Investment Options Physical and Financial Products Investment Management

Readings IBF Chap II/6

Managed Funds Vs Direct investment.

Advantages:
Professional Management Diversification Considerable convenience

Disadvantages variety of costs Popularity shows that Advantages are more significant.

Managed Funds
Retail: offered to general public Wholesale: offered to professional investors such as trusts, retails funds, superannuation funds, corporate treasuries. Minimum investment is Rs. 25,000 to a crore. Unitised or Account based

Minimum investment is Rs. 500 to 5000. Unitised

Distribution
Financial Planners and Investment advisers Banks/Private Banking Tier I Distributors/Stockbrokers Boundary jumpers Eg. Myiris.com, indianinfoline.com, equitymaster.com Portfolio Managers Asset Consultants

Mutual Funds
SEBI and AMFI Legal structure: Investors, Sponsors, Trustees, AMC, RTA, Custodian. Terms: NAV, Expenses, Sale/Subscription, Repurchase/Redemption, Load entry and exit. Each scheme may have dividend option, growth option and dividend reinvestment option. Value Added services: SIP, SWP, ECS Mandate, Systematic reallocation, Cheque book or ATM for Liquid funds.

Portfolio Managed Schemes (PMS)

SEBI gives approval to intermediaries for PMS services (Portfolio Managers Regulations 1993) The PM draws an agreement with client mentioning scope and fees (fixed/variable/both) Permitted activities: Advisory, Invt Mgt, Custody of Securities and tracking corporate benefits associated with the securities. The PM shall act in a fiduciary capacity and as a trustee and agent of the clients account.

Comparing of Products- by performance and nature of Investment.

Return Safety Volatility Liquidity Convinience

Equity FI Bonds Corporate Debentures Company Fixed Deposits

High
Moderate Moderate Moderate

Low High
Moderate

High
Moderate Moderate

High or Low
Moderate

Moderate High Low

Moderate

Low Low

Low

Low

Bank Deposits
PPF Life Insurance Gold Real Estate

Low
Moderate

High
High High High
Moderate

Low
Low Low
Moderate

High
Moderate

High
High
Moderate

Low
Moderate

Low
Moderate

Low Low

High

High
Moderate

Low

Mutual Funds

High

High

High

High

The Investor Perspective: Funds Vs Other Products

Investment Objective Risk Tolerance High Investment Horizon Long Term

Equity

Capital Appreciation

FI Bonds
Corporate Debentures Company Fixed Deposits Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds

Income
Income Income Income Income Risk Cover Inflation Hedge Inflation Hedge Capital Growth, Income

Low
H-M-Low Same Generally Low Low Low Low Low H-M-Low

Med to Long Term

Same Medium Flexible-all terms Long Term Long Term Long Term Long Term Flexible-all terms

Insurance Bonds
Investment bonds, insurance bonds or life bonds are investment cum insurance schemes. The growth is paid out in the form of bonus, increased NAV etc. Adv: Joint names, Tax efficiency, Insurance cover, roll over of income.

Key Concepts
When to invest and when to cash out Start Planning and Investing Early Have realistic Expectations Invest Regularly

INVESTMENT MANAGEMENT FUNCTIONS

FIVE STEP PROCEDURE:
SETTING INVESTMENT POLICY PERFORMING SECURITY ANALYSIS CONSTRUCTING A PORTFOLIO REVISING THE PORTFOLIO EVALUATING THE PORTFOLIO

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INVESTMENT MANAGEMENT FUNCTIONS

SETTING INVESTMENT POLICY
DETERMINE THE INVESTMENT OBJECTIVE
estimate the clients level of risk tolerance

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INVESTMENT MANAGEMENT FUNCTIONS

PERFORMING SECURITY ANALYSIS
Security Selection: A 2 Stage Procedure STAGE I: forecast
expected returns standard deviation covariances identify optimal portfolio

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INVESTMENT MANAGEMENT FUNCTIONS

PERFORMING SECURITY ANALYSIS
Security Selection: A 2 Stage Procedure STAGE II: Asset Allocation
strategic
refers to how a portfolios funds would be divided, given the managers long-term forecasts from Stage I

tactical
given short-term forecasts, who will assets be allocated at any one time

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REVISING THE PORTFOLIO

REVISING THE PORTFOLIO
Use Cost-Benefit Analysis
transaction costs should be examined since they complicate the management decision portfolio revisions must be weighed against the cost of revision particularly with regard to transaction costs

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Asset Allocation
Active Vs Passive Neutral/Strategic Vs Tactical Market Timing Risk Stock Selection

Asset Allocation the strategic tool

Benjamin Graham: Advocates 50/50 split between equities and bonds, the common sense approach to start with. If equities value goes up balance is restored by selling equity and v.v. It limits exposure to equity markets. It gives limited gains as well as limited losses.

Adjusting the basic model

Adjustment required based on age, financial circumstances and objectives. Lifecycle phases:
Accumulation phase: builds assets by periodic investments of capital and ininvestments. Distribution phase: stops investing and recieves dividends.

Equity/debt proportion
Younger Investors in Accumulation phase 80/20 Older Investors in Accumulation phase 70/30 Younger Investors in Distribution phase 60/40 Older Investors in Distribution phase 50/50
Debt investment = age

Fixed V. Flexible Asset Allocation

Fixed: implies rebalancing. Sell equity and book profits in bull market and buy more in bear market. This strategy is better in the bull market. Flexible: no rebalancing. With time the equity proportion will go on increasing.

Tactical Asset allocation

Fund managers change asset allocation percentages based on their forecasts. Proportion of value and growth investments may change Proportion of small company and large companies may change Debt Equity mix in a balanced fund may change

Examples
Cash management Funds, Liquid Funds Equity Funds- sectoral, value, growth, Indexed funds Bond Funds Property Funds REIT, Mortgage Trusts International Equity Funds Gold Funds

Evaluating Performance
Category Period Bench mark Index in any

Thank you