CHAPTER 2 ABOUT THE TOPIC & LITERATURE REVIEW 2.1.

ABOUT THE TOPIC

increasingly, individuals are in charge of their own financial futures. Most are aware that planning is critical, yet dont the have time or the expertise to develop a plan and make the needed financial decisions. So there arises a need for financial advisors to manage the individuals wealth and the whole process of managing this wealth is known as Wealth Management. There are a number of financial advisors offering a diverse portfolio of services to suit different financial requirements of their clients. In order to accomplish the task, these companies provide the assistance of professional financial advisors. These financial advisors help individuals or corporate manage their wealth appropriately through:

1. Investment Solutions: The financial planner helps the individuals diversify their portfolio through alternative investment plans, mutual funds, equities, and even save for retirement through annuities.

2. Financial Planning: Financial Planning is an exercise aimed to ensure availability of right amount of money at the right time to meet the individuals financial goals. Financial planners plan individuals current expenditures and save for analyzing different options available. future short -term or long-term goals by

3.Retirement Planning: The financial planner guides their clients in planning for their financial requirements after retirement, by helping them identify goals, researching and analyzing different opportunities to secure funds and make investments to suits their needs.

4.Wealth Management: It is a comprehensive service to optimize, protect and manage the financial well-being of an individual, family or corporation. Its basic definition covers advice on

loans, investments and insurance to give a broad picture of how individuals should best deploy their financial resources.

Financial Planner (Wealth Planner / Financial Advisor)

The financial planner helps identify various taxable and non-taxable investments. This is not a comprehensive list of services. They may differ from one financial management company to another. One can select the services according to their requirements, be it personal or professional.

A financial planner work begins with a consultation with the client, from whom the planner obtains information on the clients finances and financial goals. The planner then develops a comprehensive financial plan that identifies problem areas, makes recommendations for improvement, and selects appropriate investments compatible with the clients goals, attitude toward risk, and expectation or need for a return on the investment.

Finding clients and building a customer base is one of the most important of a financial planners job, because referrals from satisfied clients are an important source of new business.

Need for a financial planner: Holistic in outlook: CFPs consider all circumstances, family needs, goals, values, and aspirations, while making recommendations. Professionals: CFPs protect privacy, strive to maintain the highest ethical standards and continually enhance skills and credentials through continuing education. Educational in nature: CFPs guide one through options and explain the clearly to help make the best choices. Committed to success: Holistic financial planning is a process, not an event, and commit to adjusting plan as life goals change.

Role of Financial Planners

a) Defining your Goals - A planner will take note of and record all your financial goals. You save for a variety of reasons: to buy a house and a car, to educate your children, to set them up in business, to get them married, to go on vacations, and, finally, to give yourself a comfortable life in retirement. b) Saving for them - The concept of savings changes from something thats left over to something that you target every month. The planner helps with your budgeting by making you write down your income and expenses in great detail. He helps you rationalize wasteful expenses and establish a system of generating surpluses every month.

c) Covering Risk - The planner then assesses your insurance needs, which varies from person to person and from age to age. As a young bachelor with no dependants, youll need disability insurance rather more than life insurance, but the minute you get married and you have a stay-athome wife whom you support, you need life insurance as well. The planner will help you identify your insurance needs, quantify them and then suggest policy options.

d) Planning for Retirement - The planner then looks at your retirement needs and plans for the time when youll no longer be earning. A planner will help you quantify in money terms the comfortable retirement you dream of.

e) Making It Happen - The planner has taken so long just to establish what you want out of life in money terms; even now, the actual investment is two steps away. The planner will now assess your risk profile. For example, a person in his mid-30s can take far greater risk than a man in his 60s. Based on the goals, the savings and the risk profile, the planner will then chart an asset allocation strategythat is, help you decide the percentage of your total portfolio you want to put in different instruments: property, equity, debt, or funds that invest in these assets. f) Total Financial Solutions - A planner has a big picture vision and is able to see the interlinkages of all your goals, expenses and investments. For example, if a person is earning well

and has a non-working wife with two kids, theres no problem if he takes a home loan and a car loan.

Financial Planning: Financial planning is the process of charting out the money course of your life. Its like having a financial roadmap that guides your every step till you pass on the baton to the next generation. In other words, it is a process in which an individual sets long-term financial goals through investments, tax planning, asset allocation, risk management, retirement planning and estate planning.

Benefits of Financial Planning

A sound and meticulous Financial Planning will have following enumerated benefits: Sophisticated financial advice to cope with changing life situation Non-biased opinion on ones insurance needs Help dealing with ones retirement planning Optimum asset allocation and investment strategy formulation Efficient tax strategy and estate planning

Scope of Financial Planning (a) Investments The money you earn is partly spent and the rest is saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. In other words, Investment is the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. It's actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money.

Basic Investment Objectives

1. Safety : Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit, commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds.

2. Income : However, the safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa.

3. Growth of Capital :Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures.

Secondary Objectives: a) Cost of Inflation : One needs to invest wisely to meet the cost of Inflation. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past.

b) Tax Minimization: An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy.

c) Marketability / Liquidity: Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell.

How to Make Investments Having appreciated the need, objectives and types of investment, it is now time to shift focus to the actual process of investing: Set investment objectives Access risk-profile Get the right asset allocation Select an investment advisor

TYPES OF INVESTMENTS There are many ways to invest your money. Of course, to decide which investment vehicles are suitable for you, you need to know their characteristics and why they may be suitable for a particular investing objective. Debt Market Mutual Funds Equity Market Cash Gold Stock and Equity Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, and nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital and equity. Equity investments Equity investments generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gain as the value of the stock rises. It also sometimes refers to the acquisition of equity (ownership) participation in a private (unlisted) company or a startup (a company being created or newly

created). Accounts listed under ownership equity include (example):Preferred stock, Share capital, common stock, Stock options, Retained earnings. Shareholders' equity When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. Market value of shares In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, often much higher, are based on other considerations related to the business' operating cashflow, profits and future prospects; some factors are derived from the accounting statements. Thus, there is little or no correlation between the equity seen in financial statements and the stock valuation of the business. Shares The stock of a business is divided into shares, the total of which must be stated at the time of business formation. Given the total amount of money invested in the business, a share has a certain declared face value, commonly known as the par value of a share. Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares. Types of stock Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. New equity issues may have specific legal

clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Stock derivatives A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. A stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a put option is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative. The most popular method of valuing stock options is the Black Scholes model. Buying There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange. Selling Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss. As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer.

2.2 LITERATURE REVIEW

1. Securities and Exchange Board of India (SEBI) According to SEBI, Professional Rating of market intermediaries, as a concept, is a matter of debate and discussions. The need for rating is felt not only from the point of view measuring the adequacy of systems and controls to meet internal as well as external compliance requirements. So that need for Intermediaries Rating services (Brokers),In view of the developments that are taking place in the capital markets, the need to constantly upgrade and improve systems and procedures in operation as well as skill sets has gained considerable importance. Besides compliance with regulatory requirements both in letter and spirit has assumed significance so as to mitigate risk and ensure adequate protection of investors interest. And Rating objectives / benefits are rated entity would be in a position to brand its image and capitalize the same for generating more business. In a nutshell, the product may accrue significant benefits to all stake holders including the investors, stock brokers themselves, the regulator and others who will benefit from the transparency and the consequential focus on efficiency. 2. The Economic Times Investors Year Book 5 (2000-01) The Economic Times Investors Year Book5 commented on the "Paperless World and described what makes dematerialization the preferred choice and how it reduces risk. The dematerialized trading was introduced in India in 1996 to reduce pains and risks in settlement through the loss of share certificates in transit, bad deliveries, delays in transfer and forged/fake/stolen certificates. It helps in doing away with the risk of loss in transit by directly crediting the account with bonus shares and rights. There is no risk of bad delivery because the ownership status is clearly captured in the Depository's computers.

3. Chatrath, Ramchander and Song (1996) They examined the relationship between the Indian stock market and the stock markets of the U.S. and other developed countries using daily data for the period 1984 to 1992. They used the Bombay Stock Exchange National Index (BSENI) and the Dow Jones Industrial Average (DJIA) as representative indexes for the Indian and U.S. markets, respectively. The authors identify two major concerns in portfolio diversification studies. First, return comparisons between countries

are exposed to currency risk. Second, correlations between stock returns for various countries must be stable over time in order to be able to employ past correlations as a proxy in creating optimal portfolios. They find that the Indian stock market had low correlations with the markets of the developed countries. Therefore, the Indian market offered diversification benefits for investors in the developed countries for the period 1984 to 1992.

4. Nabhi Kumar Jain (1992) He specified certain tips for buying shares for holding and also for selling shares. He advised the investors to buy shares of a growing company of a growing industry. Buy shares by diversifying in a number of growth companies operating in a different but equally fast growing sector of the economy. He suggested selling the shares the moment company has or almost reached the peak of its growth. Also, sell the shares the moment you realise you have made a mistake in the initial selection of the shares. The only option to decide when to buy and sell high priced shares is to identify the individual merit or demerit of each of the shares in the portfolio and arrive at a decision.

5. L.C. Gupta (1992) He revealed the findings of his study that there is existence of wild speculation in the Indian stock market. The over speculative character of the Indian stock market is reflected in

extremely high concentration of the market activity in a handful of shares to the neglect of the remaining shares and absolutely high trading velocities of the speculative counters. He opined that, short- term speculation, if excessive, could lead to "artificial price". An artificial price is one which is not justified by prospective earnings, dividends, financial strength and assets or which is brought about by speculators through rumours, manipulations, etc. He concluded that such artificial prices are bound to crash sometime or other as history has repeated and proved.

CHAPTER 3 RESEARCH METHODOLOGY