Financial Market Assignment

Vishal Talekar

MMS Finance

Roll No. 101

CASE STUDY 1:

1. What do you think about Ajit’s ability to take risk?

Ajit ability to take risk has almost reduced because he has almost invested in FD Equities
and Mutual funds but during the internet bust 2002, he has suffered the most. Ajit being
30years need to think for his future as he may get married or else have got married. At
this age his risk-taking capacity is seems to be low. At this age he should be planning for
proper saving and investment. He might be having his parents leaving along with him
there might be medical expenses of them. If he has children he has to think about their
future expenses, their education their marriage. For every expense Ajit needs to plan from
today itself neither risking his assets. Investing in low risk schemes and maximum return
policy should be seen. But thanks to the internet, you can now make an informed decision
with the help of the guidance and tips available.

2. Will you recommend ‘stock-only’ portfolio to Ajit or ‘MF-only’ portfolio?

In order to earn attractive returns on the investment, the best place to invest money is stock
market. A person can invest in stock market either directly or indirectly. In case of direct method,
a person can directly buy stocks from the stock market after doing his/her market research and
analysis. However, if a person doesn’t know about stock market or isn’t confident about investing
directly in stock market but still wants to invest in stock market, then mutual funds are the best
instrument. In case of mutual fund, a person just has to invest his money, either lump sum or
through SIP, in a mutual fund scheme and the fund manager would then invest the whole pool of
money, collected through scheme from various people, in the stock market in various stocks,
based on his in-depth research, to diversify the money of the people. Whatever returns are earned
in that mutual fund are then distributed to the people in accordance of their investment in the
scheme.
So, considering that Mr. Ajit had incurred a huge loss in the stock market and now
psychologically is not confident to invest in stock market, I would recommend him “MF-only”
portfolio as in this case the fund manager would, on the basis of his research, diversify Mr. Ajit’s
money in various stocks, bonds, debt instruments, etc. thereby diversifying his money, reducing
 his risk and increasing the chances of him making good money. In this case his money would get
invested in stock market directly with less risk as compared to directly investing in stock market.
Thus, I would recommend Mr. Ajit a “MF-only” portfolio to continue investing.

3. What kind of MF will you recommend to Ajit?

It is clear from the case that Mr. Ajit can invest in mutual funds because of his previous
investment and losses. Essentially there are various forms of mutual funds where Mr. Ajit can
invest. I will suggest to my according to his risk appetite and the money he should spend after he
lost mostly in internet bubble burst. Ajit's "balanced fund" will include investing around 40 % -
60 % of the money in equity and equity-related instruments and investing around 60 % - 40 % of
the money in debt instruments. This will diversify both Mr. Ajit's equity capital and debt
instruments, and diversify his risk as well. In a balanced fund the risk is low and the returns are
also reasonable. Given that Mr. Ajit had lost heavily, he would be willing to slowly and steadily
make the money again with less risk and moderate returns. So I'd like to suggest Mr. Ajit to
"balanced fund."

4. Explain to Ajit how is new MF portfolio achieves diversification?

Mutual Fund Portfolio’s are the most easiest way to achieve Diversification. Diversification is a
risk management strategy that mixes a wide variety of investments within a portfolio. A
diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at
limiting exposure to any single asset or risk. The ideal number of funds depends on factors like
your investable amount, investment goals and risk profile. In Ajit’s Portfolio, all assets are
classified into different schemes in order to minimize risk and get better returns. For example, if
he invests say Rs. 100,000 in Debt Funds, the amount will be diversified into bonds, securities,
and treasury bills that will lower the risk level.

5. Why is this diversification important?

Diversification is important as it helps to mitigate risk and allows the portfolio to perform better.
Generally, it is said that we should not put all the eggs in one basket. The same concept applies to
our investment. We should never invest all our money in just single instrument. Because if this is
done and afterwards the value of that stock falls steeply, then the investors would incur huge loss.
Thus, to avoid this diversification becomes quite important. When invested in mutual fund, the
money gets diversified or invested in different stocks, debt instruments, etc. which means that if a
stock or few stocks or a sector is not performing well or goes down then money invested in only
that much instruments would get affected and the remaining stocks would keep on giving profits.
Thus, the overall profitability doesn’t get affected that much as compared to investing in only 1 or
2 stocks. Thus, diversification helps to cushion the negative performance of one or few stocks in
the whole portfolio. With proper asset allocation, higher profits are earned on average.
6. Recommend portfolio mix to Ajit

I would recommend a portfolio that is moderately risky or low in age.

7. Explain why investment in equity improves risk profile?

A risk profile is an assessment of willingness and the capacity of a person to take risks. It may
also contribute to the risks a company is subjected to. A risk profile is critical in assessing a
proper allocation of investment assets for a portfolio. Organizations use a risk profile as a tool to
minimize future threats and risks. A risk profile describes the level of risk that a person is
prepared for and willing to accept. An individual's risk profile should assess the motivation of
that person and the capacity to take on danger. In this context, risk relates to portfolio risk.
Private equity capital is invested in emerging companies or start-ups with great potential for
success. Private equity companies are now attempting to turn around or develop the businesses
they invest in by changing the management team or streamlining operations. Owing to the
existence of the underlying assets private equity bears a greater degree of risk than other asset
groups.
 CASE STUDY 2:

1. Are Amar and his family adequately covered?

According to my understanding, Amar is adequately secured with his entire family as we can see
that Amar took the life insurance policy of 70 lakh which, in the event that something happens to
him, will get the whole sum that would protect his entire family's life. Amar Company provides
its workers with a community insurance scheme worth 20 lakh, which is also a positive move by
the company. Even they have 5 lakhs of family life insurance. As we can see, Amar’s father is a
retired government worker, he may have some service and he also gets the amount of medical
costs and even medical care free in the hospital. Even in the case it can be seen that Amar took
out the health insurance for the whole family worth 10 lakhs in addition. From the entire scenario
it is shown that Amar has protected his family from all the negative implications of the future.

2. Is Asset allocation of Amar’s portfolio optimal, considering his age and family position?

The current asset allocation by Mr. Amar includes savings account +fixed deposit of Rs.5 lakhs
(13.5%), NSC and bonds of Rs.2 lakhs (5.4%) and stocks of Rs.30Lakhs (81.1%). Apart from
this, there is surplus cash of Rs.6 lakhs per year. Considering Mr. Amar’s age and his family
position, the above asset allocation of his portfolio is not optimal. This is because, firstly, his
investment in non-risky assets is very less as compared to risky assets (stocks). Secondly, his
savings is just Rs.5lakhs considering the old parents and young children. This amount is very low
for any unexpected contingent situation and future education expenses of the children. His
majority of the money is blocked in stocks (risky asset class) which mean that if he suffers loss in
stock market, his whole portfolio would go for a toss and he would face a serious financial
problem. On top of that he also has to pay his housing loan so he cannot afford to lose money.
Due to the above mentioned reasons, it can be said that the asset allocation of Mr. Amar’s
portfolio is not optimal.

3. If no, what changes do you recommend?

Mr. Amar’s portfolio needs an urgent revision to be able to remain financially sound. The
changes that I would recommend are listed below:
 His income = Rs.20 lakhs, His expenses = Rs.14 lakhs, surplus = Rs.6 lakhs
 Of the surplus, he should take a term insurance of Rs.1 Cr. to safeguard himself as he is
the sole earner. The premium amount would get deducted from the surplus. So his total
investment in insurance would Rs.2 Cr.
  After that from the remaining surplus, he should invest Rs.2 lakhs in FD and savings
account. So, his total savings in FD and savings account would be Rs.7 lakhs which is
better than previous amount to safeguard his family against some unexpected expenses.
 From the remaining surplus, he should invest 10% in gold as it is considered safe haven
and would act as a buffer and also its value would increase with passage of time.
 Now, following the 100-age thumb rule, whatever surplus amount remains of that 65%
should be invested in stocks and 35% in debt instruments.
 He already has investment in stocks equivalent to Rs.30lakhs which is very high. His
investment in equity should be restricted to Rs.24 lakhs (65%). This investment in equity
should be through indirect method like equity fund, multi-cap fund, ELSS, large cap
funds, mid cap funds, small cap funds, balanced fund, etc. i.e. through mutual funds
which would better diversify his money and risk into different stocks thereby increasing
his average returns.
 The balance Rs.6 lakhs (Rs.30 lakhs-Rs.24 lakhs) should be invested in ELSS or
balanced mutual fund to balance the risk and rewards of the portfolio.

Since value of premium on new term insurance is not known, figures cannot be computed for
the investment method shown above. Only % is mentioned.

Thus, as Mr. Amar wants to continue investing in stock, he can do so with different types of
mutual funds where the fund manager allocates the money in different stocks based on his in-
depth research of the market and the stock. In this Mr. Amar would not have to worry about
his investment in stocks. Hence, these are the changes in the portfolio that I would
recommend to Mr. Amar.

4. Keeping in mind Amar’s risk appetite, how should he go about investing?

Amar initially invested in the stock as his friend advised him to purchase 30 stocks. Which he
thought would gain some profit as the market seemed to be booming. But he faced the loss due
to market failure in 2008. As we can see, Amar is interested in investing in stock, Amar should
merely focus on maximum returns policy. For a better investment alternative, Amar should
consult a financial consultant. As we saw he sold all the good stock and kept the stock along
with the bud. He has more obligations ahead of Amar being 30, so he should minimize risk while
investing. While investing, Amar should do some research or financial consultant as described
above is intended to guide their investor on investment decision.