

10. The best returns are always derived from spotting the opportunity early and holding on for 7-‐10 years or more. These funds test the fund manager’s conviction.

11. The fund gives an opportunity to diversify across mid-‐caps as well as use some scientiXic method to identify mid-‐cap stories, rather than the next hot tip from your neighbour. If you are planning to pick mid-‐caps anyway, this is probably the safest avenue.

RISKS: -‐

1. No Insurance: Mutual funds, although regulated by the government, are not insured against losses. Mutual fund returns are subject to market risks. Despite the risk reducing diversiXication beneXits provided by the mutual funds, losses can occur, and it is possible that one may even lose the entire investment.

2. Dilution: Although diversiXication reduces the amount of risks involved in investing in mutual funds, it may lead to dilution which can be disadvantageous to the investor. If a single security held by a mutual fund doubles in value, the mutual fund itself will not double in value because that security is only one small part of the fund’s holdings.


3. Fees and Expenses: Most mutual funds charge management and operating fees that pay for the fund’s management expenses. Some mutual funds also charge high sales commissions. And some buy and trade shares so often that the transaction costs add up signiXicantly. Some of the fees and expenses are also recurring.

4. Poor Performance: Returns on a mutual fund are by no means guaranteed. On an average, around 75% of all mutual funds fail to beat the major market indexes. Critics have also questioned whether or not professional money managers have better stock picking capabilities than the average investor.

5. Loss of Control: The managers of mutual funds make all the decisions about which securities to buy and sell and when to do so. This makes difXicult on the part of the investor in managing his portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for the investor. 6. Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds i.e. open ended mutual funds cannot be bought or sold in the middle of the trading day. One can only buy and sell them at the end of the day, after the current value of their holdings have been calculated.

7. Size: Some mutual funds are too big to Xind any investment i.e. the funds that focus on small companies given that where are strict rules about how much of a single company a fund may own. As a result, the fund might be forced to lower its standards when selecting companies to invest in. However, mid cap investment is not suffering from this type of problem.

8. Inef<iciency of Cash Reserves: Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund’s money is invested in cash instead of assets, which tends to lower the investor’s potential return.


The role of the Finance Department in Companies

THE DIRECTORS OF A COMPANY have a legal responsibility for ensuring that the company keeps appropriate accounting records which enable them to report the Xinancial position of the business to investors, regulators and tax authorities.

What managers need to know In an organisation Xinancial acumen is a skill that will support any manager in their career. The skill is not about knowing the intricacies of transaction recording or the details of Xinancial reporting; it is about having the ability to do six things:

• Engage with the business strategy – know the organisation’s mission, objectives, strategy and tactics at a macro level to make sure that all actions that are taken align with these overarching principles.

• Understand performance indicators – know the portfolio of measures that are used to monitor business performance at a company, department and project level. This includes knowing how the indicators are calculated to make sure that actions taken can be translated into how the indicators will be affected.

• Read and interpret Xinancial reports – be able to read the Xinancial reports that are generated within the business. This includes company, department, budget area and projects. The skill is being able to assess strengths and weaknesses and identify appropriate actions that will improve performance.

• Contribute to the budgetary process – participate in the budgetary process, the setting of budgets and the monitoring of performance through the Xinancial year. At a detailed level this includes using variance analysis to interpret the causes of deviation from budget predictions and producing year-‐end forecasts that predict the likely outturn for the year.

• Know the Xinancial consequences of the decisions – identify the Xinancial implication of decisions through the creation and evaluation of a business case that takes into account the likely Xinancial effects of the changes to the business that will take place as a result of any decision. This involves


venturing beyond Xinance into judgment, but the judgment is made on the basis of experience and sound evidence.

• Seek ways to add value not cost – continually improve the performance of the products and services by adding customer value while eliminating cost and waste in their provision.

• Although strength in these six abilities is by no means a fast-‐track ticket up through an organisation, the opposite is almost certainly true. Weakness in them will hold back even the most ambitious individual.

Portfolio Management Among the many reasons a company may build up a portfolio of businesses, products or services are:

• economies of scale – for example, having a single head ofXice for all business units to avoid overhead duplication and to derive economies of scale in funding each business

• diversiXied risk – selling ice cream and umbrellas to ensure that sales are less vulnerable to weather;

• vertical integration – owning different parts of the supply chain, such as oil companies owning the oilXields, platforms, pipelines, reXineries and gas stations;

• purchasing power – the ability to obtain better prices from suppliers by being able to offer them more business;

• life-‐cycle stages – for example, car companies will typically have several models that they relaunch in rotation. The cash generated from the new models provides the resources to invest in development to replace the old models;

• common customers – a strong brand to which customers are attracted and loyal can be exploited by expanding into different product or service areas. There can also be an economy of scale in the marketing that supports the separate businesses.

Optimising a portfolio can involve fundamental changes that might include deleting products, launching new products, and relocating and laying off staff.


The decisions made need to be objective and based on long-‐term value creation, not on sentimentality.

The management of a portfolio and its complexities involves consideration of the following:

• Heritage – the relevance of maintaining the accumulated legacy of past acquisitions, including products, services and operating sites, while respecting crucial cultural factors.

• Resources – whether the human and other resources such as equipment and systems currently in place are appropriate.

• Product life cycle – changes in technology or customer needs that create opportunities as well as close them.

• Market dynamics – changes in the operating landscape caused by new competitors, dominance of suppliers or customers, regulation and trends.

To manage a portfolio effectively requires a combination of strategic engineering and excellent operational effectiveness. Decisions need to be made for the long-‐term beneXit of the product, service and business, not just as a response to short-‐term targets and pressures.

Stock market and investor measures

THE STOCK MARKET is where investors buy and sell shares and make and lose money – in some cases a lot of money. To monitor the performance of stocks there is a range of measures that are regularly quoted in Xinancial media showing absolute and relative performance of shares. This chapter explores a number of these measures.

Why are companies quoted on a stock market? A private company is one where shares are typically bought and sold by the owner managers or a small group of investors, and a public company is one where shares are bought and sold on the stock market. There are many successful private companies such as Cargill, an agricultural commodities and food business, and Mars, a confectionery and pet-‐food business. Both would be


in the top 300 of the Fortune 500 biggest global corporations if they were listed on a stock exchange.

The advantage of a quotation on a stock market is the ability to gain access to equity investment by issuing tradable shares. Balancing the mix of debt and equity is a fundamental part of managing leverage (gearing) levels to provide optimum levels of WACC. Shares have an added advantage of no repayment date and no interest payments. This means that in the growth phase of a business the cash Xlow can be directed towards the operations and not the investors. The growth in share price provides the investors with their required return.

A stock exchange Shares in publicly traded companies are bought and sold on a stock market. The New York Stock Exchange (NYSE) and the Bombay Stock Exchange (BSE) are two examples.

The exchanges make buying and selling easy. A stockbroker will act on behalf of its clients and trade on the market. If a client wants to buy some shares, the broker will place a buy order. However, it is not like a supermarket where there are products on shelves waiting to be purchased. At any point in time all the shares are owned by somebody (either an individual or an organisation). For a purchase to take place there must be someone willing to sell. If there are no sellers wanting to part with their shares, the market makers will raise the share price to entice a shareholder to sell and complete the trade.

If there are more buyers than sellers in the market, the price of a share will rise and vice versa. Brokers will not take more than a few shares onto their own book so trades have to be matched. Therefore share prices rise and fall as trades take place. Sophisticated investors watch this movement minute by minute when the markets are open to spot opportunities to make money out of even the smallest changes in price.

What drives a share price? Although there are equal numbers of buyers and sellers at any share price, the views of the shareholders on whether the share price is rising or falling will be at variance with each other.

The main factors can be categorised in three groups: track record, external factors and future expectations. The track record, comprising facts and


attributes of past performance, is the most tangible of these groups, but it is perhaps the poorest at predicting the future potential of a business.

However, much management credibility is created by the delivery of a strong set of Xinancial results, increased earnings and in particular a strong cash Xlow. If management has a proven track record and the strength to exceed investor expectations, there is justiXication for trusting them to continue the process in the future.

The uncontrollable inXluence is the combination of external factors:

• A change of government will create uncertainty in the market.

• Changes in regulation, policy and taxes will alter the market conditions for businesses.

• Rises in interest rates and commodity prices can reduce consumer spending, which in turn can reduce demand across the economy.

• Events in the global economy will affect exchange rates and prices for dealing with foreign suppliers and customers.

Ultimately, the main inXluence on a share price is the expectation of future returns for the investor. This is a combination of the factors from all three groups, and expectations can be assimilated and then projected into the future to determine whether the current share price offers the potential for gain or loss.

Indicators of future growth potential The P/E ratio

An important measure used by investors to compare future expectation with the current share price is a price/earnings (P/E) ratio. This is the share price divided by earnings per share and is a factor or multiple.

The share price is the current value from the market, and for active shares this will constantly move when the market is open.

Earnings is the proXit generated by the business that is attributable to the shareholders and is after tax and interest. If the total earnings are divided by the number of shares in issue, a value of earnings per share (EPS) will result. The value is usually small and therefore expressed in rupees.


Appendix (Edited excepts from interviews and responses)

Q. Do you believe that Wealth Management has increasingly becoming a booming industry in India?

� YES 84% NO 14% NOT SURE 2%

Q. What is the state of the Wealth Management Industry?

A. The summary of the response was that wealth and disposable income are growing substantially. We are also noticing that for the Xirst time the ability to earn and save are slightly different. Earlier you just put away your money in some guaranteed products. Today, when even the government is withdrawing from those products (it recently stopped the maturity bonus on post-‐ofXice savings), investors, whether they be doctors, architects or anyone else, need professional help.

Q. Is Wealth Management only for wealthy?

A. Only 10 percent of the respondents were of the opinion that yes wealth management industry is only for those who are having enormous wealth. But a massive 84 percent felt that it is for everybody. The person who is earning Rs 30,000 per month also needs this advice. For instance, if there is a 25-‐year-‐old guy who earns this sum, his Xirst priority is to buy a house for, say, around Rs 20 lakh. He has to now protect this property from, say, Xlood, cyclone or other natural disasters. You have building insurance that doesn't cost more than Rs 800-‐1,000. Only 5 percent responded in terms of do not know/can’t say.


� YES 10% NO 84% DON'T KNOW / CAN'T SAY 5%

Q. WHICH IS YOUR MAIN MARKET?

A. Stock Options 62% Expansion of Business 33% Not Sure 3%

�

62 percent prefer getting stock options. 33 percent operate on the expansion of business and entrepreneurial capacity. 3 percent responded in terms of do not know/can’t say.

Q. What about competition from foreign and Indian banks? A. The response was that basically, the service the foreign banks offer is transaction oriented. Most of them offer some mutual funds and some equity advice. But someone who has between Rs 2 crore to Rs 25 crore don't want this. Whereas Indian banks have a customer-‐centric model. They work with customers and offer them a range of services — investment advisory — in debt, equity, mutual funds, derivatives, besides tax advisory, succession planning, insurance advisory, etc.

Q. What are the emerging trends in wealth management in India?


A. Real estate and private equity are increasingly becoming important asset classes for high net worth individuals (HNIs). The demand for realty is on a high growth path on account of the burgeoning economy. While a few realty funds have been launched, the agencies believe that retail investors have been left out as only HNIs and institutional players have the capacity to participate in these. However, equity participation will be ensured by the introduction of real estate mutual funds, which are fairly common in developed countries.

Q. How is the private equity scenario developing?

A. Alternative investments including private equity allow HNIs to broad base their portfolios. Though at a nascent stage, private equity in India is on the rise because of maturing Xinancial sophistication. Secondary research highlights that in the developed markets, there is a growing conviction among HNIs that investments in fundamentally strong businesses are a very dependable wealth management strategy.

Q. Is the client base expanding? Is it becoming more expensive for people to mandate a private wealth manager?

A. India is becoming an increasingly attractive market for many industries -‐ wealth management is no exception. There is a promising onshore wealth management services sector here. Driving the development has been the country's exceptional economic performance over the last decade. The booming economy has led to innumerable opportunities and pushed individual wealth growth. According to one estimate, India has seen about 19 per cent growth in HNI population in 2005 vis-‐à-‐vis the world growth rate of 6.5 per cent. The fee structure here is yet to be developed and is currently accrued from brokerage fees and commissions on the services rendered.

Q. How can a wealth manager create a difference in prevailing market conditions?

A. Wealth management is a highly specialised service, covering all asset classes. Asset allocation helps determine an optimal mix of asset classes, ranging from equity, debt and real estate to alternatives. The latter may include investments of passion-‐even Xine art and collectables -‐ as well as structured products and hedge funds. Clients' life goals, time horizon and risk tolerance are three vital factors on this front.

Q. What value added services do a Wealth Management Firm/Company provides?

A. Financial planning 64% Individual requirements 29% Don’t Know/Can’t say 7%


�

64 percent responded that their managers offer complete Xinancial planning. They are able to give the customers advice on equity investment, debt, commodities, art, insurance, international investment, which home loans to take and why, tax planning, estate planning, Xiling tax returns, superannuation, real estate, and do a cash-‐Xlow analysis. 29 percent responded that they are specialised to meet the individual requirements of the customers i.e. in portfolio management.

Q. How much do a Wealth Manager charge and on what basis?

A. These charges are over and above any other charges like an entry and exit load charged by mutual funds when the customers invest in them.

Fees: They are based on an hourly rate, a Xlat rate, or on a percentage of your assets and/or income. At times, it is on the nature of the work done.

Commissions: Though commissions are not paid by you, but by a third party (like a mutual fund house or insurance company), it does come out of your pocket. Fund houses and insurance companies use their entry and exit loads to fund these commissions for their brokers and distributors.

Combination of fees and commissions: Here you are charged fees for the amount of work done to develop the Xinancial plan and commissions are received from any products sold.

Q. Should the allocation change be based on economic conditions ? A. Yes 50% No 41% Not sure 9%

�


Q. With interest rates low and the stock markets perhaps overvalued, where should one invest today?

A. Domestic Market 71% Foreign Market 9% Both 21%

�

Q. Why should one choose to invest in a mutual fund?

A. For a retail investor who does not have the time and expertise to analyse and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because Mutual Funds provide the beneXit of cheap access to expensive stocks. Mutual funds diversify the risk of the investor by investing in a basket of assets. A team of professional fund managers manages them with in-‐depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

Q. Can mutual funds be viewed as RISK-‐FREE INVESTMENTS?

A. Yes 12% No 72% Not sure 16%

�


Q. How do one invest money in mutual funds?

A. One can invest by approaching a registered broker of Mutual funds or the respective ofXices of the Mutual funds in that particular town/city. An application form has to be Xilled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.

Q. What are the parameters on which a Mutual Fund scheme should be evaluated?

A. Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

Q. What are the different types of plans that any mutual fund scheme offers?

A. The summary of the response was that it depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.The plan one should choose depends on his investment object, which again depends on his income, age, Xinancial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-‐income youngster is most likely to opt for growth plan.

Q. What are the beneXits of SYSTEMATIC INVESTMENT PLAN?

A. A systematic investment plan (SIP) offers 2 major beneXits to an investor: • It avoids lump sum investment at one point of time • In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-‐cost averaging. This means that at lower prices you end up getting more units for the same investment.

Q. What proportion of one’s investment should be put invested in mutual funds?

A. Major portion 19 % Minor portion 24% Depends on the economic position of the investor 57%

�


Q. What are the types of bank accounts available to NRIs?

A. Non-‐Resident External [NRE] Rupee savings account: Your funds in NRE savings accounts are held in convertible rupees -‐ principle and interest are fully reparable. Interest income is fully exempt from tax in India. The savings account can be opened jointly with a Non-‐Resident individual.

Non-‐Resident External [NRE] Rupee Xixed deposit: Fixed deposit in Indian rupees where the principle and interest are fully repatriable. All interest earned is fully exempt from tax in India. The account can also be opened jointly with a non-‐resident.

Non-‐Resident Ordinary [NRO] Rupee savings account: Your funds in Non Resident Ordinary (NRO) savings account are held in India, in Indian rupees. The NRO account can be funded through NRI income in India. Only the interest in an NRO account is repatriable. Interest income on this account is liable for Indian Income Taxes. Non Resident Ordinary [NRO] Rupee Xixed account . Fixed deposit in Indian rupees where the earnings in India can be deposited. The interest is repatriable [after payment of tax].

Foreign current Non-‐residents [FCNR] deposit: The FCNR Deposit is a fully repatriable foreign currency deposit available in major currencies: US Dollars, Pound Sterling, Euros, Australian dollars and Canadian dollars.

Q. Can an NRI invest in mutual funds?

A. Yes 81% No 19%

�


Conclusions Wealth managers are beginning to investigate innovative segmentation methods to manage the changing client proXile. Over the next 20 years, wealth managers will hone their segmentation methods. Wealth managers will develop segmentation as a service efXiciency initiative. Segmentation models will apply holistic criteria to wealth management. The most important segments globally will be entrepreneurs and SMES/CEOs apart from Doctors and Industrialists. Financial advisers will become an important separate client segment for wealth managers The organisation of direct client ownership will also change availability and Xlexibility will become vital components of the business model. Internal restructuring will aim to integrate client services. The rise of the mass afXluent represents an opportunity for wealth managers in the medium term. Wealth managers will capture the higher value mass afXluent market by offering a scaled down wealth management service. The mass afXluent proposition will run along the lines of the current wealth management service. Liability management is currently not part of the wealth management agenda but has proven potential. Clients in developed markets are seeking more holistic wealth management services Liability management is clearly a proXitable area with a proven existing client base. The incorporation of lending into wealth management will shift the focus of the service. Specialist forms of lending will also become common additions to the offerings of many wealth managers. Some will fail due to a persistence of the asset focused service model and a lack of commitment. There are signiXicant beneXits in the area of liability management for the wealthy, and that the importance of liability management as part of wealth management will inevitably grow over the next 20 years, until it becomes a key service area. Rising income and wealth inequalities, if not matched by a corresponding rise of incomes across the nation, can lead to social unrest. An area of great concern is the level of ostentatious expenditure on weddings and other family events. Such vulgarity insults the poverty of the less privileged, it is socially wasteful and it plants the seeds of resentment in the minds of the have-‐nots.


Bibliography

❖ Guide to Financial Management by John Tennent (The Economist) ❖ Economic & Political Weekly -‐ July-‐August, 2007 ❖ Finance India, July-‐2006 ❖ How Mutual Funds Work -‐ Fredman and Wiles ❖ Mutual Funds in India -‐ H. Sadhak ❖ Marketing Management by Philip Kotler ❖ Marketing Research – Naresh Malhotra ❖ Marketing Management-‐ Kotler ❖ Various Reports on Indian Insurance Industry ❖ Personal Financial Planning by Aitken and Goodmen ❖ Journal of the ICFAI on investments, 2007 ❖ www.investopedia.com ❖ www.wikipedia.com


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