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Report Submitted for the fulfillment of the Master of Business Administration [2006-2008]

Submitted To Mr. Prabhakar Shukla Faculty - MBA

Submitted By Navneet Kumar Sharma M.B.A.-4th Sem Roll No. 0621370019



Chapter No Page No Ch.# 1.0 Ch.#2.0 12

Subject Executive Summary Research Methodology Objective 12 Research Design 13 Source 13 Limitations Scope of the study 13 13 3

Ch.#3.0 14 Ch.#4.0 19

Critical Review Of Literature Wealth Management 4.1 Drivers of Indian Wealth 4.1 Asset Allocation Strategies 25 4.2 Wealth Management The Road Ahead 31 4.3 Competitors Analysis 35 25


Investments 45 5.1 5.2 5.3 5.4 5.5 Types of Investments 51 Planning Techniques 68 Investment Pitfalls 70 Asset Allocation 72 Secret of Wealth. 75

Ch.#6 76 6.1

Recommendations References


I hereby declare that the enclosed research project entitled WEALTH MANAGEMENT & INVESTMENT PATTERNS is an authentic work done by me and is based upon my own efforts. The project was undertaken as a part of Master of Business Administration Program of U.P. Technical University Lucknow.

(Navneet Kumar Sharma)

I also take this opportunity to thank my faculty guide Mr. Prabhakar Shukla, Faculty, HIT, Greater Noida. The sincerity, dedication and interest that she showed in my study was very encouraging and of extreme value. I am very grateful to her for the pains she took to support this study by giving me valuable insights and reference material. I wish to express my heartfelt gratitude to all the faculty and staff members who have been associated with this study in many small and big ways. I also wish to express my gratitude to the esteemed respondents of my research for their cooperation and support. Last but not the least; I thank my worthy friends and family members who have constantly been encouraging and supporting me through out the various stages of this study. Navneet Kumar Sharma

Chapter 1 - Executive Summary

Wealth Management
Wealth management is the coordination of a clients investment, tax and estate plans into a comprehensive plan to achieve their personal goals. The rapid growth in the affluent market combined with the investors' desire to work with professional financial advisors has presented a major opportunity to the wealth management industry. Effective Customer Relationship Management propositions to win and

retain clients, alternative investments for super affluent and ultra affluent clients, efficient tax planning are some of the critical and key drivers in this industry. Wealth management is a term that originated in the 1990s in the United States within Broker Dealers, Banks, and Insurance Companies. Wealth management has generally evolved from high net worth financial consulting for persons who are top clients of any firm. Wealth management is classified as an advanced type of financial planning that provides individuals and families with private banking, estate planning, asset management, legal service resources, trust management, investment management, taxation advice, and portfolio management. management, Thus, client wealth advisory management services, and encompasses the asset of distribution

investment products. Persons engaged in wealth management usually work for brokerage firms, large banks, trust departments, or investment and portfolio management firms. Wealth management is a high level form of private 6

banking that provides various types of investment, insurance and bank products and services. Importance of Wealth Management A financially secure future requires your wealth to grow and be preserved. It is precisely this requirement that private banks aim to fulfill through their wealth management services. The demand for such specialized services is more pronounced in the recent past as individual income and wealth levels across the country have significantly scaled up. Most private banks offer basic investment advisory services under the umbrella of their private or priority banking services. Banks may offer complimentary financial planning services to help you know exactly what to do with your money so that you realize your financial objectives. Banks may organize investor meets; circulate market information reports and more under their private banking arm. Wealth management services may also include estate planning, tax and legal consultancy, custodial services and more. Banks either has in-house teams specializing in wealth management services and advisory services on various investment options or have tie-ups with independent specialized firms offering advise on specific investment options. For instance, Kotak Bank has a tie-up with its associate company Kotak Securities Ltd for equity research and portfolio management services. ABN Amro Bank (India) has a tie-up with Saffronart.com to advise their clients on investments in art. The clients may choose to execute the transactions with these firms independently. 7

The threshold limit to be the privileged private banking customer differs across banks. At UTI Bank you will be eligible for their private banking services (which includes the complimentary financial planning services) if you either have a minimum Average Quarterly Balance (AQB) of Rs.1 lakh in a savings account or a minimum relationship of Rs.5 lakhs (AQB) in savings and term deposit accounts. Banks offer niche wealth management programmes under their private banking services to customers with predefined limits of portfolio sizes. Wealth management services include risk assessment and asset allocation advice tailor-made to individual needs. Long-term goals and objectives are discussed and a careful provision is made to help you preserve and grow your wealth. The Growth Many families in India are looking to have someone who they see as being on their side and between them and the banks, however, much the banks want to be seen to the contrary, says a wealth management consultant, who works at the newly opened HSBC office at Punjagutta, Hyderabad. Not too long ago looking after rich peoples money was not seen as a particularly exciting business. Private banks were independent, discreet and maintained offices in Switzerland or the Channel islands, where the worlds rich could store their wealth from fear of scrutiny or interference. Merrill Lynch estimates that the inventible assets of people around the world with more than $1m to invest will grow 6.5% annually in the five years to 09. The picture is changing. Demand for private banking services is escalating as a result of an explosion of private wealth in India. People, 8

who in the past entrusted their savings to their retail banks or dabbled in the stock market, are now seeking professional advice. People who relied on private banks are becoming impatient for better performance. Indeed, private banking or wealth management as it is now increasingly called is now seen as a growth business. The projected growth in the number of clients and the size of their assets suggests that the private banking industry will have to take on large numbers of new people capable of advising clients on what to do with their money. HSBC is investing heavily in an attempt to build private banking platforms in Asia. One of the biggest questions that will face the private banking industry in the coming years is where all the extra people will come from. The pressure for new staff seems likely to spark a war for talent, especially in regions such as Asia and the Middle East, where there are relatively few established private bankers on the ground. Credit Suisse has set up a training school in Singapore to help build up its workforce in Asia where demand is greatest. The focus is for staff to understand how to develop a trusted-adviser relationship with a client rather than that of a salesman. Private banking is also drawing in employees from other industries. A particularly fruitful area for recruiting has been investment banking and stock broking, though some executives also report successful hiring sprees among lawyers and sales staff from other industries. This is one sector where globalisation is difficult as there are strong national differences between clients. What an Indian wants from his or her private bank is still very different from what a Frenchman or an Englishman wants. Cultural affinity is important in establishing a 9

relationship of trust. Given that relationship managers often take a significant number of clients with them if they switch their employer, continuity is very important. As private banks chase around for new recruits, they need to be careful not to overload their cost bases. Several observers have expressed concern that the hiring spree, particularly in India, is prompting banks to take on excessive costs that could leave them vulnerable if there is a downturn in the market. Though the figures vary, most private banking executives work on the assumption that about half of their cost base is accounted for by relationship managers, whose numbers expand and contract in relation to the number of clients. The other 50% is back office costs such as information technology, which should remain relatively stable as the business grows although adapting products for different tax systems or regulatory regimes can quickly add to the overall expense of the business.

In Asia, salaries and bonuses for private bankers have boomed in recent years and they look set to carry on increasing as demand for their services intensifies. In the longer term, however, the projected growth looks set to create a challenge for the industry as it attempts to develop a new breed of relationship managers who understand the broad range of products available on the market but are also capable of winning their clients trust. As Indias economic engine moves on to a faster track, the hitherto sidelined discipline of personal financial planning is taking center stage. The process by which financial planning is organized for an individual 10

in a complex and often unpredictable financial environment for the layperson is now being managed by a new breed of financial planners. The HNWIs Taste The HSBC Asset Management and Merrill Lynch World Wealth Report 2006 identifies India as a robust economy, with High Net Worth Individuals (HNWIs) growing at the rate of 19 per cent in the year 2005. This is against 7.3 per cent in the Asia-Pacific region and 6.5 per cent worldwide. Indias HNWI population as of today is 1,00,000 and growing. Is wealth management keeping pace with this development? HNWIs are individuals with financial assets of $1 million, excluding their primary residence. The number of HNWIs in the world and the AsiaPacific region, respectively, in 2005 was 6.5 million and 2.4 million. The expansion of HNWI assets has created a super class of HNWIs, known as ultra-high net worth individuals (UHNWIs). Merrill Lynch defines the threshold of wealth required to be considered as UHNWI as $30 million in liquid financial assets. The report states that of 15,600 UHNWIs in the Asia-Pacific region, 5.5 per cent are Indians and of the 2.4 million HNWIs in the region, 3.5 per cent are Indians. More Indians are getting rich than anyone else in the Asia-Pacific. Should this satisfy me, if I were an HNWI? There is someone making a report on my wealth, I am a priority customer with XYZ Securities and ABC Bank, my chartered accountant is smart and makes the right tax decisions. My wealth is all set to grow. Is that wealth management? Wealth management implies managing the total wealth of an individual keeping in mind his special needs. This should ideally involve estate 11

planning, retirement planning, loan planning, insurance planning, education planning and lifestyle planning. A part of wealth management also ensures that future generations benefit. At present, there are no inheritance laws in India. We understand that whatever belonged to the father belongs to the son and the state has no say. In times to come, this will change. India will move towards inheritance laws, just as in the West where the son has to pay taxes when he inherits wealth beyond a certain limit. Each time the father wants to give a part of his estate to his children, he has to pay taxes or engage in philanthropic activity. The best example is Bill Gates wealth management and the foundations he supports, so that his wards can benefit. With respect to wealth management, India and China are one of the least mature markets in the Asia-Pacific region. Japan, Singapore and Hong Kong lead the race as the most mature markets, followed by Taiwan, Indonesia and South Korea. The Indian financial sector still offers mostly vanilla products as investment options. Wealth management in India still means maintaining a debt-equity ratio of the investments as explained by the relationship manager. To keep this ratio, one has to either invest in a balanced MF scheme, GOI bonds or directly in equity. As the value of the portfolio grows, so do ones desires. With desires come loans. The need for life insurance starts to rise and the relationship manager somehow comes up with the best scheme that one can buy. Child education planning is always done by capitalizing on parents guilt. Finally, an HNWI ends up taking all products a relationship manager can offer. A bull run is on and everything seems headed skyward. But what


is the net effect on wealth? No one has a clue, not even the CA, for he is equipped only to handle tax-solving queries. HNWIs are still unaware of alternative investments, such as hedge funds, property and real estate, foreign exchange linked notes, precious metal-linked notes, or for that matter, art. Investments will all seem to be doing well as long as the bull run lasts. The fall will separate boys from men. That is when everyone will become painfully aware of whether risk had been factored in or not. Recognizing this situation, a financial planning board has been set up, in tune with financial planning boards worldwide. With the opening up of Indian banks to foreign banks in 2009, wealth management will become more structured. It is still sometime before we get to see dedicated financial planning firms, which manage wealth of the individual along with his bankers and consultants. Though most financial firms advertise themselves as onestop shops, where every possible investment can be done, there is a lack of trained consultants who know how to put it together for an HNWI. At present, consultants sell what the company has asked them to. Wealth management or private banking will have truly set in when the consultant becomes an independent entity.


Chapter 2 - Research Methodology

Objectives of the Project

To study the growth of wealth management in INDIA The project will throw light on the various factors leading to the growth of high net worth individuals (HNWIs) and the bright future of wealth management although the wealth management business in India is still in the nascent stage.

To clarify the processes followed and the different parameters considered while providing investment advice to the clients under wealth management. Designing a client specific financial plan, this includes goal setting, identification of financial issues, and preparation of alternatives, recommendations, and implementation and periodic reviews and revision of the clients plan. The project will explain the various steps in financial planning and best practices in wealth management services based on the risk tolerance, personal values and economic factors.

To give information about the leading players and various products offered by them in the wealth management service The project will provide the detail information about the services offered by the top Four banks, which are Standard Chartered Bank ,BNP Paribas, DBS Cholamandalam Bank and Citibank in wealth management business. The project will also include the comparative analysis of the services offered by these banks.


Research design
Descriptive method is used in the research. A sufficient thought has been given in framing the questionnaire and deciding the types of data to be collected and the procedure to be used.

Sources of data
Secondary data: Some published information in books, articles and pamphlets of & Website of Banking firms has been used to support the study.


The sampling plan was based on non-probability method and no scientific methods were adopted. The sample size is not sufficient to represent the whole population.

Due to time constraint the survey has been done on the basis of convenience.

Scope of the Study

The scope of this project report is restricted to the Banking group and the Brokerage firms offering Wealth Management Service or in the process to implement Wealth Management or in the process to implement Wealth Management service.

Chapter 3 - Literature Review


The project started with the study of investment and mutual funds. With reference to the research paper in Journal of Economics Psychology, Aug2006, it analyzed Does the framing of investment portfolios influence Risk-taking behavior? It examined the influence of the framing of investment portfolios on the risk-taking behavior of individual investors. Investment portfolios can be presented either in aggregated or segregated framing, meaning that either the overall distribution or the single investments of portfolios are displayed. Previous studies have found that simple lottery portfolios are more attractive if their overall distribution is displayed instead of the set of lotteries themselves. Investment portfolios differ from simple lottery portfolios because they are correlated and ambiguous. Which kind of investment portfolio framing leads to a higher acceptance by individual investors? Three experiments found that ambiguity and correlation of investment portfolios affect the extent of the framing effect. Framing effects are present under ambiguous risk and for positively-correlated portfolios. Furthermore, framing effects are observed mainly for individuals who decide intuitively rather than analytically. [Copyright 2006 Elsevier] In second paper the main objective was to look that Does financial liberalization improve the allocation of investment? Microevidence from developing countries. The results presented in this paper provide empirical support for the idea that financial liberalization has lead to an improvement in the efficiency with which investment funds have been allocated.( Copyright 2007 Elsevier)


Qualitative conclusions on the positive effect of financial liberalization on the efficiency of resource allocation continue to hold when we modify the definition of the benchmark economy to one based on the preliberalization pattern of investment. The conclusions based on the aggregate index are also supported by the evidence of a stronger association between investments and return opportunities in the post-liberalization period, based on estimating a simple investment equation on firm level micro-data. Investment is one of the crucial decisions for each investor, whether to invest huge funds or small amount, each investor wants the profitable returns. For this a proper portfolio is to be made, so as to avoid the losses and earn maximum out of what you as an investor wants to invest. Investment is one of the major crucial steps before investing and even for proper evaluation of the invested funds. With the research paper on Modeling international investment decisions for financial holding companies This research analyzes the internationalization process model developed by Johanson and Vahlne and derives two integer programming investment decision models that consider the risk attitudes of investment firms. Johanson and Vahlnes model provides a starting point for building a model that suits the investment approach and decision making process of financial holding companies. In practice, when firms make an international investment decision, there is a need for a model that can generate outputs based on financial measures such as profit, investment returns, and tolerable levels of risk. Thus, in this paper, Johanson and Vahlnes concepts are studied and financial managers are interviewed to derive models that match the investment decision procedures of the firms. The model helps firms manage the risks of their investments and derive accurate investment strategies based on investment objectives and constraints. [Copyright 2007 Elsevier]


With reference to an article in Portfolio organizer (ICFAI University Journal) of Dec, 2006, it explains that as the investors are becoming aware with the passage of time, their financial needs need to be addressed and they want different products to invest in to earn more as per their requirements. There is a huge potential that is still to be realized by the mutual fund industry by getting share of the investments in traditional avenues.Though India enjoys a good saving rate, the mutual fund industry gets a little portion out of this. If this money gets channelized into mutual funds it will help India match other well-developed markets like the US, CANADA as per one the studies conducted by leading financial daily. The biggest impediment in the growth of the industry has been failure on its part to attract majority of the savings that people keeps in the banks, by thinking it to be risk free. After going through number of articles in different journals and newspapers based on mutual fund, we can say that Mutual Fund industry have shown a dramatically progress. MF company provides with a large number of schemes that suits to a large number of investors. After the entry of private sector in this field, the competition within the MF companies has also increased, which directly or indirectly benefits the investors With reference to the article Investment Strategy for the longterm investors by Nobel Prize winner William F Sharpe. (Year 2004) Investment is about risk and expected return. Efficient strategies provide highest possible expected return for a given level of risk. The key role of financial advisor is to avoid inefficient strategies. Though expected return and risk are typically measured using short-horizen, but most of the investors are concerned with long-term outcomes. The best way to manage this is Portfolio theories. An investment is subject to risks associated with changes in currency values, economic, political and social conditions, and the regulatory environment of the foreign country as well as the difficulties of receiving current and accurate information. With reference to the book Investment Analysis and Portfolio Management second edition by Prasanna Chandra


The public sector companies are not free to invest in mutual fund as they are under the government control to invest in government securities. They have to invest a fix amount of money in the government securities. Before investment, investor need to be well aware of the risk related to the particular option. Now a day, it is becoming very crucial for the companies to manage their portfolios, for these they are spending lot of money to implement the software that would help in proper management of their portfolios. As in case of Satyam, with reference to the case study (Next-gen portfolio management they have introduced Checkfree EPL (Enhanced Portfolio Lifecycle) portfolio management product. It helped in reducing the cost of maintaining the accounts. This product is developed by checkFree Investment Services(CIS) division, which provides services to the financial organizations.There is large number of software available, which are proved to be beneficial in managing the overall portfolios of mutual funds. For example (i)INVESTRAK supports all Mutual Fund transaction processing requirements including advanced options for entry of transactions on deferred posting basis, selective posting of Funds / Transactions within a batch, handling transaction currency different from Fund and Shareholder currency etc. INVESTRAK is designed to support all Fund features, Brokerage structures, Valuation methods and Pricing policies prevalent internationally. (ii) E Fund Distributor is a browser based software application intended for use by Distributors of Mutual Funds and other primary market financial products. The software, by virtue of being browser based, allows Distributors, their sub brokers and their investors access through the Internet. The software has full-fledged Front Office Sales capability, Back Office Computing ability and an exhaustive Reporting Feature. (iii) MFISC/D is a Front Office Software System enabling Fund Distributors to maintain the Client's Investment details. Distributors can keep track of the Net Asset Value of the Fund as well as the performance of their Clients. Reports relating to Clients and their investment advisors can also be generated. 19

Source: - www.acsysindia.com

ABC Bank in Luxemburg, having presence in distribution of financial products and mutual funds had implemented the software (DISTRAK and AIS), which improved the overall efficiency in managing the portfolios and other accounts. An investor doesnt investment the money without proper planning and a right kind of approach can only leads to the profit in the investment option. As said by William F Sharpe: Investment Strategy is one of the key pillars of a financial plan that allows investors to efficiently pursue their goals


Chapter 4 Wealth Management

The definition of wealth remains, as always, the means by which we fulfill our desires. As the saying goes, you are wealthy if you want no more than what you have. In economic terms, this translates into material possession and the means to attain them. In social and political terms, it translates in to greater freedoms, and the means to attain them. To fare well, we need a new mindset for the way we work and earn; spend and save; plan our mortgages, taxes and investments. Wealth has a life cycle: it is created and accumulated; then it is distributed, whether through taxations, dividends, or inheritance. The real economy creates wealth by producing goods and services while the individuals build wealth by building their net worth- by bearing risks and investment portfolios. Net worth is the difference between the assets and liabilities. The net worth is called wealth. ASSETS - LIABILITIES = NET WORTH A wealth creating asset is a possession that generally increases in value or provides a return, such as: A retirement plan. Stocks and bonds A house

A liability, also called debt, is money which we owe, such as: A home mortgage Credit card balances A car loan Hospital and other medical bills Student loans.







Building wealth requires having the right information, planning and making a good choice. Investors today face bewildering choices about what to do about their money. As market conditions change and new financial products appear and disappear, making sense of information about effective ways to manage wealth can be extraordinarily difficult. This is where the process of wealth management plays a crucial role. Wealth Management is the integration of financial products and advisory services to assist consumers with the accumulation, preservation and transfer of wealth, as they move through the various stages of their financial life cycle. It is best conceptualized as a platform where a number of different sets of services and products are provided. wealth management includes advice on investment management, estate planning, retirement, tax, asset protection, cash flow and debt management.


Wealth managers mostly come across two kinds of clients namely wealth preservers and wealth creators. Both these types of clients offer different opportunities for wealth managers.

Wealth Preservers
The wealth preservers are clients who are interested in getting some regular returns through their current wealth. These clients are very conservative and are not interested in exposing their wealth to any instrument that may cause Loss. Essentially wealth preservers would invest in instruments like Government Bonds Debt Mutual Funds Insurance plans. Their main aim is to protect their wealth from any chances of capital loss.

Wealth Creators
The more exciting and remunerating job for a private banker comes through the wealth creators, as these clients are interested in their wealth to grow. These are clients who are wiling to take risk on their capital and have a higher risk appetite as compared to the wealth preservers. Hence these clients are more interested in investing in instruments like: Direct Equity Equity Mutual Funds Derivatives Real Estates Hence, these clients have a higher risk appetite and want to earn higher returns and create wealth. It is here that a wealth managers skill is really put to test in trying to earn a higher return with minimum risk


Wealth Management in India

As compared to the years of 2003 & 2004 which witnessed the total wealth growth of the high net worth individuals (HNWIs) growing at 2.7% and 7.7% respectively, the year 2005 proved to be a better one, which witnessed the global HNWIs financial wealth growing at a rate of 8.2%. After 2005, a year that marked the strongest economic growth worldwide in 20 years, the growth expected to tamper in 2007.A combination of factors including rising inflation and interest rates, is expected to slow global growth and affect the value of financial assets.


Considering the developing nations, Brazil, Russia, India and China have emerged as strong economic powerhouses contributing more than 40% of the worlds population and 8% of GDP growth. Going by the Goldman Sachs prediction, these economies have the potential to overtake the G7 economies by the year 2040, India and China remained as the major growth drivers among the BRIC nations. Survey of the worlds leading wealth managers has predicted Asias top three wealth markets of China, India and Korea to grow by as much as 17 percent a year for the next three years. According to the survey by Barclays Capital, Wealth management firms with about $3 trillion of assets under management (AUM) predict strong growth in these economies. This will result in the Wealth Management firms holding or managing an estimated $334 billion of assets for Korean high net worth clients in three years,$256 billion for Indian clients and $150 billion for Chinese clients. For the affluent class, China will be the largest market in Asia with an estimated $93 billion, followed by Korea and India with $50 billion each.


The number of high net worth individuals (HNWIs) individuals with a net worth of at least US$1 million, excluding their primary residence grew by 7.3% to 8.3 million, a net increase of 600000 worldwide. North America led with a nearly 10% growth rate to 2.7 million HNWIs, surpassing the 2.6 million in Europe. Asia-Pacifics growth rate of over 8% -- to 2.3 million HNWIs --- was twice that of Europe. The recently released study, world wealth report-2005, by Capgemini and Merrill Lynch, points that the number of HNWIs in India grew at 14.6%, twice that of the worlds growth of 7.3% in 2004. The study further states that there are approximately, 60000 people who have financial assets of Rs 4.5 Cr about a million dollar and there are 24000 households with annual income of Rs 50 Lakh. India continued to be one of the high growth areas in 2005-06 as more people joined the elite list of HNWIs in 2005. "We work along with customers to offer a range of investment advisory services in debt, equity, mutual funds, derivatives, besides tax advisory, succession planning, insurance advisory, etc." -- MR V. MAHADEVAN, CEO, WEALTH ADVISORS (INDIA) PVT. LTD. 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 has highlighted this sector very well. The wealth management space was earlier the preserve of some foreign banks which offered these "exclusive services" to the few selected customers. This was not a service you could apply for directly as the tagline said "Don't call us. We'll call you (if you are that wealthy!)." Today, a number of private banks offer this service. Also entering this arena and portraying themselves as standalone entities that offer the full range of services such as investment advice, portfolio management, taxation advice etc. Wealth management is just emerging in India. The growth of the economy has already been widely showcased. Wealth and disposable income are growing substantially. It is being noticed that the ability to earn and save are slightly different. Earlier people just put money in some guaranteed products. Today, even the government is withdrawing from those products (it recently stopped the maturity bonus on post25

office savings), investors, whether they be doctors, architects or anyone else, need professional help. The main focused market to capture:Wealth accrual planning 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 first priority is to buy a house for, say, around Rs.20 lakh. He has to now protect this property from, say, flood, cyclone or other natural disasters. Here is when the wealth mangers show their expertise. There are such issues, such as protecting your family from medical emergencies. All these come within the scope of wealth management services where one can park their savings for meeting these future contingencies. The opportunity in this area is mainly because of two developments. First, there are more people in employment who are getting stock options and encash it later. And, second, the expansion of business and entrepreneurial capacity. These people generally need wealth management services.



Factors leading to the growth of Indian wealth are given below: Driving the attractiveness of the market has been the countrys 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. Economic liberalization is one of the most important factors for the growth of Indian wealth. For e.g. the Reserve Bank of India (RBI), investments can be made in overseas instruments without any quantitative restrictions. More recently, the RBI has introduced a liberalized remittance scheme under which resident Indians can invest up to US$25000 per annum in any overseas security. One may see a further boast in this regard with the Capital Account Convertibility coming in full circle. The stability in the market and the low level of interest rates accounted for the growth of personal wealth in the year 2004-05. Market capitalization and the rise of the knowledge based economy have proved to be a boon with an increase in the number of professionals. With the continuous corporate earnings, the individual disposable incomes are on the exponential growth. This has resulted in the growing number of HNWIs in the country.


Some of the primary observation made in the year 2005-06 related to the Asset Allocation Strategies among the HNWIs is as follows:


HNWIs made a more stable allocation among the equities and fixed income securities The year marked the growing popularity among the Private Equities. As of now, the ultra HNWI and the institutions are the major investors in the Private Equity segment. Investors view the Hedge Funds as a route towards portfolio diversification rather then as a generator of heavy returns. Hedge Fund is not that popular in India. The rising demand for alternative investments, such as real estate is gaining considerable ground in India

In the year 2005-06 the HNWIs adopted a strategy of diversifying their portfolio and adopted a more conservative asset allocation strategy as the report released by Meryll Lynch.



India will be the third largest economy in the next 30 yrs. The wealth management is growing by leaps and bounds in India. It is growing in terms of number of players as well as HNIs. there has been a significant growth in income and wealth levels over the past few years. As the economy and GDP grows, the scope of growth of wealth management is huge. The market segmentation includes old wealth (inheritance) and new wealth (creators). The new wealth is the driving force. The changed composition of the GDP where services now account for nearly 50% demonstrates the impact of the new health being created. It is now understood easy and passive options like deposits are no longer attractive given the low interest rates. There is a noticeable shift in the mindsets of the HNWIs. HNWIs need to invest in the options that give them higher yields. This is where the need of wealth managers becomes more pronounced. A long drawn process, to achieve a smooth transition, wealth managers, private bankers and financial planners have to play a very significant role. The job of the wealth manager would be to identify and create an optimum and right portfolio for the clients. In India, wealth management is evolving into a business now. Now the markets have become more complex and people need somebody to guide them because the age of guaranteed returns is gone. Now people are too busy and want their wealth to be managed prudentially and professionally. There is an immediate need for such wealth management professionals in the country. This new industry, therefore, is becoming one of the most exciting and rewarding professions today. Competitors are realizing this fact and are beginning to bring their propositions to the table. Today, India is attracting both foreign wealth managers and domestic banks to set up wealth management businesses. There are numerous agencies looking at wealth management. Banks for one are at an advantage given the nationwide presence. Almost all banks notably the private sector and foreign banks are looking at this segment.

The players in the wealth management services industry In India include HSBC, Standard Chartered, Citibank, BNP Paribas, ICICI bank, HDFC


Bank, Kotak Mahindra Bank, ABN-Bank and Brokers DSP Merrill Lynch and JM Morgan Stanley. The estimates of the market size vary from Rs 20000 Cr to Rs 200000 Cr. The wide range is in on account of the fact that there are various definitions for the wealth management service and the minimum threshold limit to be a wealth management customer varies from bank to bank, from Rs 5 Lakh/ 10 Lakh to Rs .5 Cr. Foreign Banks, for their wealth management services, insists upon the HNWIs having the financial surplus of over Rs 2 Cr per year. They expect this segment to grow by almost 25% by 2007-08. HNWIs are typically promoter or an owner of a small & medium enterprises, a top ranking official with employee stock options, a professional such as lawyer or an NRI. The services would normally comprise investment under assets such as equity, mutual funds, debt, insurance and specialized services such as estate management. The asset allocation plan is formed after taking into account risk appetite and time horizon of each client. Regular monthly or quarterly review of the clients portfolio is also part of the service providers job and customization is the key here. The advantage banks have in providing this service is that there is certain versatility in the way they operate. Banks also hope to become one stop shop for financial services, selling mutual funds, insurance policies, and brokerage through subsidiaries or partners, in addition to offering deposits and loans. Further, the quintessence of wealth management business is security and confidentiality that is what banking industry is all about. Investment areas in India normally include equities, derivative instruments, mutual funds, and bonds. Today, the suite of wealth management products is expanding and also includes art, real estate and jewelry advisory. There is a rising demand for other assets. Property for one is gaining ground in the country. Commodities as a class of asset are becoming popular. The key point is that investors are aware of the ground realities. They would look at preservation of capital in a volatile scenario rather than seeking maximization of capital


One has to remember that returns on investments are based on the kind of risk the investor is willing to take. This sees investors diversifying into more than one asset to reduce risk. Typically, wealth management customers could be classified into three categories. The delegative customer gives the wealth manager the right to make decisions, while the consultative customer wants to be involved in the decision making process and third type is the self driven customer who is more adaptable to using technology and could migrate to newer platforms like the internet. To cater the third category of customer that is self driven customer, Banks need to e-enable the investors like access to customer accounts using the Internet. Also must services like e-broking etc.



The wealth management industry at present is growing as compared with offerings by private banks and wealth managers in the west. There is no doubt however than the Indian market is still in the early stages of development. The ratio of self managed to professionally managed wealth in Asia and, particularly in India, is much higher than the trends in the USA and other developed economies. Certainly all the requisite ingredients are there; the wealth itself, the confidence in the domestic economy, the readiness to get involved in a variety of different asset classes and widens geographic allocation of asset. Why then is the market so underdeveloped? Why 85% of assets according to data are monitor still in deposit accounts? The reasons are as follows: To all intents and purposes, the HNWIs market has yet to be created. Offerings tend to be the same for all those with money to invest. Sophisticated products such as derivatives and hedge funds are barely legislated for and in the context of the middle classes driving the development of the investment landscape; they are not high priority either. One area where HNWIs do tend to invest is in property reflexive of the undeveloped nature of the market. The answer also lies in the regulatory environment. As wealth has grown and people have excess liquidity, they have become more demanding in their financial needs. The gradually easing regulatory environment is helping meet some of those needs. Currently portfolio management, mutual funds, insurance products, equity brokerage and mortgage lending are all allowed but the market remains untapped. The biggest reason for this is currently control. Initially introduced as a means to keep currency outflows at a manageable level, the controls are now acting as a barrier to the countrys retail investment industry at all levels. The good news is that all this is set to change.



There is no denying the fact that financial instruments have become to intricate for the common investor to understand. The introduction of derivative products, an increase in the number of mutual fund schemes changing interest rates and the growing number of individuals who wish to make certain part of their wealth hedge against business risks have contributed to the growth of wealth management service. The world of wealth management is growing from strength to strength and banks and other major players are focusing on the affluent population of the society. International players trying to reach this segment of the market and trying to establish a presence in the market. Moves are already afoot by players such as Barclays, Citibank, HSBC, Deutsche Bank and BNP Paribas who are all involved to a greater or lesser extent in the market. Servicing the onshore market will soon mean the provision of both advisory and discretionary wealth management solutions for HNW market. Even local banks such as ICICI and HDFC Bank are pouring in resources to tap the rapidly growing business. These banks are aiming not just to play a part in the wealth management market but also want to have a hand in creating it in the first place. The wealth management industry, though at a nascent phase, is experiencing rapid growth in terms of the number of providers, clients and assets under management. Ultimately the Indian wealth management market is about patience while waiting for the regulatory breadth and depth to become established. In five years time, we expect to see continued liberation and an end to currency controls. But its important to understand that a major dynamic of the Indian market is internal demand.


Different Parameters Considered while providing investment Advice to the clients:

Financial Planning is a vital part of the wealth Management. It is the process of managing money to achieve to achieve personal economic satisfaction. The planning process controls the financial situation and it consists of following steps:-

Determine current finan. situation

Develop Financial Goals

Identify alternative courses of action

Reevaluate and revise the plan

Create & Implement a financial plan

Evaluate Alternatives

The approach to wealth management or financial planning is based on creating customized solutions to individual clients; the focus of wealth manager is the client. Wealth Managers efforts are devoted to helping clients achieve life goals through the proper management of their financial resources. The focus is on creating or making available products and services that meet the needs of the target customers and they are profitable to the bank as well.


Step 1: Determine the Current Financial Situation Of The Client

In the first step of the financial planning process, determine the current financial situation of the client with regard to following factors: Income Savings Living Expenses Debts

Step 2: Developing Personal Financial Goals of the clients

Financial goals should be stated to take the following factors in to account: Financial goals should be realistic. It should be based on life situation and income of the client. It should be stated in specific and measurable term. Financial goals should have time frame.

Step 3: Identifying alternative Courses of Action for the Client

Developing alternatives is crucial for making good decisions. Although many factors will influence the available alternatives, possible courses of action usually fall into these categories: Continue the same courses of action. Expand the current situation. Change the current situation. Take a new course of action.



Step 4: Evaluate Alternatives for the Client

While evaluating possible courses of action for the client, take in to consideration following factors:

Life Situation



Marital Status


Personal Values-the ideas and principles that the client consider correct, desirable and important. Economic Factors- Consider inflation, market forces and interest rates while designing a financial plan for the client. Evaluate risk and time value of money.

Step5 : Create and Implement the financial plan for the Client. Step6 : Reevaluate and Revise the Financial Plan
Financial planning is a dynamic process that does not end when a particular action is being taken. A wealth Manager needs to access the financial decisions regularly. A wealth manager must review the finances once a year. Changing personal, social and economic factors may require more frequent assessment. Returns on investment are based on the kind of risk the investor is willing to take.As mentioned earlier the risk appetite of HNWIs plays a vital role while deciding the investment avenues for the client. Hence, the risk tolerance of the individuals is significant part of wealth management and without evaluating it incestment advice suggested is void.



Information About the leading players and various services offered by them under wealth management In wealth management ,the target audience is HNWIs.discretion and high quality service remain the cornerstones of the business,the focus has now shifted to performance and valuation rather than a plain emphasis on keeping money safe and secure. Competitiors analysis is done considering 5 banks which are into providing Wealth Management Services. The banks are: HSBC Bank Standard chartered BNP Paribas DBS Cholamandalam Citibank

Information about the services provided by these banks under wealth management is compared based on 5 Ps which are as follows: People Product Price Promotion Privileges Risk Analysis Intiative.


PEOPLE: Team size of each financial institution

Name of financial Institution

Number Average Average Experience of number number of of employee of relationsh relationshi s employee ip p Pan-India s per managers managers location per location
45 12 7 Anywhere between 3 to 7 years


Standard Chartered Bank


3-5 years in private/upper end banking




Delhi and prime loc in south India have 10 and Mumbai 25 5

3 years in high end banking

BNP Paribas



5-7 years

DBS Cholamandala m


2-5 years


Products: the products offered by these banks are more or less the
same.products offered by these banks under wealth management range from capital guranteed products(bonds and term deposits) to market linked products(insurance,asset products like mortgages).Furthermore,HNWIs are exposed to global products and privileges. The basic services offered by these banks are as follows: Free demand draft across the country Free cheque pick facility National banking and faster clearing Cash management services Forex and trade services Insurance privileges Real state advisory services

Citibank was the first bank to make its HNIs clients to invest overseas through the Global depositproduct,within the hours of RBI ruling. Citibank stands out other banks by providing tax and art advisory services to its citigold wealth management clients.


Name of financial Institution

Mutual Funds

Direct equity

Portfolio manage ment services

Capital protect ed produc ts


Real Estate Advisor y

Art advisory



No (they have it only in private banking)

No (they have it only in private banking) No (they have it only in priority banking) Yes

No (they have it only in private banking) No (they have it only in priority banking) Yes

No (they have it only in private banking) No (they have it only in priority banking) Yes

Standard Chartered Bank








BNP Paribas







DBS Cholamandal am Price








Price is the basic point that differentiates each bank from the other in case of HNWIs clients.price here refers to the eligibility amount or the minimum average balance that has to be maintained by the clients in order to be termed as HNWIs clients of the bank.

Name of financial Institution

Minimum portfolio threshold

Rs 25 lakhs



Client can start from 25 lakhs but should have capacity to build this up to Rs 2.5 crores The basic threshold for them is Rs 20 lakhs.these 20 lakhs are required to remain with the bank. Rs 30 lakhs is the minimum average balance that has to be maintained by the clients The minimum threshold for them to take a client on board is 2 crores and they have compulsion for this 2 crores to grow . Client can start with the minimum threshold of 25 lakhs and has to further grow the portfolio size with time.

Standard Chartered Bank

Rs 20 lakhs


Rs 30 lakhs

BNP Paribas

Rs 2 crores

DBS Cholamandalam

Rs 25 Lakhs


All banks promote their high end products at national level only without any local advertisements.the following are the ways in which the high end products are advertised:

Name of Fund financial Manager Institutio Meetings n

Concert/ Organi Art Holiday Discount Movie ze Shows Package Coupons Tickets Clients s Functio ns
Yes) Yes Yes No No

HSBC Standard Chartere d Bank

Yes (Monthly)

Yes (Frequently)

Yes (Movie Clubs)

Yes(Golf Tournam ent)

Yes(On ce a Year)


Yes (Mont Blanc etc)








BNP Paribas DBS









Yes (Golf Tournam ent)





Risk Analysis Initiatives HSBC

They utilize a very extensive risk analysis technique. It not only covers information about the client and has immediate family but in fact also requires details of their extended family in order to quantify the clients risk.HSBC has a very stringent compliance approval system in place.The investment on behalf of the client can only be done after a KYC(know your customer)document has been completed and his profile is approved in the sense that it meets the companys rules and regulations.(Met Ms Charu puri, Vice President,PFS)

Standard Chartered
Standard Chartered analyses its clients risk appetite by getting a form called Standard Chartered Customer suitability adjustment analysis completed by the client to start with.This form includes details like the Net Worth of the Individual and the percentage of the total net worth their current investment has.(Met Rajneesh Malhotra and Mr Gunjan,Vice president Chandigarh branch and Senior Relationship Manager)

Risk analysis will be carried out by asking the client to fill out Personal investment and insurance Risk profile and eventually this will form a KYC document which will be fed into various software to arrive at a figure for the clients risk appetite(Met Richa Shukla,Sr Relationship Manager,WMS)

BNP Paribas
They have everything online as in softcopy and presentations.Details were not disclosed due to security reasons.(Met Mr. Ravinder Singh,Vice president,PCG)


DBS Cholamandalam
DBS Cholamandalam has a questionnaire by the name of Risk Analysis and portfolio planner to assist exclusive customers in choosing investments suiting their personal needs and objectives. (Met Mr Aum Manchanda,Regional Manager,PCG).


Relationship Profitability Cycle

Greater profitability

More comprehensive solutions

Deeper relationships Increased referrals

More satisfied customers


Awareness of new products and solutions Banks should keep abreast of technology developments that may enable them to run a more efficient and profitable business. In addition, banks must alert to investment product and service developments and take a discerning approach to the best new solutions for their clients Flexibility and the readiness to transition when the time comes to transition the practice to a wealth management model, banks should be prepared to do so. Moreover, wealth managers need to continue to evolve to meet changing client needs in a dynamic competitive environment.


Chapter 5 - INVESTMENT
An investment is the current commitment of money or other resources in the expectation of reaping future benefits. A company can invest money either in real assets or in financial assets depending upon the expected or desired profit that it wants to grab. It depends on the individual company/firm/person that it wants the money to be consumed today or they want to invest it somewhere else in the desire to earn more. It is not necessary that a company would be able to earn the expected benefits from the current investment; actual outcome may vary from the expected ones. Before making an investment a company needs to take decision on proper investment portfolio. Two things are very important making such a decision: Asset allocation Security selection

Asset allocation decision is the choice among broad asset classes, and then security selection is the choice of which particular securities to hold within each asset class. Now days, we not only have the option of investing in own country but international investment can be made easily Investment decisions are one of the crucial decision for an individual/company. Because a lot more investment depends on the earning from these investments. Investing is the proactive use of your money to make more money or, to say it another way; it is your money working for you. Investing is different from saving. Saving is a passive activity, even though it uses the same principle of compounding. Saving is more focused on safety of principal (the amount you start out with) and less concerned with return. Where money can be invested? It can be invested in different markets available to earn the desired benefits. Like in: Money Market Fixed-Income Capital Market Equity Market Derivative Market


Money market includes Treasury Bills, CD, Commercial papers, Repos & Reverses etc. In money market, the investment is only for a short term period, so risk involved in them is almost negligible as compared to other investment options. Fixed income capital market includes Treasury bonds & notes, Federal agency debt, municipal bonds, corporate bonds, mortgagebacked securities. Equity Market includes common stocks & preferred stocks. Derivative Market includes options, future & forwards. For evaluation of investments, following factors need to be given major importance: Rate of Return Risk Marketability Tax shelter Convenience 1. Rate of Return It is generally calculated for a period of time (for a year),as : Rate of Return = Annual income + (Ending price Beginning Price) Beginning Price This Rate of Return can be split in two components: - Current Yield and Capital gain /Losses yield Current Yield= Annual Income Beginning Price Capital gain/loss yield= Ending Price Beginning Price Beginning Price E g. Information about the equity shares of company ABC is Price at the beginning = Rs 100 Dividend paid at the end = Rs 3 Price at the end = Rs 110

Rate of Return = 3 + (110-100) = 13

i.e. 13%


100 100 Depending on the investor requirement, they invest in the particular investment option. 2. Risk Generally an investor measures the risk as deviation of actual return from the expected ones. Other tools used in the finance to measure the risk are variance, standard deviation, Beta etc 3. Marketability Investments that are highly marketable are those, which can be easily transacted, whose transaction cost is low and the price change between two successive transactions is negligible. Generally, equity shares of well-established companies enjoy high marketability than small companies. High marketability is desirable characteristic for an investor. 4. Tax Shelter Tax benefit in an investment can be during the initial entry or continuous benefits or with withdrawal of money

5. Convenience Convenience refers to the ease with which the investment can be made or looked after. Higher the convenience better is the investment option.


Common investment pitfalls There can various reasons for not getting the expected outcomes from a particular investment. Like: Fad chasing Chasing returns Buying after a major price increase Selling after a major price decline Lack proper investment portfolio Fearing to take common risks Ignoring the corrosive effect of inflation & taxes on investment returns

The larger menu of investment choice today means that most investors can find an investment instrument that suits the need of particular investor (companies). At the same time, however this larger menu leads to confusion and sometimes-poor choices. Today, before investing money companies as an investor also need to do a lot of homework. Only taking decisions for an investment are not enough for a company. It still needs to do continuous evaluation of the returns & results of the investment & make necessary changes whenever required. Investment Management techniques fall into two categories: 1. Active Portfolio Management 2. Buy and hold Management Investors who actively manage their portfolio buy & sell more frequently than more passive investors. Active investors shift funds between various types of investment in anticipation of changing market. To plan these moves, they tend to monitor investment performance more closely and are more concerned about the short-term gains. A passive investor tends to buy a portfolio of securities and keep it for a long period of time. These types of investors are less inclined to make changes to the portfolio in response to changing market conditions. Depending upon the actual performance, the asset investment need to be changed with time . An asset performing up to the expectation and above that will receive more investment with the passage of time.Because there is only a single


motive, while making an investment that is benefits & assured returns as per expectation. Though while making an investment, money is put to some risks that are inevitable. So, an investor should be ready to face such kinds of risks. But sometimes it becomes difficult for an investor to decide what the right time to sell. A well known quotation about the investor thinking given by Robert Wibbelsman: The problem with the person who thinks he's a long-term investor and impervious to short-term gyrations is that the emotion of fear and pain will eventually make him sell badly.

Investing is the proactive use of your money to earn more for you or it is your own money working for you. Investing is different from saving. Saving is like a passive activity which mainly focuses on safety of principle amount and less on the returns.


The wealth management industry in India is experiencing an evolutionary phase of development. With the liberalization of the Indian economy and subsequent growth and prosperity across sectors, the wealth management industry is poised to gain greater traction in an expanding market. The client segmentation schema promises growth across all the six categories:

Ultra-high net worth, or Ultra-HNW (in excess of US$30 million), will have a total population of 10,500 households by 2012. Super high net worth (between US$10 and $30 million) will have a total population of 42,000 households by 2012. High net worth (between US$1 million and $10 million) will have a total population of 320,000 by 2012. Super affluent (between US$125,000 and $1 million) will have a total population of 350,000 households by 2012. Mass affluent (between US$25,000 and $125,000) will have a total population of 1.8 million households by 2012. Mass market (between US$5,000 and $25,000) will have a total population of 39 million households by 2012.


5.1 Types of Investments

There are two broad categories of securities available to investors equity securities (which represent ownership of a part of a company) and debt securities (which represent a loan from the investor to a company or government entity). Within each of these types, there are a wide variety of specific investments. In addition, different types can be combined (e.g., through mutual funds) or even split apart to form derivative securities. Each type has distinct characteristics plus advantages and disadvantages, depending on an investor's needs and investment objectives. In this section, we provide an overview of the most common classes of investment securities.

The type of equity securities with which most people are familiar is stock. When investors buy stock, they become owners of a "share" of a company's assets. If a company is successful, the price that investors are willing to pay for its stock will often go up--shareholders who bought stock at a lower price then stand to make a profit. If a company does not do well, however, its stock may decrease in value and shareholders can lose money. The rise in the price of a stock is termed appreciation or "capital gain." The stockholder is also entitled to dividends, which may be paid out from the company. Investors, therefore, have two sources of profit from stock investments, dividends and appreciation. Some stocks pay out most of their earnings as dividends and may have little appreciation. These stocks are sometimes referred to as income stocks. Other stocks may pay out little or no dividend, preferring to reinvest earnings within the company. Since all of an investors potential earnings comes from appreciation these stocks are sometimes referred to as growth stocks. Stock prices are also subject to both general economic and industry-specific market factors. There is no guarantee of a return from investing in stocks and hence there is risk incurred in investing in this type of security. As owners, shareholders generally have the right to vote on electing the board of directors and on certain other matters of particular significance to the company. Under the federal securities laws, most companies must send to shareholders a proxy statement providing information on the business experience and compensation of nominees to the board of directors and on any other matter submitted for shareholder vote. 54

This information is required so that stockholders can make an informed decision on whether to elect the nominees or on how to vote on matters submitted for their consideration. Stock investments are typically common stock, which is the basic ownership share of a company. Some companies also offer preferred stock, which is another class of stock. Preferred stock typically offers some set rate of return (although it is still not guaranteed), and pays dividends before dividends are paid for common stock. Preferred stock may not, however, participate in a much upside as common stock. If a company does really well, preferred stockholders may receive the same dividend as any other year while common stockholders reap the rewards of a great year.

Corporate Bonds
The most common form of corporate debt security is the bond. A bond is a certificate promising to repay, no later than a specified date, a sum of money which the investor or bondholder has loaned to the company. In return for the use of the money, the company also agrees to pay bondholders a certain amount of "interest" each year, which is usually a percentage of the amount loaned. Since bondholders are not owners of the company, they do not share in dividend payments or vote on company matters. The return on their investment is not usually dependent upon how successful the company is. Bondholders are entitled to receive the amount of interest originally agreed upon, as well as a return of the principal amount of the bond, if they hold the bond for the time period specified. Companies offering bonds to the public must file with the SEC a registration statement, including a prospectus containing information about the company and the security.

Government Bonds
The U.S. Government also issues a variety of debt securities, including Treasury bills (commonly called T-bills), Treasury notes, and U.S. Government agency bonds. T-bills are sold to selected securities dealers by the Treasury at auctions.


Government securities can also be purchased from banks, government securities dealers, and other broker-dealers. Similar to corporate bonds, these bonds pay interest and the amount of principal at maturity. Some (viz., Treasury Bills) may not pay cash interest. Instead the bond is purchased at a discount and the interest is
built into the amount the investor receives at maturity. Contrary to popular belief investors must pay income tax on U.S. government bond interest.

Municipal Bonds
Bonds issued by states, cities, or certain agencies of local governments (such as school districts) are called municipal bonds. An important feature of these bonds is that the interest a bondholder receives is not subject to federal income tax. In addition. the interest is also exempt from state and local tax if the bondholder lives in the jurisdiction of the issuing authority. Because of the tax advantages, however, the interest rate paid on municipal bonds is generally lower than that paid on corporate bonds. Municipal bonds are exempt from registration with the SEC; however, the MSRB establishes rules that govern the buying and selling of these securities.

Stock Options
An option is the right to buy or sell something at some point in the future. An option is a type of derivative security. There are a wide variety of these specialized instruments such as futures, options and swaps. Most are not appropriate for the average investors. The type of options with which we are concerned here are standardized, exchange-traded options to buy or sell corporate stock. These options fall into two categories

"Calls," which give the investor the right to buy 100 shares of a specified stock at a fixed price within a specified time period, and "Puts," which give the investor the right to sell 100 shares of a specified stock at a fixed price within a specified time period.

While options are considered by many to be very risky securities, if used properly they can actually reduce the risk of a portfolio. Generally you buy a call option if you are bullish on a stock (i.e. you expect the price to go down). The price you pay is called the premium. You would purchase a put option if you are bearish on a stock (i.e. you expect the price to go 56

down). If the stock moves in the right direction you can profit handsomely. If it doesnt you lose the premium that you paid. Buying puts and calls is not a risky strategy, but selling puts an calls is. One exception is selling a call option on a stock you already own. This is known as a "covered call." This actually reduces the overall risk of your portfolio in exchange for you giving up some of your upside.

Mutual Funds
Companies or trusts that principally invest their capital in securities are known as investment companies or mutual funds. Investment companies often diversify their investments in different types of equity and debt securities in hope of obtaining specific investment goals. In a mutual fund you invest in the mutual fund which then invest in individual equity and debt securities. This relieves you of the necessity to make individual purchase and sale decisions. It also provides an easy way to diversify a portfolio. Rather than purchasing 50 stocks yourself, you can purchase one mutual fund. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them.

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. The flow chart below describes broadly the working of a mutual fund:


Mutual Fund Operation Flow Chart Source: Google search engine

Performance of mutual fund Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. (1983) For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The Assets under Management of UTI was Rs. 67bn. by the end of 1987.


Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992.

Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choices apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandals, the losses by disinvestments and of course the lack of transparent rules in the where about rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds the key instrument for long-Term saving. The more the variety offered, the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds


ORIGIN OF MUTUAL FUND The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) were Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of 60

Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under management. Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29, 835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds.

The mutual fund industry has entered its current phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.



Source: - amfiindia.com Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards. Source: - amfiindia.com


Mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, dividends, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding Since their creation, mutual funds have been a popular investment vehicle for investors. Their simplicities along with other attributes provide great benefit to investors with limited knowledge, time, or money. To help you decide whether mutual funds are best for you and your situation, we are going to look at some reasons why you might want to consider investing in mutual funds. ADVANTAGES Diversification One rule of investing that both large and small investors should follow is asset diversification. Used to manage risk, diversification involves the mixing of investments within a portfolio.

For example, by choosing to buy stocks in the retail sector and offsetting them with stocks in the industrial sector, you can reduce the impact of the performance of any one security on your entire portfolio. To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds having varying maturities from different issuers. For the individual investor this can be quite costly. By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. One caveat (beware), however, is that simply purchasing one mutual fund might not give you adequate diversification - check to see if the fund is sector or industry specific.


For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio wills likely suffer. Economies of Scale The easiest way to understand economies of scale is by thinking about volume discounts: in many stores the more of one product you buy, the cheaper that product becomes.For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This occurs also in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large. Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio - as you can see the costs begin to add up. Mutual funds are able to make transactions on a much larger scale (and cheaper). Divisibility Many investors don't have the exact sums of money to buy round lots of securities. One to two hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100 to $1000 minimums. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. This leads us to the next advantage. Liquidity Another advantage of mutual funds is the ability to get in and out with relative ease. You can sell mutual funds at any time as they are as liquid as regular stocks. Both the liquidity and smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments 64

through monthly purchase plans while taking advantage of averaging. Professional Management


When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to research thoroughly every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you. As with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry loads, annual expense fees and penalties for early withdrawal. In the next article we will take a closer look at some of these drawbacks so you can decide if mutual funds are right for you. DISADVANTAGES Fluctuating Returns Mutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar. Another important thing to know is that the U.S does not guarantee mutual funds. Government, so in the case of dissolution, you won't get anything back. This is especially important for investors in money market funds. Unlike a bank deposit, a mutual fund will not be FDIC insured. Diversification Although diversification is one of the keys to successful investing, many Mutual fund investors tend to over diversify.


The idea of diversification is to reduce the risks associated with holding a single security; over diversification occurs when investors acquire many funds that are highly related and so don't get the risk reducing benefits of diversification. Cash, Cash and More Cash As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolio as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous. Costs Mutual funds provide investors with professional management; however, it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds the fees are classified into two categories: shareholder fees and annual fund-operating fees. The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money these fees only magnify losses.


Misleading Advertisements The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income. The SEC (Securities and Exchange Commission) requires funds to have at least 80% of assets in the particular type of investment implied in their names. The remaining assets are under the discretion solely of the fund manager. The different categories that qualify for the required 80% of the assets, however, may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labeling itself a small cap, a fund may be sold under the heading growth fund. Evaluating Funds Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another? Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers. Whenever an investor plans to buy any investment, it's important to understand both the good and bad points. If the advantages that the investment offers outweigh its disadvantages, it's quite possible that mutual funds are something to consider. Whether you decide in favor or against mutual funds, the probability of a successful portfolio increases dramatically when you do your homework.


On the basis of their structure and objective, mutual funds can be classified into following major types:

Closed-end funds Open-end funds Large cap funds Mid-cap funds Equity funds Balanced funds Growth funds No load funds Exchange traded funds Value funds Money market funds International mutual funds Regional mutual funds Sector funds Index funds Fund of funds

Investment Contracts and Limited Partnerships Investors sometimes pool money into a common enterprise managed for profit by a third party. This is called an investment contract. Such enterprises may involve anything from cattle breeding programs to movie productions. This is often done through the establishment of a limited partnership in which investors, as limited partners, own an interest in a venture but do not take an active management role. Some of these securities have been issued in the past primarily for purposes of reducing income tax liability. Such opportunities are limited today. Care should be taken in investing in these securities since they can be illiquid and require a great deal of expertise. You should consult with your financial advisor regarding these types of investments.


Real Estate Investment Trust (REIT)

Real estate investment trusts are set up in a fashion similar to mutual funds. Instead of investing in stocks or bonds, however, REIT investors pool their funds to buy and manage real estate or to finance real estate construction or purchases. Real estate limited partnerships are also common. This is a way to get diversification from real estate investment without the headaches of property ownership and management.

Asset Allocation
Asset allocation is the process of allocating your investments among the broad categories of stocks, corporate bonds, government bonds, etc. It is extremely important in investment success. In fact, portfolio selection should generally be based on asset allocation, whether formal or informal. This process can be complicated, but computer programs are available to assist in performing the allocation. Risk vs. Return There are many types of risk. The one most people think of is market risk, which is the risk that market prices can fluctuate. If you have a short investment horizon, generally something less than five years, this risk is important since the market could be down at the time you most need the money. On the other hand, if you have a long time horizon, for example when saving for retirement, you may be unconcerned with market risk. The investment has the opportunity to come back prior to the time you need the funds. Another risk, which many people dont think about, is purchasing power risk. This is the risk that your investment will not keep up with inflation and you will not be able to maintain your desired standard of living. A bank CD for example might pay interest of 3% and have no market risk. Your principal does not fluctuate in value and you are insured against loss. However, if inflation exceeds 3% you will lose purchasing power You need to assess how much risk you can tolerate. One easy way to measure this is how well do you sleep at night. If you lie awake worrying about your investments, you risk tolerance is probably too low for your current investment strategy. In general the longer your investment horizon the greater the amount of risk you can afford to take. Your financial advisor can also assist you in measuring your risk tolerance.


Risk can also be reduced through diversification. Rather than buying one stock, buy a basket of 20 to 30 stocks. This reduces your overall risk. You can also reduce risk by combining different investment types such as stocks, corporate bonds and government bonds. These securities are not highly correlated (i.e. they tend not to go up or down at the same time).

Why would one want to take on more risk? Because it generally comes with a higher expected return. While stocks may have the greatest market risk, they have also provide that highest market return over the long haul. Stock returns have averaged between 10 and 11% since the early part of this century. Corporate bonds on the other hand have averaged between 6 and 7% and government bonds closer to 5%. As you can see the lower the risk the lower the expected return. You must balance the amount of risk you are willing to tolerate with the amount of return you expect to achieve. There is no such thing as a high return/low risk investment

5.2Planning Techniques
You should assess your current resources and future goals. This will assist you and your advisors in determining what rate of return is necessary to achieve your goals and how much risk you can tolerate. Here is a suggested checklist:

Assess your current financial resources. How much do you have to invest? Assess your future financial resources. Do you have an excess of income over expenses that can be invested? Determine your financial goals. How much money do you need and when do you need it? Determine the rate of return you need to achieve your goals. Determine how much risk you can tolerate based upon your time horizon and personal preferences. Choose an appropriate asset allocation to achieve the desired risk/return relationship. How should you allocate your investment among the various classes of investments? Choose the individual securities within each asset class. Which securities should you buy?


Security Selection Once you have decided what percentage of your assets should go in each asset class, you need to select the appropriate individual securities. You should consider the same techniques as in selecting the asset classes to invest in. For each security you must evaluate its unique risk and its expected return. There are a number of sources of information about specific securities that you can explore.. Generally, the most important of these for mutual funds and new stock issues is the prospectus, which is the security's selling document, containing information about costs, risks, past performance (if any) and the investment goals. Read it and exercise your judgment carefully, before you invest. You can obtain the prospectus from the company or mutual fund or from your financial advisor. In the case of a mutual fund, there is also a Statement of Additional Information (SAI, also called Part B of the prospectus). It explains a fund's operations in greater detail than the prospectus. You can get a clearer picture of a fund's investment goals and policies by reading its annual and semi-annual reports to shareholders. If you ask, the fund must send you an SAI and/or its periodic reports. This process is timeconsuming and requires a great deal of time and expertise. Keep in mind that proper security analysis is extremely complex. Computer programs (the good ones are usually quite expensive) are invaluable in helping choose an appropriate portfolio; however, these programs require a familiarity with their use and an understanding of their limitations. Generally, if you do not have the time to perform the necessary analyses or the experience or expertise in security selection, you should consult with your financial advisor

5.3 Six Investing Pitfalls To Avoid

Here are the top mistakes that cause investors to lose money unnecessarily. 1. Using A Cookie-Cutter Approach


Most investorsalong with many of the people who advise them are satisfied with a one-size-fits-all investment plan. The "model portfolio" is useless to most investors. Your individual needs as an investor must govern any plans you make for investment. For instance, how much of your investment can you risk losing? What is your investment timetable (i.e., are you retired, a young professional, or middle-aged)? The allocation of your portfolios assets among various types of investmentsTreasuries, blue-chip stocks, equity mutual funds, and others-- should match your needs perfectly. 2. Taking Unnecessary Risks You do not have to risk your capital to make a decent return on your money. There are many investments that offer a return that beats inflationand morewithout unduly jeopardizing your hardearned money. For instance, Treasuries, the safest possible investment, offer a decent return with virtually no risk. Blue-chip preferred stocks, common stocks, and mutual funds offer high returns with a fairly low level of risk. 3. Allowing Fees and Commissions to Eat Up Profits Many investors allow brokers commissions and other return-eating costs to cut into their returns. Professionals need to be compensated for their time, however, you should make certain that the fees you are paying are appropriate for the services performed. 4. Not Starting Early Enough Many investors are not cognizant of the power of interest compounding. By starting out early enough with your investment plan, you can invest less, and still come out with double or even quadruple the amount you would have had if you started later. Another way to look at it is that by investing as much as possible earlier on, youll be able to meet your goals and have more current cash on hand to spend. 5. Ignoring the Cost of Taxes Every time you or your mutual fund sells stocks, there is a capital gains tax to pay. Unless you are in a tax-deferred retirement account, the taxes will eat into your profits. What to do: Invest in funds that have low turnover (i.e., in which shares are bought and sold less frequently). Your portfolio, overall, should have a turnover of 10% or less per year.


6. Letting Emotionor Magical Thinking--Govern Your Investing Never give in to pressure from a broker to invest in a "hot" security or to sell a fund and get into another one. The key to a successful portfolio lies in planning, discipline, and reason. Emotion and impulse have no role to play in investing. Similarly, do not be too quick to unload a stock or fund just because it slips a few points. Try to stay in a security or fund for the long haul. (On the other hand, when its time to unload a loser, then let go of it.) Finally, do not fall prey to the myth of "market timing." This is the belief that by getting into or out of a security at exactly the right moment, we can retire rich. Market timing does not work. Instead, use the investment strategies that do work: a balanced allocation of your portfolios assets among securities that suit your individual needs, the use of dividend-reinvestment programs and other cost-saving strategies, and a well-disciplined, long-haul approach to saving and investment

5.4 Asset Allocation

Asset allocation is based on the proven theory that the type or class of security you own is much more important than the particular security itself. Asset allocation is a way to control risk in your portfolio. The risk is controlled because the six or seven asset classes in the well-balanced portfolio will react differently to changes in market conditions such as inflation, rising or falling interest rates, market sectors coming into or falling out of favor, a recession, etc.


Asset allocation should not be confused with simple diversification. Suppose you diversify by owning 100 or even 1,000 different stocks. You really havent done anything to control risk in your portfolio if those 1,000 stocks all come from only one or two different asset classessay, blue chip stocks (which usually fall into the category known as largecapitalization, or large-cap, stocks) and mid-cap stocks. Those classes will often react to market conditions in a similar waythey will generally all either go up or down after a given market event. This is known as "correlation." Similarly, many investors make the mistake of building a portfolio of various top-performing growth funds, perhaps thinking that even if one goes down, one or two others will continue to perform well. The problem here is that growth funds are highly correlatedthey tend to move in the same direction in response to a given market force. Thus, whether you own two or 20 growth funds, they will tend to react in the same way. Not only does it lower risk, but asset allocation maximizes returns over a period of time. This is because the proper blend of six or seven asset classes will allow you to benefit from the returns in all of those classes. How Does Asset Allocation Work? Asset allocation planning can range from the relatively simple to the complex. It can range from generic recommendations that have no relevance to your specific needs (dangerous) to recommendations based on sophisticated computer techniques (very reliable although far from perfect). Between these extremes, it can include recommendations based only on your time horizon (still risky) or on your time horizon adjusted for your risk tolerance (less risky) or any combination of factors. Computerized asset allocations are based on a questionnaire you fill out. Your answers provide the information the computer needs to become familiar with your unique circumstances. From the questionnaire will be determined:

Your investment time horizon (mainly, your age and retirement objectives). Your risk threshold (how much of your capital you are willing to lose during a given time frame), and Your financial situation (your wealth, income, expenses, tax bracket, liquidity needs, etc.). 74

Your goals (the financial goals you and your family want to achieve).

The goal of the computer analysis is to determine the best blend of asset classes, in the right percentages, that will match your particular financial profile.

What Are the Asset Classes? The securities that exist in todays financial markets can be divided into four main classes: stocks, bonds, cash, and foreign holdings, with the first two representing the major part of most portfolios. These categories can be further subdivided by "style." Let's take a look at these classes in the context of mutual fund investments: Equity Funds: The style of an equity fund is a combination of both (1) the fund's particular investment methodology (growth-oriented, valueoriented or a blend of the two) and (2) the size of the companies in which it invests (large, medium and small). Combining these two variables investment methodology and company size offers a broad view of a fund's holdings and risk level. Thus, for equity funds, there are nine possible style combinations, ranging from large capitalization/value for the safest funds to small capitalization/growth for the riskiest. Fixed Income Funds: The style of a domestic or international fixedincome fund is to focus on the two pillars of fixed-income performance interest-rate sensitivity (based on maturity) and credit quality. Thus, fixed-income funds are split into three maturity groups (short-term, intermediate-term, and long-term) and three credit-quality groups (high, medium and low). These groupings display a portfolio's effective maturity and credit quality to provide an overall representation of the fund's risk, given the length and quality of bonds in its portfolio. How Are Asset Allocation Models Built? Simply stated, financial advisors build asset allocation models by (1) taking historic market data on classes of securities, individual securities, interest rates and various market conditions; (2) applying projections of future economic conditions and other relevant factors; (3) analyzing, comparing and weighting the data with computer programs; and (4) further analyzing the data to create model portfolios.


There are three key areas that determine investment performance for each asset class: 1. Expected return. This is an estimate of what the asset class will earn in the futureboth income and capital gainbased on both historical performance and economic projections. 2. Risk. This is measured by looking to the asset classs past performance. If an investments returns are volatile (vary widely from year to year), it is considered high-risk. 3. Correlation. Correlation is determined by viewing the extent it which asset classes tend to rise and fall together. If there is a high correlation, a decision to invest in these asset classes increases risk. The correct asset mix will have a low correlation among asset classes. Correlation coefficients are calculated by looking back over the historical performance of the asset classes being compared.


5.5 Secret of Creating Wealth

There are a lot of ways to build wealth, but there is a simple, sure way that can always work. It is simply to develop the habit from a young age of saving a share of your income, say 10%. Paying this amount to your investment account must become the same as paying your monthly rent or mortgage payment. Developing the habit of saving money should be developed the same as the habits of bathing, washing hands before a meal, or shaving. If you can't have certain luxuries now and maintain your savings ritual, postpone the luxuries now so you can enjoy them and financial security


Chapter 6 - Recommendations

Financial institutes, Banks, AMCs, and brokering houses increasingly looking at wealth management to augment their revenues. Sophisticated financial products and solutions are no longer seen as value propositions by the affluent investors, as these products with little variation are available from all the players in the market. The real difference stands out in the personal touch and technology of the service provider. Based on this and my entire study on wealth management I have chalked out some recommendations for the bank to increase market share. The new money and mass affluent segments will experience the highest growth. These customers are time constraint, technology savvy and will be the major users of wealth management services. Banks that are geared to service this segment in terms of reach, technology, products and knowledgeable staff, will reap significant gains in market share and profitability. Banks should invest in profitability models and MIS tools to understand profitability at all levels in the wealth management business as wealthy clients generate more fees but incur higher cost due to high level of service. Hence, banks need to strike an optimum balance between the increased revenue and higher costs due to high level of service. Performance should be monitored by measuring client, product, and relationship manager and distribution channel profitability. This analysis will unable bank to refocus its efforts on high value customer segments and rethink strategy on unprofitable clients. The success of the wealth management industry is dependent on global and domestic economic factors. Banks need to innovate and appropriate products and services to meet the needs of wealthy individuals in times of economic boom as well as depression.


The decision to outsource certain services should be driven by cost consideration. If a service is not part of a banks core offering and competency, it may be more cost effective and prudent, to hire outside specialists. In the end, this service will be provided more effectively, with a greater degree of confidence, and at a lower total cost. All this will eventually result in more satisfied clients.

Currently, I have found that banks are investing very little in training their advisors on market and economic trends. And often banks are just selling product. They say here is a mutual fund, a loan or a deposit. Most advisors are dependent on newspapers and industry newsletters. After going through the various research papers on wealth management, I think imparting regular updates on the market and trends in the form of internal newsletters or posting important data on the intranet helps advisors in analyzing data before counseling their clients. Hiring product specialists help both internal advisors as well as client in identifying market trends opportunities well in advance. This will help in building the clients Confidence and rebalancing the portfolio on regular intervals.

Technology has the potential to bring banks long-term cost savings, greater efficiency and enhanced customer service. Technology tools covering the areas of financial planning, straight through processing, product and account aggregation and performance monitoring will unable banks to enhance their service quality and responsiveness. Product aggregation tools will enable the banks provide from different suppliers to their clients from its own website. Account aggregation tools will enable the customer to access account information across multiple providers from a single banks site. And performance monitoring tools will track the investment portfolio helps in timely corrective actions of the investment not delivering the returns as per the expectations. Customer retention will become critical issue going forward in this business. Banks should have a formal mechanism like in house and external surveys, complaint monitoring etc. to measure customer satisfaction on an ongoing basis. The customer retention


strategies will succeed in the long term and benefit the bank increase its market share. Banks must provide wealth management clients with interpersonal service through help desk, financial Advisor, or Relationship Manager depending on level of service the client is qualified. Using the internet as a channel for information delivery, self service and communications facilitator between the banks and the client eliminates costly paper and people laden process to the extent possible. Broad and deep client relationshipsthis is the essential point of differentiation between wealth managers and other type of investment advisors managers and speaks to the wealth managers holistic approach to service delivery. To have an upper hand in this business I will recommend HSBC bank to hire wealth managers over the investment advisors as latter is more interested in the volume of the business rather than in the profit of the client. Banks must provide more comprehensive set of services to its clients under wealth management. By doing so, the banks could expand and strengthen relationships with existing clients and potentially attract new clients who may be more profitable to the firm. As a result, deeper client relationships may lead to greater profitability of success for both bank and client.



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