A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks,

bonds, short-term money market instruments, and/or other securities.

Developing A Wealth Management Plan

Any financial planning including retirement decision -making should be based upon the six steps of the wealth management process. 1. Identify and Clarify the

Current Situation
This first step involves data gathering and a review of quantitative information such as the investors total assets and liabilities which comprise the net worth statement, statement of income and expenses, life, disability and other insurance policies, imp ortant documents such as: tax returns, wills, powers of attorney, investment portfolio and transactions, shareholders agreements, employee benefit booklets, trust agreements, pension statements, and some basic family history such as name, age, marital stat us, employment history or details of a family business, details of the childrens birth dates and other qualitative details. Essentially this step summarizes where the client is today. An individuals current situation is a result of the cumulative effects of all of the financial decisions and transactions that have occurred in the past up until the current time. 2. Identify Goals and Objectives This step seeks to identify both financial and personal goals and objectives. After identification and listing, t he goals and objectives need to be prioritized, to facilitate the allocation of the available resources to the most critical concerns. It is of primary importance that the financial goals are measurable, in order to track success and to provide feedback so that strategies can be fine -tuned. Goals must be: Specific. Otherwise, they are not goals, they are merely dreams. I require $500,000 by my 65th birthday is an example of a specific goal. I want to be rich when I retire is a dream not a goal. Measurable. Financial goals are easily measurable since dollars and cents can be counted. Attainable. Goals must be securable. Realistic. In order for a goal to be achieved, it must be within the realm of reason. To accumulate $1 million by age 65, if one is currently age 64, and has no savings may be attainable by winning a lottery however; this is unrealistic. Conversely, for a 25-year-old to accumulate $1 million by age 65 through saving and investing is probably both attainable and realistic. Time bound. All goals should be time bound in order to track progress towards the goals completion and to provide feedback. Corrections should be made in the action plan therefore maximizing the probability of success. If goals are determined to be unattai nable and/or unrealistic, the individual can: reduce discretionary expenditures, increase income, choose more aggressive investments, with potentially higher investment returns, increase the timeframe over which to obtain the goal, or reduce the dollar value of the goal.

3. Analyze Problems and Opportunities An analysis of the current situation will allow for the identification of additional opportunities that can be exploited in order to more efficiently accomplish the specified financial goals. Moreover, the situational analysis will help to identify problems that may be acting as obstacles or preventing the most efficient accomplishment of the identified objectives. Problems must be identified

before solutions can be established. It is in this stage of the wealth management process that the use of various mathematical tools is most powerful. The answers to questions like should I pay off my mortgage or contribute to my RRSP this year? are not straightforward. The answer will depend upon each individuals situation, and the assumptions that the individual makes such as the interest rate, the rate of inflation, and the chosen investment vehicles. It is imperative that the economic assumptions upon which the financial plan will be based be set by the individual (with input from the financial adviser). It is therefore necessary that some basic understanding of the interrelationship of key economic information and investment performance be acquired in order to make educated or enlightened fina ncial decisions.

4. Develop Solutions If sufficient analysis has been performed in the previous step of the process, the development of solutions is straightforward. 5. Implementation This step involves putting the financial plan into action. An action pl an should be created with appropriate strategies and tactics outlined in writing. 6. Monitor and Review The final step in the wealth management process is the ongoing monitoring that is required in order to fine -tune the financial plan and to ensure the su ccessful attainment of the specified financial objectives. Regular reviews and updates allow any plan, which has gone off track to be quickly, set back onto the rails . Regular review allows for any changes in an individual s lifestyle or in the economic environment to be reassessed. Additionally, a review allows the opportunity to provide for any changes to strategies or tactics, which might be required.

STEPS IN THE ASSET ALLOCATION PROCESS

By JLP | April 30, 2006 Heres a step-by-step approach to the asset allocation process. This process is adapted from a version found in Personal Financial Planning Seventh Edition by G. Victor Hallman and Jerry S. Rosenbloom. Ill list the process and then expand where necessary with follow-up posts. The Steps in the Asset Allocation Process: 1. Consider your personal situation. What are your investment constraints, time horizon, financial position, and tax status? These are all important things to know when deciding on the asset allocation that is best for your needs. It is also important to understand your risk tolerance. 2. Consider your investment objectives. Is your goal maximum current income, capital preservation, moderate capital growth, long-term growth, aggressive capital growth, or tax reduction through taxadvantaged investments? Theres a lot to consider. 3. Review your present allocation. Where are you now? 4. Consider and select the asset classes to be included in your allocation. Heres a list of possible asset classes to be considered: Domestic common stocks Foreign common stocks Domestic bonds (investment grade, not junk) Foreign bonds High-yield (aka junk) bonds Cash-type assets (cash equivalent) Longer-term fixed-dollar (guaranteed principal) assets Investment real estate Other tax-sheltered investments Convertible securities Gold and other precious metals Collectibles Other assets 5. Look at the long-term return-risk features of each asset class. 6. Decide on your allocation percentages of the selected asset classes. 7. Along with Step 6, decide on strategy and allocation INSIDE each asset class. 8. Decide how each asset class should be held. Should you use your 401(k), IRA, or taxable account? This is a very important step in the asset allocation process. 9. Implement the plan. Nothing happens until you implement. 10. Review your plan at least annually and make adjustements as necessary.

Financial Planning Process

The Financial Planning Process consists of the following six steps: 1. Establishing and defining the client -planner relationship. The financial planner should clearly explain or document the services to be provided to youand define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made. 2. Gathering client data, including goals. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need. 3. Analyzing and evaluating your financial status. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies. 4. Developing and presenting financial planning recommendations and/or alternatives. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate. 5. Implementing the financial planning recommendations. You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals such as attorneys or stockbrokers. 6. Monitoring the financial planning recommendations. You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.

What are the financial instruments in India?

Written by Ranjan Monday, 08 October 2007 22:39

We took a look at the players in the financial markets earlier. Let us now look at the Financial Instruments these players ha v They van be braodly classified into Government securities and Industrial securities.

Government Securities( G-Sec ) : In India G- Secs are issued by the Central Government , State Governments and Semi Government Authorities such as municipalities, port trusts, state electricity boards and public sector corporations. The Central and State Governments raise money through these securities to finance the creation of new infrastructure as well as to meet their current cash needs. Si these are issued by the government, the risk of default is minimal. Therefore, interest rates on these securties often serve a i benchmark for the level of interest rates in the economy. Other issuers may price their offerings by `marking up this benchmark rate to reflect the credit risk specific to them. These securities may have maturities ranging from five to twenty years. These are fixed income securities, which pay inte every six months. The Reserve Bank of India manages the issues of the securities. These securities are sold in the primar market mainly through the auction mechanism. The RBI noti fies issue of a new tranche of securities. Prospective buyers submit their bids. The RBI decides to accept bids based on a cut off price. The G -secs are primarily bought by the institutional investors. The biggest investors are commercial banks who inv st in G e secs to meet the regulatory requirement to maintain a certain percentage of Statutory Liquidity Ratio (SLR) as well as an investment vehicle. Insurance companies, provident funds, and mutual funds are the other large investors. The Primary De perform the function of market makers through buying and selling activities. The Government of India also borrows short term funds for up to one year. This is through the issue of Treasury Bills whic sold at a discount to the face value and redeemed at the full face value. Industrial Securities: These are securities issued by the corporate sector to finance their long term and working capital requirements. The Majo Instruments that fall under Industrial Securities are Debentures, Preference Shares And Equity Shares. Debentures Debentures have a fixed maturity and pay a fixed or a floating rate of interest during their lifetime. The company has an obligation to pay interest and the principal amount on the due dates regardless of its profiability position. The debenture t holders are not members of the company and do not have any say in the management of the company. Since these carry predefined rate of return, there is no scope for any major capital appreciation. However, in case of fixed rate debentures, th market price moves inversely with the direction of interest rates. The debenture issues are rated by the professional credit

Inves

ent Instruments

rating agencies regarding the payment of interest and the repayment of the capital amount. Apart from the `plain vanilla variety of debentures (periodic payment of interest during their currency and repayment of capital on maturity), a number of variations have been devised. For example, zero coupon bonds are issued at a discount to their face value and redeemed at the full face value. The difference constitutes return for the investor. Preference Shares

Preference Shares carry a fixed rate of dividends. These carry a preferential right to dividends over the equity shareholders. This means that equity share holders cannot be paid any dividends unless the preference dividend has been paid in full. Similarly on the winding up of the company, the preference share holders get back their capital before the equity share holders. In case of cumulative preference shares, any dividend unpaid in past years accumulates and is paid later when the company has sufficient profits. Now all preference shares in India are `redeemable, i.e. they have a fixed maturity period. Thus preference shares are sometimes called a `hybrid variety incorporating features of debt as well as equity. Equity Shares

Equity Shares are regarded as high return high risk instruments. These do not carry any fixed rate of return and there is no maturity period. The company may or may not declare dividend on equity shares. Equity shares of major companies are traded on the stock exchanges. The major component of return to equity holders usually consists of market appreciation. Call Money Market: The loans made in this market are of a short term nature overnight to a fortnight . This is mostly inter-bank market. Those banks which are facing a short term cash deficit, borrow funds from the cash surplus banks. The rate of interest is market driven and depends on the liquidity position in the banking system. Commercial Paper (CP) and Certificate of Deposits (CD) : CPs are issued by the corporates to finance their working capital needs. These are issued for short term maturities. These are issued at a discount and redeemed at face value. These are unsecured and therefore only those companies who have a good credit standing are able to access funds through this instrument. The rate of interest is market driven and depends on the current liquidity position and the creditworthiness of the issuing company. The characteristics of CDs are similar to those of CPs except that CDs are issued by the commercial banks.

Classification of Mutual Funds

There are a myriad of different mutual funds. The Investment Company Institute (ICI) is an association for mutual funds that classifies the many types of funds. Essentially, there are three basic types of mutual funds: equity funds, fixed income funds and money-market funds. If you are not completely sure what

classification a mutual fund belongs to, check its beta co -efficient. The funds with the higher betas will probably be aggressive growth funds (equity or stock funds), and those with lower betas will be fixed-income funds.

Aggressive Growth Funds

Aggressive growth funds are stock funds that have primarily one objective-maximum capital gains. Capital gains are just the increase in the value of an investment. These types of mutual funds invest in many different securities, including new industry stocks, small-company stocks, and practice investment techniques such as selling stocks short, futures, and options. Aggressive growth funds tend to be the most volatile of funds, as well. Examples of aggressive growth funds are Fidelity Magellan, Tudor, 20th Century, etc.

Growth Funds
Growth funds are those that invest in the stocks of well-established, blue chip companies. Dividends, and consequently steady income, are not the primary goal of these types of funds. Instead, they focus on increasing capital gains. Examples of growth fund are Fidelity Destiny I, Ivy, Janus, T. Rowe Price New Era, 20th Century Growth, Manhattan and many more.

Growth and Income Funds

Growth and income funds incorporate both increased capital gains and producing steady income. They are less volatile than aggressive growth funds. Examples of these funds are Evergreen Total, Investment Company of America, 20th Century Select, Vanguard Index Trust, Windsor II, etc.

Equity (Stock or Income) Funds

Equity funds allow investors to own a piece of the company that they have invested in, like common stocks. Stocks have historically been the best investment bar none. They have outper formed all other investment vehicles in the long term, but there is added risk. See the section on stocks and bonds for more information about this. Equity funds seek to produce a high lev el of current income by investing primarily in equity securities of companies with solid reputations and a record of good paying dividends. Decatur and Fidelity Puritan are examples of equity funds.

Balanced Funds

Balanced funds have a portfolio mix of bon ds, preferred stocks and common stocks. Balanced funds generally aim to conserve investors' initial investment, to pay an income and to aid in the long -term growth of both the principle and the income. Examples include Phoenix balanced, Wellington, Loomis -Sayles Mutual, etc.

Bond Funds
These type of mutual funds invest in a mixture of corporate and government bonds at all times. The most sophisticated investors often switch between short -term, intermediate-term and long-term bonds, depending upon the direct ion of interest rates. Short-term bonds are those with maturity of less than three years; intermediate bonds are those that have bonds of three to ten years, and long - term bonds are over ten years. For a more comprehensive description of bonds, refer to that section.

Global Funds
Global funds are those that invest in equity securities of companies around the world and in the United States. These funds can change the percentage of their allocation in foreign and domestic markets, as well. For example, if there are major problems in foreign markets, global funds will allow the mutual fund company to pull out money invested there.

International funds
International funds invest in equity securiti es of companies located outside of the United States. Two-thirds of their portfolios must be invested in these companies at any one time. Many of these international funds invest in the emerging markets of nations around the world. They do not offer the fl exibility of the global funds because of the two-thirds minimum requirement.

Fixed-Income Funds
Fixed-income funds are safer than equity funds, but as always, do not yield as high returns as the latter do. These types of funds are geared towards the invest or who is approaching old age and doesn't have many earning years left. Many investors hope to draw a steady income from these types of mutual funds. Bond funds fall into the category of fixed-income funds. Fixed-income funds entail lending out money to bu y Certificate of Deposits (CDs) or bonds, and as a result, your principle isn't expected to take a great hit in the event of the market heading south, but at the same time, your principle won't appreciate greatly when the loan comes due either.

Money-Market Funds
Money market funds are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. Money-market funds have beta co-efficient values of zero because the chances of your principle being eroded are very minimal. How do these funds work? Money-market funds are like fancy checking accounts and the best part is that they are risk-free. If you invest a thousand dollars, you will get that money back. It is simply a matter of when you get it back. A thousand dollars will get you a thousand shares. Usually the prices of shares in money-market funds are kept at around $1. As an investor, you will be given checks which you can use against your deposit. The minimum amount for these checks, however, is usually around $250 or $500. When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Moneymarkets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people. The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields --like 18% in the early 1980s. The interest rate is very important information. Many investors believe that even 1% is not worth the trouble of shopping around. The graph below shows the difference 1% makes on $5000 invest ed for different duration.

The Importance of 1%
Yield 1 Year 3 Years 5 Years 10 Years 15 Years 5.25% $5,268 $5,847 $6.490 $8,423 $10,933 6.25% $5,320 $6,022 $6,818 $9,296 $12,676 7.25% $5,372 6,203 7,161 10,257 14,690

Real Estate Funds

Real estate has often rivaled common stocks as amongst the most profitable of investments. A drawback to investing in real estate is that it is not very liquid. In other words, an investor cannot pick and sell and turn around and buy as quickly as with other investments. Mutual funds provide some of this liquidity. Real Estate Investment Trusts (REITs) are sold like stocks on an exchange. They are not exactly mutual funds. REITs provide the most liquidity, along with the lucrative

benefits of investing in real estate. T. Rowe Price, Vanguard and others have many REITs that you can invest in.

Index Funds
Indices (pl. index), as you know now, provide a snapshot of how the market is doing on the whole. The most famous indices are the Dow Jones Industrial Average (about 30 blue-chip stocks) and Standard & Poor's 500 Index. Both of these give a view of how the market is doing in general, but for more a specific view, the Wilshire 5000 and the Value Line Composite provide more accurate information. Index funds try to emulate a market index, most often the S&P 500. Because of expenses, these index funds perform a bit worse than the index itself. An example of a good index fund: Vanguard's 500.

Fund Families
A family of funds are a group of funds under one organizatio n. When you invest in a fund of families, you can switch between different types of funds with ease. Some of the best fund families available are Strong, T. Rowe Price, Dreyfus, Fidelity, Vanguard, etc. The largest family is Fidelity, with over 100 differe nt available funds. See the table of some popular funds at the end of this section.