Personal Wealth

Management
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COURSE CONTENTS
Unit-I: Introduction to Financial Planning
Introduction- Financial Planning, Role of Financial Planner, Financial Planning Process, Investor’s and
Wealth Life Cycle, Risk profiling and Asset Allocation, Financial Plan and Financial Planning in India
Wealth Management & the Economy- Financial planning to wealth Management, Economic Cycles and
indicators, Role of Currency and Interest Rates
Wealth Management & the Psychology- Behavioral and Emotional Biases, Market Psychology and
Behavior
Unit-II: Risk and Return: Investment & Risk Management
Equity, Debt, and Alternate Assets – Techniques of Analysis, Leveraging with equity, Valuation of Debt
Securities, Interest Rate and Concentration Risks. Investment Products & Services - Investment and risk
in Gold Mutual Funds and Real Estate and PMS
Investment Evaluation Framework- Risk Return Framework, Risk adjusted Returns
Unit-III: Risk and Asset Allocation
Risk Profiling & Asset Allocation- Risk profiling, Strategic and Tactical Asset Allocation, Fixed and
Flexible Asset Allocation, Asset Allocation in various Asset Class
Risk Management through Insurance- Risk Assessment, Life Insurance, General Insurance and Health
Insurance. Safeguards in Insurance
Unit-IV: Taxation in Investment
Elements of Taxation- introduction, Deductions, Capital Gains, Setting Off and Carry Forward
Taxation of Investment Products – Dividend Tax, Securities Transaction Tax, Taxation of Debt
instruments, Wealth Tax
Unit-V: Estate Planning
Introduction to Estate Planning, Assets and Liabilities, Inheritance Law, Will and Trust
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Acronyms
FBR=G+A+L+I+E
FCF to Equity= EBIDTA-D&A-Interest-
Tax+change in WC-CAPEX+D&A-Net
Debts
FCF to firm=EBIDTA-D&A-Interest-
Tax+D&A+Interest(1-t) +change in WC-
CAPEX

04/30/2023
Group discussions (05 marks)
GD 1-
What will happen if one rupee becomes e
qual to one dollar?
GD 2 - Should people invest in Crypto
currency?
GD 3 -
How can we utilize technology to tackle fi
nancial crimes?
GD 4 - Should the rich and wealthy in
India be taxed more?
 04/30/2023
Group Presentation (10 Marks)
10 Disruptive Trends in wealth
management, A report by Deloitte
Tax Efficient Retirement
Estate planning by Investors
Medicare Needs in present scenario
Five Key aspects of Personal Finance, ET
Money

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Assignment (05 Marks)
Create a Financial Plan using the
parameters of Financial Planning for
any of below category:
A Retired Professional
A working professional of 25 years
A house wife

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Unit-I: Introduction to Financial
Planning
Introduction- Financial Planning, Role of Financial
Planner, Financial Planning Process, Investor’s and
Wealth Life Cycle, Risk profiling and Asset
Allocation, Financial Plan and Financial Planning
in India
Wealth Management & the Economy- Financial
planning to wealth Management, Economic Cycles
and indicators, Role of Currency and Interest Rates
Wealth Management & the Psychology- Behavioral
and Emotional Biases, Market Psychology and
Behavior
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Financial Planning
Financial Planning is an approach to assess
the adequacy of income and assets of a person
to meet the financial requirements for
fulfillment of these needs and aspirations.
Financial Planning is the process of meeting
your life goals through the proper management
of your finances.

Examples of goals:
 - Buying a house (Aspiration)
 - Higher Education (Need)
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Why/Role of Financial Planning
Increasing Needs and Aspirations
Reduced period of earning
Increasing life span
Increased Income levels
Complex Financial Assets
Increased Awareness
Increasing Complexities in Families

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 Role of Financial Planner
Prepare Blue Print of client’s future
Advise for Expenditure, Saving and
Investment
Appropriate Asset Allocation
Insurance Planning
Tax Planning
Estate Planning
Ensuring Financial education of client

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Financial Planning Process
US-headquartered Certified Financial Planner Board
of Standards, Inc. (CFP Board), which grants the
international CFP Certification, has laid down the
following steps:
Establish Client-Planner Relationship
Gathering Client data and goals
Analyzing Client’s financial Status
Developing and Presenting Financial
Planning recommendations
Implementing, Monitoring and Review

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Financial Planning Process

1. 2.
Data Collection Draft Plan
Goal setting Final Plan
Current Analysis Product Suggestions

Execution
Monitoring Follow ups
Follow ups
Query Solving

4. 3.
 Financial Planning Process
Establish Client-Planner Relationship
 Contract and Documentation about
parties involved
 Deliverables and frequency to be
provided by whom
 Documents collected
 Brokerage and service charges
 Data Privacy
 Assurance and Limitations
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Financial Planning Process
Gathering Client data and goals (exercise)
 Tools used can be questionnaire/form
 Family Structure
 Financial Status
 Residential Status
 KYC
 Income of client and family
 Life style, life expectancy, Medical History
 Goals
 Assets Owned and Liabilities to be paid off
 Risk Preferences and covered
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Financial Planning Process
Analyzing Client’s financial Status
Analyze the collected data and form a
balanced opinion through life cycle
 Young and unmarried
 Young and married, with no children
 Married and having young children
 Married and having older children
 Retirement

and wealth cycle

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Financial Planning Process
wealth cycle

Windfall Gain

Transition

Wealth
Creation/Accumulation

Inter Generation Transfer

Start
Financial Planning Process

Risk Profiling

Aggressive
Moderately
Aggressive
Conservative

Risk Averse

Modera
tely
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Risk
Financial Planning Process
Asset Allocation Analysis

Debt -
Gold
FDs

Real Debt -
Estate NSC

Mutual
Funds
Financial Planning Process

Developing and Presenting Financial

Planning recommendations

Implementing, Monitoring and Review

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Systematic Approach to
Investing
Systematic Investment Plan (SIP),
removes the element of timing the market
while investing, fails in continuously
falling markets
Systematic Withdrawal Plan (SWP),
eliminates element of timing while
withdrawing from the market
Systematic Transfer Plan (STP), benefit
of SIP and SWP both

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Financial plan
GoalBased Financial plan
Comprehensive Financial plan

04/30/2023
 Financial Blood Test Report
Status Quo vs. Goal
6000000

5000000

4000000

Current family Income

3000000
Current Family Expenses
Current Asset Holding
2000000
Current Liabilities Holding
Status Quo

current savings Account balance

1000000
current investment in FD/Bonds
current investment in Mutual Funds/Equity
0
e s ce s ) ) current Holding in Gold
m se i ng i ng n nd u ity ol
d
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co pe
n ld ld la o q G su su Any Term Plan (Sum Assured)
In
Ex Ho Ho ba t D/
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s/E in As As
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t ie
s n F n d n g
um um
Any Mediclaim - Family (Sum Assured)
m il y As
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Goal

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Financial Planning
Common Misconceptions

- Financial Planning is for the Rich

- Insurance Planning is Financial Planning

- Tax Planning is Financial Planning

- I am young to think about Financial Planning

- Confuse Financial Planning with investing

Financial Planning Concepts
Investment Planning (Time Value of Money)
Interest

Invest at highest interest

rate possible
Invest as (Best opportunity)
much as
possible &
as often as
possible Money

Time

Invest as long as possible

(Power of compounding)
Financial Planning Concepts
Diversification & Asset Allocation
Financial Planning Concepts
Estate Planning

Estate planning involves making plans for the transfer

of your estate after death. Your estate is all the
property that you own. It can include cash, jewelry,
cars, houses, land, retirement, investment and savings
accounts, etc.

Nominations
Wills
Trust
Wealth Management & Economy

https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=18968

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https://stableinvestor.com/2018/01/nifty-annual-yearly-returns-historical.html
 Economic Indicators
Lag indicators: GDP, unemployment

https://indianexpress.com/article/explained/india-gdp-gdp-fall-7-3-per-cent-in-perspective-modi-govt-coronavirus-economy-7338852/

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https://www.statista.com/statistics/271330/unemployment-rate-in-india/

04/30/2023
Co-Incident Indicators
Consumption of luxury Goods, Life style
expenses

https://helicopter-view.com/blog/luxury-goods-worldwide-market-trends
04/30/2023
Lead indicators (Purchasing Manager’s
index)

https://www.nextias.com/current-affairs/02-12-2021/purchasing-managers-
index-pmi

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Sector Identification
In recessionary situations, investment
may be allocated to sectors like education
and healthcare, where consumption is
unlikely to decline.
As the economy recovers, investment
may be allocated to sectors like luxury
goods, mining and energy stocks

04/30/2023
Interest Rate Views
A lower rate of interest aids economic
growth by increasing investment as loans
become cheaper
In situations of high inflation and / or
growth, RBI adopts a tight monetary policy,
which leads to interest rates going up. If on
the other hand, the economy is weakening,
RBI adopts a liberal monetary policy,
which leads to interest rates going down.

04/30/2023
https://
www.rediff.com/business/report/rbi-leaves-repo-rate-unchanged-at-4-for-7th-time-in-
a-row/20210806.htm

https:// 04/30/2023
Interest Rates and Investment Instruments

 When interest rate is expected to increase, it is

better for depositors to invest in floating rate debt
instruments or fixed rate instruments of shorter
maturities; borrowers will find it beneficial to opt
for fixed rate of interest.
 When the interest cycle turns downwards,
depositors who have invested in fixed rate debt
securities for longer tenors benefit; however,
borrowers who have taken a loan at fixed rate of
interest will be adversely affected by the interest
rate movement.
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Currency Exchange Rate
An investor investing in a currency other
than the domestic currency is exposed to
an additional risk – the risk that the
exchange rate moves adversely
Factors affecting exchange rate are:
Supply and demand
Interest Rate Differential
Foreign Currency inflows

04/30/2023
https://www.xe.com/currencycharts/?from=USD&to=INR&view=10Y

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Revenue and fiscal deficits
Revenue deficit means that the revenue receipts are
not even adequate to cover the revenue expenses.
Fiscal deficit shows the extent to which the
government had to rely on borrowings and other
liabilities to fund its expenditure.
Current Account Deficit is the difference between
the foreign currency received/paid in export/
import activities.
to meet CAD either external borrowings or foreign
currency reserves are used up.

India's current account balance recorded a deficit of US$ 9.6 billion (1.3 per cent of GDP)

04/30/2023
Wealth Management & Psychology
Why… because, emotions overrule Facts
Ease in using Plastic Money
Buying a lottery ticket, knowing that winning
chance is one in million
Unusual rise in Stock prices in the short run
Holding Loss Making Stock in Portfolio
Early Profit Bookings
Investing more stocks of companies , In which they
work
Emotional Attachment to inherited Stocks
Referring to a base amount at the time of Selling
Picking up stocks due to04/30/2023
peer pressure
Prospect Theory
In an Intraday trade you started with
500/-, made 500/- in another hour.
Next day with 500/- , made 1000/- by lunch
and lost 500/- by closing time

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1. Overconfidence
11. Confirmation
Classification of Behavioural Biases
2. Representatives
Emotional
12. Hindsight 1. Endowment
3. Anchoring and 2. Self-Control
Adjustment 13. Recency 3. Optimism
4. Cognitive Dissonance 4. Loss aversion
Bias 14. Framing 5. Status quo
5. Availability Bias 6. Regret aversion
6. Self-Attribution
7. Illusion of Control
8. Conservatism Bias
9. Ambiguity Aversion
10. Mental Accounting

04/30/2023
Cognitive Biases
Overconfidence Bias: unwarranted faith in one’s reasoning
Applications:
Try to predict the range of profits or losses. Also too sure about
their investment choices
Ignore Warning Signals
Undiversified Portfolios
Diagnostic Testing:
Ask if they had to predict Tech Bubble, was it easy for them. If
answer is “Yes”
Also if they rate themselves superior to others in any skill….
Advise:
Track each transaction, ask opinion ..….

[email protected]
Cognitive Biases
Suppose, a company’s share price increased from 25/- to 80/- due to good performance.
Now, one major customer refuses to give new tender to company, and share price has
fallen to 40/-
Anchoring 80/-, you may consider stock available at discount, and fall prey of
Anchoring.

 Representativeness Bias : wrong interpretation of new elements, due to pre

existing experiences
 Anchoring Bias: Expectation of return after adjusting with some initial
value, defined as “Anchor”
Applications:
Develop “Gambler’s Fallacy”, Base Rate Neglect and Sample Size Neglect
Unable to adjust buying/selling prices according to new market situation
Diagnostic Testing:
Investor’s inclination to information, served to him at first instance
Advise:
Each Investment Environment is different ..….
[email protected]
Suggest your best choice plan to investor at priority.
Cognitive Biases
 Cognitive Dissonance Bias: New information contradict to
beliefs, create discomfort
Applications:
Most people avoid potentially relevant information to avoid
psychological conflicts.
Try to modify beliefs at modify actions
Delay in unloading failed investments, Don’t admit investment
mistakes, ignore changes situations
Diagnostic Testing:
Provide your client with better Mutual fund scheme or stock,
which he already has, he tries to favour his decision….
Advise:
Try to convince him to start with your strategy with small sum of
money useful in new client acquisition
[email protected]
Cognitive Biases
 Availability Bias: believing in easily available information
Applications:
Retrieving mutual fund first, with higher advertising
Leads to invest in “Domestic Stocks”
Ignore less talked potential investment avenues (Narrow Range of
Experience and Resonance)
More buying in attention grabbing stocks
Diagnostic Testing:
Client believing COVID-19 as bigger disease than other regular
death causing diseases
If your client deviates from well researched stock to hot pick stock
easily
Advise:
Study Hot Tips before investing [email protected]
Cognitive Biases
Self Attribution Bias: Giving credit to self for success, blame
others for failure.
Applications:
Giving Much Credit to self for success (Self-enhancing)
Irrational denial towards failure (self-protecting)
Unable to learn from mistakes
Susceptible to overconfidence bias
Diagnostic Testing:
Asking client about strength and weakness in initial meeting
Ask client about his investment experience
Advise:
Post analysis of Winning and loosing investments

[email protected]
Cognitive Biases
Illusion of Control Bias: tendency to control / influence outcomes.
Applications:
Unable to learn from mistakes
Susceptible to overconfidence bias
Hold undiversified Portfolio
Investors prefer investment avenues, which they think they can control
Diagnostic Testing:
Asking client about his preferences for driving a car or filling the form
on his own
Advise:
Make investor realized about complexity of markets and disclaimers.
Provide contrary viewpoint
Post Analysis of Winning and Loosing Portfolio

[email protected]
Cognitive Biases
Conservatism Bias: tendency to cling to prior views.
Contrary and co existent to Representativeness bias
(Ward Edward’s Urn experiment)
Applications:
Under reaction/ Overreaction to market news
Forecast of future dividends attract more customers
Holding on Investment for longer times/ slow shift
Diagnostic Testing:
Share bad news about his stock, notice his reaction
Advise:
Provide clear cut, well analysed information to investor
[email protected]
Cognitive Biases
Ambiguity Aversion Bias: hesitant tendency in situations of
ambiguity.
Applications:
Investors take decisions if they feel themselves competent first
(Competency Effect)
More confident about local investment options (Domestic Effect/
Home Bias)
Ambiguity Premium
Diagnostic Testing:
Seek opinion on different topics and notice reaction
Advise:
Continuous investor education, Alert them from Trading too
frequently,
[email protected]
Cognitive Biases
 Mental Accounting Bias: Grouping of assets in mental accounts.
Applications:
Different types of incomes are compartmentalized to meet different expenses
Higher preference to regular income generating instrument, funding some
specific expense
Cling to worthless investment and “House Money Effect”
Investing in FD for specific purpose, paying expenses through debit card
Diagnostic Testing:
Situations if clients easily pay more than estimated amount for an
expenditure, or not
Advise:
Check correlations between Mental Buckets
Piecemeal approach attract higher costs,
Use mental accounting for “Goal Based Planning”

[email protected]
Cognitive Biases
 Confirmation Bias: tendency to confirm self beliefs and devaluing
contradictory.

Applications:
Over concentrating self companies stocks (Classic case of IBM)
Under diversified portfolio
Diagnostic Testing:
Noticing if client is talking only positive about his existing holdings
Advise:
Gradually make client aware of his biased behaviour by providing well researched
information
evident during Tech Bubble

[email protected]
Cognitive Biases
 Confirmation Bias: tendency to confirm self beliefs and devaluing contradictory.

Applications:
Over concentrating self companies stocks (Classic case of IBM)
Under diversified portfolio
Diagnostic Testing:
Noticing if client is talking only positive about his existing holdings
Advise:
Gradually make client aware of his biased behaviour by providing well researched
information
evident during Tech Bubble

[email protected]
Cognitive Biases
 Hindsight Bias: tendency to have an impulse “ I know it all along”

Applications:
Under Estimate Uncertainty, don’t learn from mistakes, develop
overconfidence
Excessive risk takers
Diagnostic Testing:
Noticing if client is concerned about performance or non performance of his
selection, interested in post analysis or not
Advise:
Gently point to the facts through story telling to the client, ask him to
recapitulate post events, educate not to blindly praise or criticize fund
manager

[email protected]
Cognitive Biases
 Recency Bias: tendency to recall recent incidents easily. Based on logic of Free Call test, which is
U shaped. Recency bias denotes the right side of Serial position Curve/ Free Call test.

Applications:
Over weightage to recently talked assets
Can become misguided confident by seeing narrow horizon of investment
Ignore fundamental value, ignore proper asset allocation
Diagnostic Testing:
Asking criteria to choose mutual fund scheme (1-3 yrs performance, 5 yrs performance or beyond that)
Ask names of bureaucrats, and notice if they recall recent ones easily
Advise:
Giving well analysed data to client for investment decision
Not only include “Hot Money” assets in portfolio
Follow a piggy Bank approach

[email protected]
Cognitive Biases
 Framing Bias: looking at the same situation with different mindset

Applications:
Investor’s preference may change due to differently framed (gain frame/loss frame) information
Optimistically framed advertisements
Framing+Loss Aversion together can cause excessive risk aversion

Diagnostic Testing:
“By giving XYZ medicine 25% patients will be saved, 75% patients will die in absence of
medicine”.
Advise:
Positively framed information to be presented
Listening to his beliefs, and gradually advising you opinion

[email protected]
Emotional Biases
Suppose You have inherited 100 HCL Technologies shares from your grandfather, you already have enough exposure to IT sector,
will you , a) Hold b) easily sell off for balancing of Portfolio

Suppose you and your friend resides in two different societies in the same location,: a) do you rate your society better or b)
your friend’s society

 Endowment Bias: accessing property more when under possession or falling in love , with what we possess
Applications:
Inclination towards Inherited and purchased Securities
Decision Paralysis, followed by herd leads to stagnant markets
Passive Portfolio Management
Diagnostic Testing:
Try to explore about the inherited securities and existing investment
Advise:
Advise can be tailored keeping Inheritance securities, Purchased securities, commission aversion and desire of familiarity of
client
Stress on future financial needs
Gradual shift in Investment choices

[email protected]
Emotional Biases
 Self Control Bias: tendency to consume today at the expense of saving for
tomorrow
Applications:
Developing a saving behaviour
Saving and Spending tendencies mapped against different stages of life (life-cycle
Hypothesis- Shefrin and Thaler-SMTP)
“Hump Shaped” saving profile
Having Mental Accounts- Current Income, Current Assets, Future Income
Diagnostic Testing:
Observing clients life style and standard of living and enquiring on retirement
planning
Advise:
Introduce forced saving instruments, show power of compounding and long term
survival needs
[email protected]
Emotional Biases
 Optimism Bias: having a belief that bad investment will not happen
to them
Applications:
Downsizing the risk
Leads to home bias and domestic effect
Leads to Overconfidence
Diagnostic Testing:
Get idea on expected return from investments
Advise:
Save Regularly, Diversified asset allocation, advise regularly

[email protected]
Emotional Biases
 Loss Aversion Bias: stronger impulse to losses, generally twice. So a “risk premium” is demanded
Applications:
Carry Non performing investments, additional investments on unviable projects, spending on repairs
Hasty profit booking
Leads to “Disposition Effect”- risk seekers for loss and risk averse in gain scenario
Lower Returns by taking more risk defined as “Myopic Loss Aversion”
Attract higher cost due to high churning
Diagnostic Testing:
Get idea if investors have big chunk of investment in Bonds.
Asking questions like:
What will you choose: sure gain of 5%, 50-50 chance of gaining 15% or loosing 5% (Risk averse)
What will you choose: sure loss of 2%, 50-50 chance of gaining 15% or loosing 5% (Risk Taker)

Advise:
Advise client not to pay too much attention to short term changes in investment
Not to hold loss making investment for too long
Consider tax implications before selling profit making investments

[email protected]
Emotional Biases
Status Quo Bias: tendency to prefer “No Change”
Applications:
Emotional Attachment to Inherited Assets
Status Quo+ Loss Aversion= No Review of Assets
Diagnostic Testing:
If investors are hesitating, to offload excess portion of a specific asset
category

Advise:
Don’t give forceful advise on inherited assets
Provide proper calculation about offloading assets pending for decision

[email protected]
Emotional Biases
Regret Aversion Bias: delayed decisions
Applications:
Carry Non performing investments,
Avoid equity Markets, become too conservative
Delayed profit booking
Cause errors of Commission and Omission
Intensifies in presence of loss aversion tendency
Leads to herd tendency
Motivates to prefer large cap companies
Diagnostic Testing:
If investor is not sure about confirming to sell/buy call from broker

Advise:
If client is too conservative, give him clear picture about compromised returns
Offer hedging strategies
Provide data for promising growth stocks, ask client to consider
[email protected]
 Investment Behavior :
Herd Tendency  Momentum builds as more and
more joins the rally, SENSEX
reached 21000 in 2008
 Followers can end up paying the
price, SENSEX fell 8000 in 2008
 Invest under peer pressure
 Herding Leads to lazy Thinking
Takeaway for Advisors:  Leads to Optimism and
 Advise client as per his risk overvaluation of stocks, finally
profile leading to “Bubbles”
Takeaway for Investors:  DOT COM bubble and its sequel
 Identify your own risk appetite , may be….
 Don’t follow market tips
blindly
 Be a Contrarian Investor [email protected]
 Greed and Fear
Endowment effect
and Loss Aversion
Decision Paralysis

+ +
Herd

[email protected]
 What you will achieve……
 Be a Financial Advisor who can, customize as per
investor’s beliefs and personality

Be a Financial Advisor who can give, Better delivery of

returns as per investors expectations

Be a Financial Advisor who , Helps investors to

identify what “NOT TO DO” while investing and learn
from mistakes

Achieve a Humble relationship between client and

advisor, ensuring “Mutual Benefit”
[email protected]
Unit-II
Risk and Return: Investment & Risk
Management
Equity, Debt, and Alternate Assets –
Techniques of Analysis, Leveraging with
equity, Valuation of Debt Securities, Interest
Rate and Concentration Risks. Investment
Products & Services - Investment and risk in
Gold, Mutual Funds and Real Estate and PMS
Investment Evaluation Framework- Risk
Return Framework, Risk adjusted Returns

04/30/2023
Equity
Growth Asset- Returns are in form of
Dividend or Growth
Active Equity
Passive Equity- buying an Index
Tracking Error- (+ or –), timing lag or cost
Exposure Risk

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Active vs Passive Equity Selection

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Fundamental vs. Technical Analysis

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Approaches for Fundamental Analysis
Dividend Discounting
Gordon Growth Model [DPS ÷ (Required Rate of Return on
Equity – growth rate)]

P=E(1-b)/ke-br

Free Cash Flow

Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity
(FCFE).

FCFF = PAT + Depreciation & Amortisation + Interest (1 – Tax

Rate) – Normal Working Capital Investment – Normal Fixed
Capital Investment

FCFE = FCFF – Interest (1-tax rate) – Loan Repayment

04/30/2023
F
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74
 Know the essential terms in Simplest Way

EBIT NET Profit

( Earnings )
Earnings per
share (EPS)
Cost of ROE ( Return
ROCE ( Return
on Capital
Capital on Equity ) Employed )
Price Earning Book Price to Book
Ratio ( P/E ) Value Value ( P/B )
NIM ( Net Free Cash
Interest Margin) flow

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 Return On Equity (ROE)

 ROE – How effectively management is using company’s asset to create profit

for share or equity holders
ROE = NET INCOME / Average shareholders'
Equity
 Suppose,
 Net Profit 20 Lakhs, Shareholders' Equity 80 lakhs
 ROE = 20,00,000/ 80,00,000 = 25 %

 What should be Ideal ROE



 Less Than 10 : Poor , Greater than 14 : Fair

 More than 20 : Good More than 25 : Excellent
 It varies sector wise, if it’s less than industry average :
poor
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 Use OF Return On Equity

 Management effectiveness to create wealth to equity

holders
 To forecast FUTURE GROWTH RATE of company
 Multiply ROE with Retention Ratio to forecast future
growth rate
 Retention ration : The ratio of profit retained to fund
future growth of company
 To Arrive SUSTAINABLE GROWTH RATE for
company

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 ROCE–Return on Capital Employed

 ROCE tells how A company generate return on Capital Employed

 ROCE = EBIT / CAPITAL EMPLOYED
 Capital Employed = TOTAL ASEETS – CURRENT
LIABILITIES
 Capital here DEBT and Equity
 ROCE must be > Cost of Capital
 ROCE is very relevant for capital intensive industry like Auto,
Telecommunication, Engineering

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 Dividend Payout Ratio and Future Growth Rate

 IfNet Profit 20 Lakhs, Expected Future growth rate =

ROE * Retention Ratio
Shareholders' Equity 80
lakhs, = 25 %* 80 % = 20 % or
 ROE = 20 L/ 80 L = 25 % Sustainable Growth rate = ROE *
( 1- Dividend payout ratio )
 Out of 20 Lakhs ,
= 25 % *80 % = 20 %
Dividend payout is 4 If company pay less dividend say 15 %
Lakhs Expected Sustainable growth rate
 Dividend Payout Ratio = = 25 % ( 1- 15 %) = 25 % * 85 % = 21.25
%
4 L / 20 L = 20 %
If we cut dividend to ZERO
 Retention Ratio 80 %
SGR will be 25 % without any borrowing

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 Utility of P/E Multiple

 P/E is most discussed ratio in Stock Analysis

 P/E tells us how much price Multiple I have to
pay to buy a stock
 It should be compared with Industry Average
 High P/E indicates inflated price and low
undervalued price
 Below Industry average P/E means Poor Quality
Stock
 Sometimes irrelevant in practical terms

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 More on P/E

90% of Companies not able to

generate Earning Growth ,so,
Price = P/E * Earnings Price moves up /inflate in Bull
Market on News and Rumours
and finally price goes down.

In case of very high

quality company
High P/E justify future
price growth.

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 Book Value

Book Value = Total Assets - Total Liabilities

 Suppose, Total Assets= 8 Cr. And Total Liabilities= 2 Cr.
 Book Value = 8 Cr. – 2 Cr. = 6 Cr.
 Number of Shares = 20Lacs
 Book Value per Share = 6 Cr/20 Lacs = 30
 Market Price of Share = Rs. 90

P/B Ratio = Market Price / Book Value per share

 = 90 / 30
 =3
 It means, Current Stock Market Price is 3 Times of Book Value.

Ideal Book value should be close to 1, but after 10

in some growth stocks price seems inflated and this
is more relevant ratio than P/E Ratio.
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 Free cash flow

Free Cash Flow = ROCE - Cost of Capital

 (Excess Cash generated over and above the Cost of Fund, to
reinvest in company to grow the business)
 ROCE of some Great Companies
Nestle_____% , Dr. Lal Path Lab _____%
Asian paints _____% Relaxo ______%

So, these companies are Capable of Reinvesting 10 - 20% every year

in Business, because of High Capacity to generate free cash.

Ultimately, Great Value to Investors!!!

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 Comparison of Return on Capital Employed

Comparison of ROCE
  Company A Company B

Sales 20000 50000

EBIT 4500 15000

Total Asset 16000 120406

Current Liability 3000 30210

Capital Employed 13000 90196

ROCE 35% 17%

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Investment
Speculation
Leveraging- Derivatives, Margin Trading, Term Loan
Intraday

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Delivery(cash)

https://asthatrade.com/blogs/highest-margin-
brokers-in-india-full-comparison/
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Few examples

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Debt- investment and Risk Management

Debt is an income asset.

Debt may not protect investors against
inflation. However, it fluctuates less than
growth assets like equity. Debt provides a
stabilizing influence in a portfolio that
also includes growth assets.
Fixed deposits (with a bank or company)
or debentures

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Debt- investment and Risk Management
FD vs Debenture
Valuation of Debt Securities
Perpetual debt : P = A ÷ y
A discount debt is valued as :
P = MV ÷ (1 + y)^n
Normal coupon bearing debt is valued as :

P = {CF1 ÷ (1 + y)1} + {CF2 ÷ (1 + y)2} ………+{CFn ÷ (1 +

y)n}
XIRR function for Calculating Yield
Duration: Duration indicates the years it takes to receive a bond's true
cost, weighing in the present value of all future coupon and principal payments.

MDURATION for calculating Modified

Duration

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Passive Investment in Debt
ICICI Securities’ Total Return Index
(TRI)
NIFTY 10 yr Benchmark G-Sec Index

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Alternate Assets- Investment and Risk
Management
Gold
GMS (Gold Monetization Scheme)- 2015
E gold
Gold ETF
Gold Index Fund
Bullions and Gold futures
Gold Sector Funds

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Alternate Assets- Investment and Risk
Management
Real Estate
Physical
Real estate sector funds
Physical LTCG 3 years, sector Real Estate
LTCG 1 year
Real estate venture capital > 1 cr.
REITs: It is a company that owns or
finances income-producing real estate.

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Embassy REIT (started in 2017), Brookfield
REIT (commenced in 2019), and Mindspace
REIT (began in 2020).

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Payoff
Reverse positioning of an asset
Long Position and short position
Derivatives are hedging and leveraging
asset class
Futures and Options
Futures are Zero Sum Gain Contracts
Options are either call (+) or put (-)

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Some more Asset class..
FMPs
MIPs
PIPEs
Hedge Funds

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PMS
PMS are regulated by SEBI, under the
SEBI (Portfolio Managers) Regulations,
1993.
The protective structures of board of
trustees, custodian etc. is also not
available.

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Investment evaluation Framework
Risk-Return Framework
Portfolio Return Risk

A 1% 1%

B 1% 2%

C 2% 1%

D 3% 3%

Risk: Standard Deviation(stdev) and Beta(slope).

(money control)- DSP Natural Resource and New Energy fund

Unlike standard deviation which uses its own

past standards for the calculation, Beta
measures risk as compared to a diversified
equity index.
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 Investment evaluation Framework
Risk Adjusted Returns: how well the returns are covering for the risk
taken in investing.
Sharpe Ratio:
12% return from an investment portfolio, whose standard deviation is
0.5. risk-free return of 7%
portfolio yielded a return that was higher by 12% minus 7% i.e. 5%.
This is his risk premium,
If the risk premium of 5% is divided by the standard deviation of 0.5, we
get a value of 10%.

(Portfolio Return minus Risk free Return) ÷ Standard Deviation

comparison of two portfolios of the same type, the one with the higher
Sharpe Ratio is considered to have delivered superior risk-adjusted
returns.

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Investment evaluation Framework
Treynor Ratio: Treynor ratio uses beta, instead
of standard deviation, as a measure of risk.
(Portfolio Return minus Risk free Return) ÷
Beta of the Investment.
if Beta of the portfolio was 1.25, then Treynor
Ratio would be 5% ÷ 1.25 i.e. 4%.
In a comparison of two diversified equity
portfolios, the one with the higher Treynor Ratio
is considered to have delivered superior risk-
adjusted returns.
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 Investment evaluation Framework
Jensen Alpha: Alphais a measure of the portfolio
manager’s performance.

Actual return- (RFR+ (beta*(Market return-RFR

return)
Alpha compares the return which ought to have been
generated (for the risk taken) by the scheme with the
return that was actually generated. The difference between
the two is out-performance (if actual return is higher) or
underperformance (if actual return is lower). Between two
managers of competing diversified equity portfolios, the
one with higher alpha is considered to have delivered
better risk adjusted returns.
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SSELECTIVVELLY – Invest Classification
Scheme for Investment Products
Source (Issuer)
Sector
Exposure (Asset Class)
Liquidity
End (Maturity)
Cost
Tax Exemption
Insurance level
Vehicle (The structure through which investment is being made, e.g. Direct,
Mutual Fund, Insurance, PE Fund, VC Fund, Structured Product, etc.)
Valuation
Exchange Rate
Leverage (asset class)
Leverage (foreign currency)
Yield

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Asset Allocation
A young investor- equity-debt mix of 80:20.
A senior citizen - Equity-Debt mix of 20:80
A client who is in transition mode– Parking
of funds
A client who has earned windfall gains –
Risky assets

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Asset Allocation

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Asset Allocation

Flexible Asset Allocation

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Elements of Taxation

•Income from subletting of a house property by a tenant.

•Casual income.
•Insurance commissions received by the assesse.
•Family pension payments received by the legal heirs of dead employees.
•Interest on bank deposits and deposits with companies.
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Income Tax Slabs

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Income Tax Slabs

Advance Tax

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Income Tax Slabs for LLP and Company

Surcharge: <10 cr = 7%
Surcharge: >10 cr = 12%
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The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed
between India and another country ( or any two/multiple countries) so that
taxpayers can avoid paying double taxes on their income earned from the
source country as well as the residence country.

Withholding Tax Rate= 20% or tax slab which ever is higher

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Deductions U/S 80CCC and 80CCD

Under Section 80CCC of Income Tax Act

1961, an individual can claim tax
deduction for contributions made to
certain pension funds.
Section 80CCD relates to the deductions
available to individuals against
contributions made to the National
Pension Scheme (NPS) or the Atal
Pension Yojana (APY). 

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Deductions U/S 80D and 80E, 80GG
 Under Section 80D, you are allowed to claim a tax
deduction of up to Rs 25,000 per financial year on
medical insurance premiums. This limit applies to the
premium paid towards health insurance purchased for
you, your spouse, and your dependent children.
 This deduction on repayment of education loan can be
claimed by the individual for self, spouse, children,
and a person for whom he is a legal guardian. The
person who is repaying the loan for the above mentioned
people can take benefit of 80E deduction upto entire
interest but not on principal amount
 Individuals residing with their parents in a property
owned by their parents are also eligible to claim
Section 80GG benefits upto04/30/2023
60,000, if not claiming HRA
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Unit-V: Estate Planning
Introduction to Estate Planning, Assets and
Liabilities, Inheritance Law, Will and Trust

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