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Management
Saving &Investing…
Investing ….
What is investing?
An investment operation is one which, upon thorough
analysis promises safety of principal and an adequate
return. Operations not meeting these requirements are
Speculative
- Benjamin Graham – The Intelligent Investor
What is investing?
Investing is a method of purchasing assets to gain profit
in the form of reasonably predictable income (dividend,
interest or rentals) and / or appreciation over the long
term
- Burton G Malkiel – A Random Walk Down Wall
Street
Speculation
Investors “speculate" every time they commit money to
something they don't understand.
Speculation
Do you know what Frontier Industries does?
Are you familiar with its competition?
What were its earnings last year / last quarter?
FV = future value
PV = present value
K = rate of compounding
n = no. of years
Child’s Marriage
Child’s Education
Having a
Housing Financial Goal is
primary to
starting a
Investment
Child birth
Plan.
Marriage
The more specific the investor can be, the more likely he
is to set and achieve reasonable goals.
GOI Relief
Bonds
Bank Fixed
Deposits Sacred Assets
Investment Avenues
Equity
H Growth
i
Funds
g
R h
I Index
S
Don’t Invest here Balance Funds
K
Funds
Gilt
Funds
Aggressive
Income
Stance
Funds
RETURN High
Low
Liquid Comp FD
Fund
GOI Sec
P.O.
Sedate Zone Bank FD Optimal
L
RBI o
w
Asset
Allocation
91.5%
10% 10%
5% REAL ESTATE 5% REA L ESTA TE
CA SH CA SH
20% 55%
BONDS BONDS
30%
65% STOCKS STOCKS
13%
25% 15%
5% REAL ESTATE REAL ESTATE
44% CA SH 10% CASH
BONDS BONDS
STOCKS STOCKS
38%
50%
Asset Allocation Principles
Risk and return are related
Risk depends on the length of time one
holds the investment
Rupee Cost Averaging can reduce the
risks of investing
Risks that an investor can take depends
on the investor’s capacity to take risks
and his attitude to take risks.
Asset Allocation drivers
Asset allocation must take into account 2
factors:
Time horizon: the number of years you have
to invest
Return = _________________________________
Amount invested
A B C
-8%
Investment A: no Investment B: Investment C:
return variation, some return wide return
no risk variation, some variation, much
risk risk
Nature of Risk
The more variable an investment’s return, the greater
its risk
A highly variable return could lead to investment losses
if the investment needs to be sold
However, the longer the investment is held, the greater
the chances of earning the long-run rate of return
What is investment risk?
Xi
2
i 1
Standard Deviation: N
Xi=Observation
µ= Mean
N = Total No. of observation
Comparing Standard Deviations
Data A
Mean =
15.5
s = 3.338
11 12 13 14 15 16 17 18 19
20 21
Data B
Mean =
11 12 13 14 15 16 17 18 19 15.5
20 21 s = .9258
Data C
Mean =
15.5
11 12 13 14 15 16 17 18 s = 4.57
19 20 21
It can be seen from above that data sets with
same means could have widely different standard
deviations depending on the variance from the
mean
Breaking down sources of risk
Stand-alone risk = Market risk + Firm-specific risk
Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook
Risk depends on the length of
time one holds the investment
Range of Annual Returns on Common Stocks for Various
Time Periods, 1950-97
60.00%
52.62%
50.00%
40.00%
30.00% 23.92%
19.35%
17.52%
20.00% 16.65%
13.10%
10.00%
0.00%
1.24% 4.31% 5.53% 7.90%
1 Year 5-2.36%
Years 10 Years 15 Years 20 Years 25 Years
-10.00%
-20.00%
Maximum
-30.00%
-26.47% Minimum
-40.00%
Sensex Returns Analysis -1979
to 2004
275
250
225 Average Return (%)
200 Highest Return (%)
175
Lowest Return (%)
Returns (%)
150
125
100
75
50
25
0
-25 1 3 5 7 10 15
-50
Time Horizon (years)
1 Rs.150 Rs. 75 2
2 Rs.150 Rs.25 6
3 Rs.150 Rs.50 3
Total Cost Rs.450
Average Price Rs.50
Total Shares 11
owned
Weighted Average Cost: Rs. 40.91 ( 450 / 11)
Understanding
Historical Trends is
the key to success in
Asset Allocation…
Looking through the rear view
mirror makes the journey
safer ….
Investing is a lot of numbers. One needs to get used to that, and
quickly.
An investor can see exactly what he needs to get to his destination,
and can be accountable to himself along the way.
Bonds and stocks are the two major asset classes that have been
used by investors over the past century.
Growing
consumer
Infrastructure
class that is
Spend
acquiring
critical mass
Sustained Corporate
growth in FDI sector set to
and foreign invest in
portfolio capacity
investment World class additions
market
infrastructure
and
regulations
Changing Demographics of India
100%
6.7% 7.0% 7.5% 8.0% 8.4% 8.9%
90%
80%
70% 45.9% 47.9% 50.7% 53.1% 54.4% 55.0%
60%
50%
40%
30%
47.5% 45.1%
20% 41.8% 38.9% 37.2% 36.0%
10%
0%
FY1996 FY2001 FY2006 FY2010 FY2013 FY2016
0-19 years 20-59 years 60 years & above
39.3%
Others
Scenario 2:
You have bought a ticket for the same program
for Rs.1500, and the same situation happens.
Would you go?
Fallacies in Investor Behaviour
Sunk Cost Fallacy :
Most people would go for the show if they paid for
the ticket, but avoid it if was complimentary.
Tax Saving Schemes : Offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws as the Government offers tax
incentives for investment in specified avenues. Investments made in Equity
Linked Savings Schemes (ELSS) and Pension Schemes are allowed as
deduction u/s 88 of the Income Tax Act, 1961. The Act also provides
opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds.
Industry Specific Schemes : Invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries
like InfoTech, FMCG, Pharmaceuticals etc.
Convenient Administration : Investing in a MF reduces paperwork and helps you avoid many
problems. Saves time and money.
Return Potential : Over a medium to long-term, MFs have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
Low Costs: MFs are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.
Liquidity : In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the MF. In closed-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the MF.
Benefits of Mutual Fund investment
Transparency : You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.
Flexibility: Through features such as regular investment plans, regular withdrawal plans
and dividend reinvestment plans, you can systematically invest or withdraw funds
according to your needs and convenience.
Choice of Schemes: MFs offer a family of schemes to suit your varying needs over a
lifetime.
Well Regulated: All MFs are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors.
Investing in index funds is relatively less cumbersome. Here, the
two most important points which investors have to look out for are
the expense ratio and the tracking error (i.e., the difference
between the returns clocked by the benchmark index and index
funds).
Closed-End Schemes
A mutual fund scheme in which the
investors commit their money for a
particular period.
Expense Ratio
A mutual fund's operating expenses,
expressed as a percentage of its average
net assets. Mutual funds with lower
expense ratios are able to distribute a
higher percentage of their total returns
to their shareholders.
Entry Load
The commission charged at the time of
buying the fund. It is also called front-end
load.
Exit Load
The commission or charge paid when an
investor exits from a mutual fund. They are
basically imposed to discourage
withdrawals.
Sharpe Ratio
The Sharpe ratio is calculated using standard deviation and
excess return to determine reward per unit of risk.
First, the average monthly return of the risk free security
is subtracted from the fund's average monthly return.
The difference in total return represents the fund's excess
return beyond that of the risk-free investment.
An arithmetic annualized excess return is then calculated
by multiplying this monthly return by 12.
To show a relationship between excess return and risk, this
number is then divided by the standard deviation of the
fund's annualized excess returns. The higher the Sharpe
ratio, the better the fund's historical risk-adjusted
performance.
Calculation of NAV
It’s time to
Once you
figure out
know HOW to
where to put
invest.
your money.
Research Your Investments
What do I need
to know?
Research Your Investment
To....
20
Market Risk
10 20 30 40 2,000+
0 # Stocks in Portfolio
Tracking Your Portfolio
Asset allocation
Dividing investment dollars among various asset classes,
typically among cash investments, bonds, and stocks.
Asset classes
The three major asset classes are cash (also called cash
reserves, money market instruments, etc.), bonds, and
stocks.
Diversification
Investing in separate asset classes (stocks, bonds, cash)
and/or stocks of different companies in an attempt to
Investing terminology ….
Portfolio
All the securities held by an individual, institution, or
mutual fund.
Compounding
When an investment generates earnings on reinvested
earnings.
Capital appreciation
One of the two components of total return, capital
appreciation is how much the underlying value of a
security has increased. If you bought a stock at Rs.10 per
share and it has risen to Rs.13, you have enjoyed a 30%
return or appreciation on the original capital you invested.
Dividend yield is the other component of total return.
Investing terminology ….
Dividend
A share of a company's earnings paid to each stockholder.
Dividend yield
The annual percentage rate of return paid in dividends on
a share of stock. To figure out the dividend yield (or just
"yield"), divide the annual dividend by the current share
price of the stock.
Inflation
A rise in the prices of goods and services.
Real return
The inflation-adjusted returns of an investment.
Investing terminology ….
Risk-adjusted return
A measure of how much risk a portfolio has employed to
earn its returns.
Annualize
To make a period of less than a year apply to a full year
to facilitate comparative analysis.
Volatility
The degree of movement in the price of a stock or other
security.
Investing terminology ….
Risk tolerance
The measurement of an investor's willingness to suffer a
decline (or repeated declines) in the value of investments
while waiting and hoping for them to increase in value.
Standard Deviation
A measure of variation about the mean
Beta
A measure of the relative volatility of a stock or other
security as compared to the volatility of the entire market
(usually measured by the S&P 500 index). A beta above
1.0 shows greater volatility than the overall market, and a
beta below 1.0 is less volatile.
Investing terminology ….
Broker
One who sells financial products. Whether in insurance,
real estate, or stocks, most brokers work under
compensation structures that are at direct odds with the
best interests of their clients. When using a broker, you
should always find out how he or she is compensated.
Order
A request from a client to a broker to buy or sell stock,
either at the market price or at a specific price.
Bear
A person with a generally pessimistic market outlook or a
pessimistic view on a sector or specific stock.
Investing terminology ….
Bear market
When the overall market loses value over an extended
period of time.
Bull
A person with a positive or optimistic outlook for the
general market, a market segment or industry, or for
particular stocks
Bull market
A market that has been gaining value over a prolonged
period.
Investing terminology ….
Buy-and-hold
A strategy that employs buying shares of companies with
the intention of keeping those holdings for a long time,
preferably indefinitely, and participating in the long-term
success of being a partial owner of the business
underlying the stock.
Market timing
An investment strategy based on predicting short-term
price changes in securities, which is virtually impossible
to do.
Churn
Churning is unconscious or conscious overtrading by a
broker in a customer's account. Since brokers are most
often compensated by the number of transactions made
on a customer's behalf, there is temptation to trade too
frequently, whether that's in stocks, bonds, or mutual
Investing terminology ….
Capital gain/loss
The difference between the price at which an asset is sold
and its original purchase price (or "basis").
Common stock
A security representing partial ownership in a public or
private corporation.
Blue-chip stocks
Really good, large companies -- often INDEX components
-- that have been around long enough to have a solid
history of rewarding shareholders.
Investing terminology ….
Index
An unmanaged selection of securities whose collective
performance is used as a standard to measure
investment results.
Mutual fund
The pooled cash of many unitholders that is invested
according to a stated objective, as defined by the fund's
prospectus.
Open-end fund
A mutual fund that has an unlimited number of units
available for purchase. Most mutual funds are open-
ended.
Investing terminology ….
Equity Plans
Returns
Risk
Actual
Performance
Conservative Moderate Aggressive
Allocation (%) Allocation (%) Allocation (%)
One Year Returns 4.5% 17.6% 22.9%