Summer Project Report

On

“Portfolio Management”-
An Empirical Study on the Art of
Investing
Acknowledgement
Table Of Contents
Topic Page no
Acknowledgement

Executive Summary

Company Profile

Project Profile & Need for Study

Objective of Study

Research Methodology

Data Collection

Functioning of project

Finding & Interpretation- Part 1

Finding & Interpretation- Part 2

Implementation

Limitations

Future Scope, Recommendations,

Conclusions
Bibliography

Appendix
 Executive Summary:
Portfolio Management is the professional management of various securities
(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment
goals for the benefit of the investors..

Asset classes exhibit different market dynamics, and different interaction effects;
thus, the allocation of monies among asset classes will have a significant effect on
the performance of the fund.

¾ Returns:
It is important to look at the evidence on the long-term returns to different assets,
and to holding period returns (the returns that accrue on average over different
lengths of investment).

¾ Diversification:
Against the background of the asset allocation, fund managers consider the
degree of diversification that makes sense for a given client (given its risk
preferences) and construct a list of planned holdings accordingly. The list will
indicate what percentage of the fund should be invested in each particular stock
or bond.

¾ Risk - Factor:
Measurement of risk taken is an integral tool for Performance measurement of
various Investments for the interest of Investors. Several other aspects are also
part of performance measurement: evaluating if managers have succeeded in
reaching their objective, i.e. if their return was sufficiently high to reward the
risks taken; how they compare to their peers etc.
This Project Planner would give us an insider’s view on “How to Invest Right in
order to lay a Strong Foundation of Wealth” for one’s stable future prospects.

The core study area of this project would follow a flow through a Four – Step
Portfolio Construction Process, which would go as follows:

1. Construct Policy 2. Examine economic

Statement Environment

4. Evaluate Portfolio 3. Portfolio Construction

Performance
Company Profile:
 Project profile
and
need for study:
“Portfolio Management”-
A Theoretical Study on the Art of Investing
The practice of investing funds and managing portfolios should focus primarily
on managing risk rather than on managing returns.

This Project examines some of the practical implications of risk management in

the context of asset allocation. Asset allocation is the process of deciding how to
distribute an investor’s wealth among different countries and asset classes for
investment purposes.

Asset Management Companies:

Asset management companies play the leading role for managed investment,
where they are known as "portfolio management companies". Asset management
companies are responsible for the financial, administrative and accounting
management of products under management in collective investment schemes
and under discretionary mandates. Asset management companies act solely in the
Investor’s Interest. A company that invests its clients' pooled fund into securities
that match its declared financial objectives. Asset management companies
provide investors with more diversification and investing options than they would
have by themselves.
 Objective of the study:
Every individual is populated with specific financial and social events that he
needs to plan for. He has his own Wealth G.R.I.P. (Goals, Retirement, Investment
& Protection) plan, to be met upon, for an easy future living.

The Objective of this Study is to study the Ideal Investment Pattern suitable
for an Individual, based on the following parameters:

¾ Age

¾ Risk – Taking Profile

¾ Financial Goals

This Project planner will help him understand his Investment requirements and
start planning for the above mentioned events. It will enable him to articulate his
needs, convert them into financial goals and effectively plan for the same.
 Research Methodology:
The Research Methodology used is Exploratory in nature. The study was
conducted through a Risk Profiler and secondary data analysis.

The study involved, interviewing five different people through the Risk –
Profiler, falling under five distinct Age – Brackets, being:

¾ Under 30
¾ 30 – 40
¾ 41 – 50
¾ 51 – 60
¾ Above 60

This project would brief you on the Asset – Allocation for two employed
Investors of the age – bracket: Under 30 and 51 – 60 respectively

It was decided to take the two extreme limits, namely to study the Investment
Pattern of a 23-year-old and a 51-year-old in detail, as it was of the view, that a
detailed written study of all the five individuals would run into quiet a lengthy
affair, while a lot of data would seem similar between a minimum of two
consecutive Age – Brackets.
Thus we focus on the twp extreme age – brackets; Under 30 & 51 – 60, as these
two individuals would display a very distinct behavior with regards to their
Investment Response towards various Investment tools and the quantum of
Money

to be allocated against each Investment Vehicle being quite different on account

of their differences with regards to their:

¾ Risk Level
¾ Need
¾ Age
¾ Tax Needs
¾ Benefits
¾ Family Responsibilities etc.
 Data Collection:

Risk-Analyzer Questionnaire

The data collected through the Profiler provided for an Analysis of an

Individual’s Risk – taking capacity through the Risk – Analyzer.

The Risk – Analyzer, after being administered on the Respondents categorizes

each of them on the basis of their risk – taking appetite, as Investors of the
following classes:

¾ Conservative
¾ Moderate
¾ Balanced
¾ Aggressive
¾ Highly Aggressive

The respondents were placed in any of the above relevant class of Investment
Behavior in relation to their individual opinions and answers from the duly filled
profiler which was matched against certain ratings (The Ratings Calculation is
explained in the attached Profiler in the Appendix) that signified their risk related
investment behavior.
Customer Profile

The Customer Profile provided for details and analysis of an individual in areas
as follows:

¾ Personal Details

¾ Income Level

¾ Number of Dependents

¾ His Financial Goals etc.

 Functioning of the project:
The asset allocation decision is not an isolated choice; rather, it is a
component of a portfolio management process. In this project, we present
an overview of A four-step portfolio management process in order to chalk
out a fairly balanced risk – return basket of securities for an investor :
STEP – 1:

A Policy Statement is a road map that guides the investment process.

Constructing a policy statement is an invaluable planning tool that will help the
investor understand his or her needs better as well as assist an advisor or portfolio
manager in managing a client’s funds. While it does not guarantee investment
success, a policy statement will provide discipline for the investment process and
reduce the possibility of making hasty, inappropriate decisions.

There are two important reasons for constructing a policy statement:

¾ It helps the investor decide on realistic investment goals after learning

about the financial markets and the risks of investing.

¾ It creates a standard by which to judge the performance of the portfolio

manager.

When asked about their investment goal, people often say, “to make a lot of
money,” or some similar response. Such a goal has two drawbacks: First, it may
not be appropriate for the investor, and second, it is too open-ended to provide
guidance for specific investments and time frames. Such an objective is well
suited for someone going to the racetrack or buying lottery tickets, but it is
inappropriate for someone investing funds in financial and real assets for the long
term. An important purpose of writing a policy statement is to help investors
understand their own needs, objectives, and investment constraints. As part of
this, investors need to learn about financial markets and the risks of investing.
This background will help prevent them from making inappropriate investment
decisions in the future and will increase the possibility that they will satisfy their
specific, measurable financial goals.

Thus, the policy statement helps the investor to specify realistic goals and become
more informed about the risks and costs of investing.
STEP – 2:
The process of investing seeks to peer into the future and determine strategies that
offer the best possibility of meeting the policy statement guidelines. In the second
step of the portfolio management process, the manager should study current
financial and economic conditions and forecast future trends. The investor’s
needs, as reflected in the policy statement, and financial market expectations will
jointly determine investment strategy.

Economies are dynamic; they are affected by numerous industry struggles,

politics, and changing demographics and social attitudes. Thus, the portfolio will
require constant monitoring and updating to reflect changes in financial market

Because this research is concerned with the macroeconomic analysis of security

markets, we should examine the macroeconomic impact of inflation and interest
rates. We have all realised the critical role of expected inflation and nominal
interest rates in determining the required rate of return used to derive the value of
all investments. We would expect these variables that are very important in
microeconomic valuation to also affect changes in the aggregate markets.
STEP – 3:
The Third & the heart of all steps of the portfolio management process is to
construct the portfolio. With the investor’s policy statement and financial market
forecasts as input, the advisors implement the investment strategy and determine
how to allocate available funds across different countries, asset classes, and
securities. This involves constructing a portfolio that will minimize the investor’s
risks while meeting the needs specified in the policy statement. Financial theory
frequently assists portfolio construction.

Portfolio Construction is based on is based on certain true assumptions

regarding investor behavior:

1. Investors consider each investment alternative as being represented by a

probability distribution of expected returns over some holding period.

2. Investors estimate the risk of the portfolio on the basis of the variability
of expected returns.

4. Investors base decisions solely on expected return and risk, so their

utility curves are a function of expected return and the expected variance
(or standard deviation) of returns only.

5. For a given risk level, investors prefer higher returns to lower returns.
Similarly, for a given level of expected return, investors prefer less risk to
more risk.
Under these assumptions, “a single asset or portfolio of assets is considered to
be efficient if no other asset or portfolio of assets offers higher expected return
with the same (or lower) risk, or lower risk with the same (or higher) expected
return.

1) Individuals can start a serious investment program with their savings. Because
of changes in their net worth and risk tolerance, individuals’ investment
strategies will change over their lifetime.

Through the below pictorial representation, we review various phases in the

investment life cycle. Although each individual’s needs and preferences are
different, some general traits affect most investors over the life cycle. The four
life cycle phases are shown (the third and fourth phases are shown as concurrent)
and described here:
 1) THE RISK – RETURN SAGA:
¾ HOW MUCH RISK IS RIGHT FOR YOU?

You’ve heard the expression “no pain, no gain”? In the investment world, the
comparable phrase would be “no risk, no reward.” How you feel about risking
your money will drive many of your investment decisions. The risk-comfort scale
extends from very conservative (you don’t want to risk losing a penny regardless
of how little your money earns) to very aggressive (you’re willing to risk much of
your money for the possibility that it will grow tremendously). As you might
guess, most investors’ tolerance for risk falls somewhere in between.

¾ SECURITY MARKET LINE

The line that reflects the combination of risk and return available on alternative
investments is referred to as the security market line (SML). The SML reflects
the risk-return combinations available for all risky assets in the capital market at a
given time. Investors would select investments that are consistent with their risk
preferences; some would consider only low-risk investments, whereas others
welcome high-risk investments.

Investors place alternative investments somewhere along the SML based on their
perceptions of the risk of the investment. Obviously, if an investment’s risk
changes due to a change in one of its risk sources (business risk, and such), it will
move along the SML. For example, if a firm increases its financial risk by selling
a large bond issue that increases its financial leverage, investors will perceive its
common stock as riskier and the stock will move up the SML to a higher risk
position. Investors will then require a higher rate of return. As the common stock
becomes riskier, it changes its position on the SML. Any change in an asset that
affects its fundamental risk factors or its market risk (that is, its beta) will cause
the asset to move along the SML as shown in the below graph. Note that the SML
does not change, only the position of assets on the SML.
Procedure and analysis of data:
In view of the above vital constraints, needs, elements to be borne in mind while
drawing out a proficient Portfolio for an Ideal Common Investor, an intricate Risk
– Analyzer was drafted (A copy of the same has been enclosed in the Appendix
section for reference).

The Risk – Analyzer incorporated various open – ended and closed – ended
questions in relation to various parameters, being:

¾ Personal Details
¾ Risk – Taking Profile
¾ Income Level
¾ Number of Dependents
¾ His Investment Areas & Preferences
¾ His Financial Goals etc.

Now, the main arena of focus of the research in this project, is the Investor’s Age
– Risk combination, i.e. How old is the individual and how his age determines his
risk – holding capacity and consequently the profound Roadmap that would guide
his Investment process towards building up a corpus for his secure future.
The Risk – Profiler was thus administered on five distinct individuals falling
under different age – brackets, namely:

¾ Under 30
¾ 30 – 40
¾ 41 – 50
¾ 51 – 60
¾ Above 60
This project would brief you on the Asset – Allocation for two employed
Investors of the age – bracket: Under 30 and 51 – 60 respectively.

The Risk – Analyzer, after being administered on the Respondents categorizes

each of them on the basis of their risk – taking appetite, as Investors of the
following classes:

¾ Conservative
¾ Moderate
¾ Balanced
¾ Aggressive
¾ Highly Aggressive

The respondents were placed in any of the above relevant class of Investment
Behavior in relation to their individual opinions and answers from the duly filled
profiler which was matched against certain ratings that signified their investment
behavior.
An analysis of the secondary data collected through various Investment based
books and websites, and through a detailed discussion with the guide at Reliance
Money, A generalized, yet a proficient nature of investing criteria was
conceptualized, in correlation to a certain percentage range that would justify the
description of each exclusive Nature of Investing term as mentioned below. The
following tabular content and each preferred nature of investing would be
appropriately placed against each Investment tool, that would vary with respect to
the individual Investor’s utility towards the Investments and his category of being
a Risk - taker . This allocation is explained below in a tabular form as given
below:

PROPOSED RANGE PREFERENTIAL NATURE OF INVESTING

0% - 20% Below Average

21% - 40% Moderate

41% - 60% High

61% - 80% Very High

81% - 100% Aggressive

The above strategies gives us a broad guideline to determine an overall

investment strategy for a class – specific investor. Though a detailed study would
be drawn to indicate which specific securities to purchase and when they should
be sold, it should provide guidelines as to the asset classes to include and the
relative proportions of the investor’s funds to invest in each class. How the
investor divides funds into different asset classes is the process of asset
allocation.

The asset allocation decision is very vital. How important is the asset allocation
decision to an investor? In a word, very. Several studies have examined the effect
of the normal policy weights on investment performance, using data from both
pension funds and mutual funds, from periods of time extending from the early
1970s to the late 1990s.The studies all found similar results: About 90 percent of
a fund’s returns over time can be explained by its target asset allocation policy.
 Findings and Interpretations:
Part-1
To illustrate the above framework, we discuss the investment objectives and
constraints that may confront “typical” employed 25-year-old and 51-year-old
investors, while framing their portfolios.

Firstly, we take into account the findings of a 25-year-old investor through

the Risk-Analyzer that was administered upon him. The project-relevant
details of the individual are given as follows:

a) From the Risk-Profiler section of the Questionnaire (Refer to Appendix)

being filled by the individual, and as against his scores being matched against
the relevant ratings, we came to the conclusion that the individual was to be
placed under the Balanced Class of Investors i.e., He is known to be one
who would prefer to take a balanced amount of risk in comparison to his
returns from his Investment.

b) Thus, in order to initiate the Asset – Allocation process for our concerned
investor, a pie – diagram is graphed for the same. This graph indicates an
approximate perception and a recommendation for the individual’s
Investment basket allocation, strongly defining the class of Investor that he
has been bracketed under as per the results of his Risk – Profiler, and with
the assistance of the earlier devised Nature of Investing criteria
c) NOTE: The percentages mentioned in the below graph, are purely
approximated statistics, based on the ongoing Consumer Behavior of a
Balanced Class of Individuals, this investor class being studied through
vital secondary data and with the help of the rich experience in the field of
Investments Study held by my guide.
However, the above mentioned percentage allocation of the various Investment
tools for the proposed 25-year-old investor in his portfolio is a generalized
rational allocation. Thus, this would be altered with an error margin of -5 to +5,
depending upon his specific personal, income details and financial goals, as
tabled as follows:
With the data in hand and keeping the Balanced Asset-Allocation class proposed
to him in mind, an Optimal Portfolio is now proposed to the individual to
roadmap a path that would reasonably help him achieve his financial and security
goals:

1) INSURANCE:

a) WHY INSURANCE? MY INSURANCE...

Life Insurance should be a component of any financial plan. Although nobody

ever expects to use his or her insurance coverage, a first step in a sound financial
plan is to have adequate coverage “just in case.” Lack of insurance coverage can
ruin the best-planned investment program. Life insurance protects loved ones
against financial hardship should death occur before our financial goals are met.
The death benefit paid by the insurance company can help pay medical bills and
funeral expenses and provide cash that family members can use to maintain their
lifestyle, retire debt, or invest for future needs (for example, children’s education,
spouse retirement, parents health needs). Therefore, one of the first steps in
developing a financial plan is to purchase adequate life insurance coverage.

Insurance can also serve more immediate purposes, including being a means to
meet the individual’s long term goals, such as retirement planning. On reaching
retirement age, you can receive the cash or surrender value of your life insurance
policy and use the proceeds to supplement your retirement lifestyle or for estate
planning purposes.
 b) CHOICE OF PLAN

The individual can choose among several basic life insurance contracts. Term life
insurance provides only a death benefit; the premium to purchase the insurance
changes every renewal period. Term insurance is the least expensive life
insurance to purchase, although the premium will rise as you
age to reflect the increased probability of death.

ULIPs (Unit Linked Investment Plans) policies, provide both a death benefit and
a savings plan to the insured. The premium paid on such policies exceeds the cost
to the insurance company of providing the death benefit alone; the excess
premium is invested in a number of investment vehicles chosen by the insured.
The policy’s cash value grows over time, based on the size of the excess premium
and on the performance of the underlying investment funds. Insurance companies
may restrict the ability to withdraw funds from these policies before the
policyholder reaches a certain age.

ULIPs also offer features that no other investment instruments offer. ULIPs offer
features such as:

¾ Top up
¾ Switch between funds
¾ Increase or decrease the protection level during the term of the policy
¾ Cover continuance option
¾ Surrender options
¾ Range of riders which can be attached to the main policy to provide you
¾ added protection
ULIPs basically work like a mutual fund with a life cover thrown in. They invest
the premium in market-linked instruments like stocks, corporate bonds and
government securities.

c) RETURNS:

ULIPs are considered to be better for long-term investments because of the

following reasons:

Higher product costs in the initial years - ULIPs have higher costs associated with
it in the initial years because of charges which go towards the policy charges.
Also, market fluctuations will tend to provide lower amount of returns as the
amount invested would be slightly lesser in the first couple of years of the policy.
However, overall charge structure for the term comes down substantially over a
long period of time thus allowing greater allocation of your premium in the
chosen funds.

Market fluctuations can hamper returns in the short-term. However, long-term,

market linked investments not only yield very attractive returns, but also have the
least downside to them. To get the best out of your ULIP, you should remain
invested in the ULIP for the long-term of at least 6-10 years

Investments in ULIPs attract tax benefits under Section 80C. The returns and
the lock-in period depend on the plan chosen. Maturity proceeds from ULIPs
are 100% tax free.
Insurance coverage also provides protection against other uncertainties: Health
insurance helps to pay medical bills. Disability insurance provides continuing
income should you become unable to work. Automobile and home (or rental)
insurances provide protection against accidents
and damage to cars or residences.

Thus, our 25-year-old young investor can place aside around 20% of his Net
Disposable Income for Investment purposes in Life Insurance, preferably one of
the good ULIP schemes, whose returns will not only help him reap goo returns,
but also acts as a Life-cover and a Tax-saver.
His amount of investment into Insurance can increase over time, with an increase
in his age and overall income in his hands.

d)FEW PROFICIENT INSURANCE INVESTMENT PLANS:

¾ TATA AIG MAHALIFE

¾ HDFC FREEDOM 58
¾ LIC’s JEEVAN LAKSHYA
¾ RELIANCE ULIP SCHEME etc.
EQUITY MARKETS:

a) INVESTING IN STOCK MARKET... GOOD STOCKS??:

As the individual being placed In the Balanced Class, is quiet young at age and
thus has a god amount of risk – appetite (the fact that he is not married as yet also
supports his increased risk capacity) he has the capacity to invest around 30% of
his Net Disposable Income into pure stocks.

Equities are at the top of the list of hot investment options. Despite the market
slowdown and crash in stock markets, Indian economy is still strong and the
companies are still making profits. Moreover Indian economy is not dependent on
exports, thus shielding it from the global economy problems. Also the
conservative policies followed by the RBI and Indian government have provided
the necessary security to the Indian economy. So despite all the surrounding
doom and gloom, Indian equities remain your best bet to make money.

b) RETURNS:

However one must not make the mistake of buying when the markets are up.
Instead wait for the market to crash, which will help you buy good companies
with strong fundamentals at bargain prices.

Equity stocks are known to have given a 30% rate of return YoY.
For a 25-year-old Investor, he may find it quiet cheap to own common stocks,
that would help him acquire capital appreciation at a later stage of his life,
providing him a neat corpus in order to support his endeavor for his future
marriage and buying a new house expenditure.

In order to gain maximum returns against his stocks, the individual must
understand certain ratios that describes the profitability and value of the said
stock and then make the best possible stock selection. The key ratios to watch out
for would be:

¾ Price-Earning Ratio
¾ Earnings Per Share
¾ Dividend and Yield
¾ Return on Capital Employed

c) CURRENT SECTOR-BASED SPECIALIZED STOCKS:

¾ Infrastructure
¾ Steel
¾ Banks
THE RIGHT TIME TO ENTER GOLD EQUITIES!!!

Conditions have improved for gold equities and with enhanced economic policy
decisions, it could further increase the investment appeal of mining stocks. Gold
stocks have delivered a 9.9%average annual returnsince 1971, while the S&P 500
annualized returns has been 9.6% The $100 gold stocks invested in 1971
would have grown to nearly $3800 dollars at the end of May 2009. While the
same amount in the S&P 500 INDEX would be worth around $3400.
Gold stocks are among the most volatile asset classes, but old and new research
shows that judicious use can enhance investor returns without adding portfolio
risk.

There are many ways to invest in gold. Our investor may directly in bars and
coins; through gold futures, options, warrants and certificates.

They may also hold gold in metal accounts with their bank in just the same way
they could have a foreign currency account. The most popular, fastest-growing
form of gold investment is also the newest: gold traded in the form of a security
on stock exchanges around the world, generally referred to as “gold ETFs”.

Gold Exchange Traded Funds offer investors an innovative, cost-efficient and

secure way to access the gold market. Gold ETFs are intended to offer investors a
means of participating in the gold bullion market by buying and selling units on
the Stock Exchanges, without taking physical delivery of gold.
MUTUAL FUNDS:

Our investor in his early twenties has wide exposure benefit towards MUTUAL
FUNDS – The hottest Investment arm in today’s Money Market. Considering
his risk-return profile, as suggested, we recommend him to have around 35% of
his NDI being placed in distinct return bearing Mutual Funds.

a) WHY MUTUAL FUNDS?

Mutual Fund both conceptually and operationally is different from other savings
instruments. A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial goal .Anybody with an
investible surplus of as little as a few hundred rupees can invest in Mutual Funds.
These investors buy units of a particular Mutual Fund scheme that has a defined
investment objective and strategy.
Mutual Funds invest in instruments of capital markets which have different
riskreturn
profile. It is very necessary that the investors understand properly the
conceptual framework of Mutual Fund and its operational features. Thus a Mutual
Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities
at a relatively low cost.

TEN ADVANTAGES OF INVESTING IN MUTUAL FUNDS

¾ Professional Management
¾ Diversification
¾ Convenient Administration
¾ Return Potential
¾ Low Costs
¾ Liquidity
¾ Transparency
¾ Flexibility
¾ Choice of Schemes
¾ Well Regulated
CHOICE OF FUND & RETURNS:

As a young investor, and in line with his future financial and security goals, we
recommend him to invest in a couple of good Mutual Funds, in the form of
Systematic Investment Plan (SIP), funds that will give him lump sum returns after
a few years.

He has to bear in mind that any one scheme may not meet all your requirements
for all time. He needs to place your money judiciously in different schemes to be
able to get the combination of growth, income and stability that is right for this
23-year-old investor. As always, higher the return you seek higher the risk you
should be prepared to take.

To begin with, Our young investor, could divide and break his money to be
invested into mutual funds into the following Schemes:

¾ Balanced/ Sectoral Schemes

¾ Money Market / Liquid Schemes
¾ Tax Saving Schemes (Equity Linked Saving Scheme – ELSS)
Balanced / Sectoral Schemes:

a) This aims to provide both growth and income by periodically distributing a

part of the income and capital gains they earn. They invest in both shares and
fixed income securities in the proportion indicated in their offer documents.
In a rising stock market, the NAV of these schemes may not normally keep
pace or fall equally when the market falls. It is ideal for our investor looking
for a combination of income and moderate growth.

b) CURENT PROMINENT SCHEMES :

¾ RELIANCE GROWTH FUND

¾ RELIANCE INFRASTRUCTURE FUND
¾ HDFC TOP 100 FUND
¾ FRANKLIN TEMPLETON BLUE CHIP FUND

Money Market / Liquid Schemes:

This would Aim to provide easy liquidity, preservation of capital and moderate
income to our investor. These schemes generally invest in safer, short term
instruments such as treasury bills, certificates of deposit, commercial paper and
interbank call money. Returns on these schemes may fluctuate, depending upon
the interest rates prevailing in the market.

And thus it is ideal for our respondent as a means to park their surplus funds
for short periods or awaiting a more favourable investment alternative.
ELSS:

a) ELSS as the name clearly suggests is a savings scheme linked to equity

markets. The minimum amount of Rs. 5000 is locked in for three years.
Although, ELSS gains are linked to the market performance, it has been seen
that they yield healthy returns.

From March 31st, 2006 the investment limit in ELSS has been increased to
Rs.1, 00,000/- and this entire investment is eligible for deduction under sec 80C
of Income tax Act, 1961.

These schemes offer tax incentives to the investors under tax laws as prescribed
from time to time and promote long term investments in
equities through Mutual Funds.

c) CURENT PROMINENT ELSS SCHEMES :

¾ Canara Robecco Tax Saver Fund

¾ Reliance Tax Saver
BANK / FIXED DEPOSITS:

a) In order to enjoy a capital safety, we offer a recommendation of about 10-12%

of our young investor’s NDI to be locked in a Fixed Deposit offered by banks.

In recent times, with the stock markets in the continuous downward spiral, banks
came out with various FDs, offering attractive rates. The interest earned on an
FD is fixed, as the rate of interest for the particular term is constant. Even if the
rates increase or decrease subsequent to your opening an FD, your rate of interest
will not be affected. So you are guaranteed a regular income, making it an ideal
investment option for those looking for regular income.

In future, when our investor would be looking for a secured loan, either to buy
a house or to fund for his further education, Then he can avail of a loan by
offering his FD as collateral. While his FD continues to earn interest, the rate of
interest for the loan will be a few notches higher than that of the FD. Hence this
type of loan works out cheaper than any other type of loan, since the bank has the
assurance of claiming your deposit if he fails to repay the loan.

b) RETURNS AND PROMINENT RATES:

With many private players and with the evolution of NBFCs on the way, we have
the latest Mahindra Finance Ltd. Offering a handsome rate of as high as 10%
on its Fixed Deposit Scheme.

The bank return rates stay close to a neat number of about 7% - 9.5%

The tax saving FD offers the best of both the world, as your money is locked for
just 5 years while your capital is safe.
CONCLUSION TO PART - 1:

We have thus managed to help our 23-year-old investor in educating him on

investing the Right Way to lay a strong foundation for wealth!

It is always important for us to understand our goals as well as our risk appetite.
Don’t be taken in by the high returns offered by equities or gold if your goal is
short term (within 2-3 years of investment), or if you cannot withstand the
volatility of these assets. Similarly, just because income funds tend be safe, don’t
put your entire corpus in those funds, as inflation tends to erode the value of your
investment.
 Findings and Interpretations:
Part-2
We now take into account the findings of a 51-year-old investor through the
Risk-Analyzer that was administered upon her. The project-relevant details
of the individual are given as follows:

a) From the Risk-Profiler section of the Questionnaire ( Refer to Appendix)

being filled by the individual, and as against his scores being matched against
the relevant ratings, we came to the conclusion that the individual was to be
placed under the Moderate Class of Investors i.e., This individual will want
less risk exposure than the 25-year-old investor, because her earning power
from employment will soon be ending; she will not be able to recover any
investment losses by saving more out of her paycheck. Depending on her
income from social security and a pension plan, she may need some current
income from her soon-to-retire portfolio to meet living expenses. Given that
she can be expected to live an average of another 20 years, she will need
protection against inflation. A risk-averse investor will choose a combination
of current income and capital preservation strategy; a more risk-tolerant
investor will choose a combination of current income and total return in an
attempt to have principal growth outpace inflation.
This implies, that this individual’s Investment basket allocation would be
devised on the basis of the earlier graphed (pie-diagram) asset – allocation
strategy, being:

d) Thus, in order to initiate the Asset – Allocation process for our concerned
investor, a pie – diagram is graphed for the same. This graph indicates an
approximate perception and a recommendation for the individual’s
Investment basket allocation, strongly defining the class of Investor that he
has been bracketed under as per the results of his Risk – Profiler, and with
the assistance of the earlier devised Nature of Investing criteria

e) NOTE: The percentages mentioned in the below graph, are purely

approximated statistics, based on the ongoing Consumer Behavior of a
Balanced Class of Individuals, this investor class being studied through
vital secondary data and with the help of the rich experience in the field of
Investments Study held by my guide.
MODERATE CLASS

However, the above mentioned percentage allocation of the various Investment

tools for the proposed 51-year-old investor in his portfolio is a generalized
rational allocation. Thus, this would be altered with an error margin of -5 to +5,
depending upon his specific personal, income details and financial goals, as
tabled as follows:
With the data in hand and keeping the Moderate Asset-Allocation class proposed
to him in mind, an Optimal Portfolio is now proposed to the individual to
roadmap a path that would reasonably help him achieve his financial and security
goals:

1)INSURANCE:

a) Our said Investor being 51 years old has a shorter life – span and would soon
reach the Retirement stage. She has a whole family to look after, and not to
forget, her husband is already a retired individual, as well she has a less risk –
appetite as well, the obvious reason being her present age.
Thus, in view of the above instances, our Investor must invest around 20 – 25%
in a couple of ULIPs as part of her Investment Bag. These ULIPs would give her
the best of both worlds, namely:

¾ Reasonable returns in her hands

¾ A cover in the form of the Sum Assured for her family, in case of the
Investor’s demise

b) CHOICE OF FUNDS & RETURNS:

As in the case of our 51-year-old investor, the “Age – factor” plays a strong
determining role in almost all her Investment decisions, she could very well
adopt for two ULIPs, which could be as follows:

¾ Growth Fund
¾ Bond Fund (Pension Plan)
Growth Fund:

A good popular ULIP Growth Fund will complement her Investment strategy as it
would give her timely regular returns.

Bond Fund:

A Pension Plan in her portfolio would help her to reap sufficient funds to meet
her post – retirement needs.

“The reason behind allocating a Growth – Bond Fund ULIPs is to her best
advantage: What the Investor earns from a Growth Fund could be very well
transferred to a Bond Fund, thus giving her a higher liquidity and a higher
returns’ opportunity, thus enabling her to build a corpus that would support
her financial goal with regards to her son’s marriage.

And nevertheless, Investments in ULIPs attract tax benefits under Section 80C.
The returns and the lock-in period depend on the plan chosen. Maturity proceeds
from ULIPs are 100% tax free. So the Individual’s tax – matters are also taken
care of.
2) EQUITY MARKET INVESTMENT

a) As this individual will want less risk exposure than the 25-year-old investor,
because her earning power from employment will soon be ending; she will
not be able to recover any investment losses by saving more out of her pay
check, therefore we suggest a nominal rate of about 15 – 20% of Her NDI
into equity stocks.

b) CHOICE OF STOCKS AND RETURNS

This amount could be very well invested in stock and bond investments to meet
income needs (from bond income and stock dividends) and to provide for real
growth (from equities).
3) MUTUAL FUNDS:
a) As we have seen quite briefly while detailing the portfolio construction of the
23-year-old investor, the whole gamut of merits that Mutual Funds offer to its
Investors in recent times since its inception, and how it has exclusive benefits
to people of all age – classes, we have thus recommended about 35% of the
individual’s NDI to be invested into various schemes of Mutual Funds
matching our individual’s needs and lifestyle.

b) CHOICE OF FUNDS & RETURNS:

Our soon-to-be-retired 51-year-old investor has a greater need for liquidity.

Although she may receive regular checks from her pension plan and social
security, it is not likely that they will equal her working paycheck. She will
want some of her portfolio in liquid securities to meet unexpected expenses or
bills. Not to forget, her son’s marriage and retirement fund plans on the cards,
Therefore, we would recommend her to ideally go in for couple of mutual
funds through an SIP, namely:

¾ Liquid Funds
¾ Growth Funds
¾ Dividend Funds
¾ Infrastructure Funds
Liquid Funds:

A Liquid Mutual Fund is a must – have for our 51-year-old individual. This
fund shall have the Investor’s money being predominantly invested in Debt
and Money Market Instruments, thus ensuring sound liquidity measures that
our Investor earnestly looks out for in her Investment planner. With the
inflation showing downward trend, the interest rates are set to fall. This in turn,
will cause an increase in the value of the units of the fund, thus generating
regular income.

Growth/Dividend/Infrastructure Funds:

Though on the slightly riskier side, but nevertheless, “No pains, No gains” and
also with the recent upward trend that the market seems to be working on
lately, our Investor could very well think of having an SIP in any of the above
mentioned three funds.

ELSS:

An ELSS scheme could very well offer tax incentives to the investor under tax
laws as prescribed from time to time and promote long term investments in
equities through Mutual Funds.
4)BANK/ FIXED DEPOSITS

Investors with shorter time horizons like our 51-year-old investor generally favor
more liquid and less risky investments because losses are harder to overcome
during a short time frame. Thus, Bank Fixed Deposits are the safest and most
secure option for our experienced investor, who would soon be approaching
retirement.

In a fixed deposit saving scheme a certain sum of money is deposited in the bank
for a specified time period with a fixed rate of interest (currently between 8% and
10% depending on banks). When you want to invest your hard earned money for
a longer period of time and get a regular income, a Fixed Deposit Scheme is
ideal. It is safe, liquid and fetches high returns.

FD is comparatively lot safer than equities, as the investor’s deposit up to Rs. 1

lakh is insured by Deposit Insurance Credit Guarantee Corporation. So in case, if
the bank fails, her money is still secured. This makes an FD an ideal investment
option for the elderly.

The tax saving FD offers the best of both the world, as your money is locked for
just 5 years while your capital is safe.
EXTRAS FOR OUR 51-YEAR-OLD:

Is Real Estate a Good Investment?

Real estate investing is providing retirement incomes for many. It has brought
excellent returns on investment to those who have learned the tools and pitfalls
well. Don't buy that first real estate investment property without thorough study
of the process.

Real estate is a great investment option. It can generate an ongoing income

source. It can also rise in value overtime and prove a good investment in the cash
value of the home or land that you buy. However you need to be sure that you are
ready to begin investing in real estate.

When purchasing real estate as an investment, you need to consider the cost of
taxes and the way that you plan on renting it out. Often it is easy to go through a
rental company and contract through them for repairs and rent collection. This
takes away part of the burden of caring for your property, but it will also cost you
money.

You need to price your rental property so that all of these fees and other expenses
are fully covered. Additionally you should take the first few months of surplus
money and set it aside to cover the cost of repairs on the property. You should
carry good insurance on the property and be prepared to deal with additional costs
and other situations as they arise.

If you are purchasing land that you plan to sell at a later date you need to research
the land deed thoroughly. Find out if any roads are planned close to the land you
purchase and consider how that will affect the property value. At times it will
help make the land more valuable, at other times it will decrease the value. Once
you have done the research, you should be able to make the correct decision
about purchasing it for investment.
Top 5 Ways that Real Estate Investment Property
Returns Profits:

1) Cash Flow from Rental Income

As with a stock that pays dividends, a properly selected and managed rental
property will provide a steady stream of income in the form of rental payments.
Historically, this percentage of return has exceeded that of dividend yields on
Average

2) Increases in Value Due to Appreciation

Historically, real estate has shown to be an excellent source profit through the
increase in investment property value over time. Of course, one cannot predict
that this trend will always be true, and it varies significantly by area.

3) Improving Your Investment Property - More Value at Sale

While it's providing rental income cash flow, your property can also be improved
in order to garner a better price and more profit when you do choose to liquidate
it as an investment.

Upgrades to the appearance and functionality of a real estate investment property

can significantly increase value. As trends and styles change, keeping the
property interesting to renters will at the very least help you to retain value.

4) Inflation is Your Friend When it Comes to Rent

Though your fixed mortgage will remain constant over time, inflation that drives
up home construction costs will also drive up rents. Population growth creates
housing demand, again driving up rent prices if supply cannot keep pace.

5) Paying Off Your Mortgage

As you pay down your mortgage, the increase in equity can be used for other
purposes and investments. Though it's frequently accessed by selling the
property, a real estate investor can also take out equity loans if the terms are right
and use those funds for more investing or other purposes.

Should you be fortunate enough and have the experience to locate a valuepriced
property, this is an immediate way to increase your net worth and the
value of your investment portfolio.
 Implementations
¾ The above mentioned strategies for both the Investors can prove to be an
insight, when it comes to guiding Investors on how to strike a right balance
between various Investment alternatives.

¾ The above Asset – Allocation idea framed in the project would hopefully
help in its endeavor towards guiding Indian investors in transacting in
financial markets and those availing its financial services.
Future scope, Recommendation
and Conclusion
Thus, My Ideal Portfolio Mix for Long-Term Wealth
Creation:

The simplest way to create long-term wealth from financial markets is to persist
with a permanent portfolio allocation, which withstands volatility.

A simple methodology to construct such a portfolio is through funds requirement

planning projections. The individual’s projected liquidity requirements over the
immediate two-to-three years should be funded through investments in
liquid/debt funds. The remainder should be invested in a blend of diversified
Tequity and sector funds. The allocation made to both, the debt and equity funds,
must be after close deliberation as to whether the fund management style and
intent suits the investor’s perceptions and goals.

This approach would result in differing allocations to the various asset classes,
depending on the existing liquidity requirement/wealth ratio, rather than the
conventionally followed age parameters, which may also be blended into this
approach to yield a portfolio that provides security and reasonable returns. A
disciplined approach to investing will result in a well-balanced portfolio.

CONCLUSION:

Warren Buffett recommends that 'broad diversification is used by people to

protect themselves against their own ignorance.' If you know what you are doing
(high financial intelligence), you should concentrate your portfolio into equities
(stocks & mutual funds) as they achieve the highest return. And you can achieve
low risk not by simply spreading your money around, but by your competence of
knowing which funds and stocks to pick.
ALL AT A GLANCE….
 Bibliography

¾ www.moneycontrol.com

¾ www.investopedia.com

¾ www.irdaindia.org

¾ www.amfiindia.com

¾ “Investment Analysis & Portfolio Management” by Riley Brown