Professional Documents
Culture Documents
Agenda
Financial Planning concepts Wealth creation principles Mutual Funds nuts and bolts Mutual fund myths vs. realities Mutual fund Sales pitch
Why do we invest?
Steps in Financial Planning Process Goal Setting based on data gathered. Asset Allocation. Implement and Monitor. Review and Rebalance.
Ram at, 30
I am well prepared for my retirement: when I retire, my retirement savings will total Rs. 80 lakhs which gives me about Rs. 40000 p.m.(@0.5%p.m) to meet my household expenses. This is more than sufficient
30 years later
Ram at, 60
I now have Rs. 40,000 p.m. to meet my household expenses, but it buys less than Rs. 10,000 of what it used to buy 30 years ago. To lead the same quality of life, I need over Rs. 2.3
The problem?
Ram failed to factor in inflation into his calculations.
Consider: To buy Rs. 40,000 worth of goods and services when he was 30 years old, John would need Rs. 2,30,000 at 60.
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10 years
20 years
30 years
40 years
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Basics of Investing
When it comes to financial planning, we normally think of accumulating a certain amount first and investing the savings in a lump sum. This however may not be feasible since certain expenses assume priority over savings. For example, it is not possible to plan overnight for a childs education or marriage. These are heavy expenses which require adequate time and planning, without feeling the pinch at the time of expense.
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Important factors
Set Measurable Financial Goals Set Measurable Financial Goals Understand the Effect of Each Decision Understand the Effect of Each Decision Re-evaluate Financial Situation Periodically Re-evaluate Financial Situation Periodically Start Planning ASAP Start Planning ASAP Set realistic expectations Set realistic expectations You are in-Charge of the process You are in-Charge of the process
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Why Save?
Phase III
Distribution of Wealth
Over 25 - 30 yrs
Earning Years
60 yrs
Retirement
Age
Savings Vs Investing Why Save? Consider this: HUMAN LIFE CYCLE Age 23.yrs. Starts off career (100% dependent on Job) Age 40 yrs. Builds a House Age 45 yrs. Pay for Sons/Daughters Professional Degree Age 50 yrs. Arrange for Daughters Marriage Age 60 yrs. Retirement (100% dependent on earnings from Investments) And What are the factors underlying expenses? Expenses are a factor of:Inflation Higher Life Expectancy New Products/ alternatives available Change in Income and Consumption Levels
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Luxury OR Necessity?
To maintain a standard of living & to also meet future goals
Items
Mobile Phones Colour T. V. Telephone Washing Machine Microwave Two-wheeler / Car
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Childs Education
Climb High, Climb Far, Your Aim the Sky, Your Goal, the Star
As human beings, every parent/s vision is to facilitate the best potential upbringing for their child/Children. As a parent, the dream would be to plan for your child in such a way that all their future necessities are properly taken care of and there is no running around at the time when actual necessity arises. And for a proper plan to be in place we need to take into account all the realities of the times we are living in. Have You planned for it?
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3.5 lacs 5.0 lacs 2.0 lacs 6.3 lacs 8.9 lacs 3.6 lacs 11.2 lacs 16.0 lacs 6.4 lacs
ENGINEERING
YEAR 2020
MEDICINE MBA
YEAR 2030
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Why Invest?
Why Invest?
To beat Inflation i.e. preserve existing wealth To fund future needs To meet contingencies To maintain same standard of living after retirement.
Many of us do not realize how inflation keeps on eating into our purchasing power. If you had a monthly expenditure of Rs 10,000 today, what would you need to have the same standard of living in different years, considering the fact that prices keep going up at the current rate ? Yes we are talking about the impact of inflation ! Let us look at the impact of inflation.
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102,800
10 years
20 years
30 years
40 years
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Why Invest?
Emergencies????
Kid 2s 2 Marriage Kid 1s 1 Marriage House
Retirement
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Income
Kid 2s 2 College
Marriage
Savings / Investing
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Birth and Education
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Age
Working Life
60
Retired Life
75 +
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There are two ways we make money: Through our Profession Through our Investments.
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Investors Psyche
The cy cl e o f fea r, g re ed a nd ho pe
Wrong emotions at the wrong time!
Fear
Greed
Ho p e
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Different Objectives
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Spreading risks
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INCOME INCOME
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Getting ones timing right is a different story altogether. It is very difficult to time the market
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PANIC DEPRESSION
HOPE
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Have long term view in Equity Investments to tide over Cycle of Market Emotions: The above graph is only for illustration purpose. It does not suggest or indicate investors behaviour at different market levels.
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They say, wealth creation is not a function of income; it is not a function of investment expertise Its a matter of Regular Savings!
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Assuming 7% p.a.
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Illustration
The illustration in the previous slide on two different investment periods 40 years and 25 years clearly indicates that if an investment is started at an early stage on a regular basis, good amount can be accumulated to ensure a comfortable living. If you start at a later stage in life, then the amount would be considerably less. To catch up with the person who has started early, You will have to either save and invest much larger amount per month and /or your investment should also earn very high rate of return, assuming 7% p.a.
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FV = PV(1 + r)n
FV = Future Value PV = Present Value r = Rate of Return/ Coupon Rate n = No. of compounding periods Applications aside, what do you think this equation really signifies? The essence of how to create wealth!
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Here's some food for thought: the more you save, makes a bigger difference than you could possibly imagine. For instance a nominal additional saving of Rs 500 a month, translates into an extra 1.5 lacs saved over 25 years. Compounded @ just 7% per annum, it would mean extra 4.07 lacs.
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Past performance may or may not be sustained in future And there's a cost for delaying, too
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Finally, the more you earn, can make a huge difference, over time
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Investment Options
Real Assets Property Gold & Precious Metals Commodities Arts & Collectibles.
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Investment Options
Financial Assets Equity Debt Money Market instruments Commodity & Financial Derivatives Mutual Funds ULIP.
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Comparison
Investment Objective Equity Cap Growth FI Bonds Income Corp. Deb Income Co. FD Income Bank FD Income PPF Cap Growth/Income Insurance Risk Cover Gold Inflation Hedge Real Estate Inflation Hedge Mutual Fund Cap.Growth,Income Products Risk Tolerance High Low H-M-Low H-M-Low Low Low Low Low Low H-M-Low Investment Horizon Long Term M - L Term M - L Term Medium Flexible Long Term Long Term Long Term Long Term Flexible
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Mutual Funds
Investing Wisely
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High
Low
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Investing Wisely
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Investors
Contribute money Receive dividend/capital appreciation
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GROWTH SCHEMES
By Investment Objectives
INCOME SCHEMES BALANCED SCHEMES LIQUID/FLOATER SCHEMES TAX SAVING SCHEMES SPECIAL SCHEMES SECTOR SCHEMES
Other Schemes
Do not tax Aims to provide Offer issue Aims at Investors are Aims at This Units for capital Aims join providing easy rebates free to to providing category Sectoral Repurchase, appreciation provide liquidity, to fund the the includes both funds redemption Over & regularunder investorsthe preservation or Index& growth arewithdraw ideal On capitalto medium for steady income thea periodic offrom the& tax laws Schemes who income. investors that Basis. Units can long term. to investors. prescribed. moderate fund Ideal for Beattempt have Idealredeemed for retired Eg., Equity income. at any time Investors to Only & Ideal for already peopleon Linked Savings after an looking for replicate Termination investors to decided in Others, with Corporates & Schemes Initialalock-in the their thein theOf prime need for Individual (ELSS). investYou period. performance combination scheme, earning years, capital investors as a Idealbuy or scheme acanof a & particular Of Through who are stability & means to park for Sector sell at particular Income & Dealings in the seeking growth regular their surplus Investors or at unitssuch Index the moderate Secondary over income funds for short seeking Segment NAV related growth as term market long the tax rebates periods BSE or NSE 50
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Equity Funds
ACTIVE
DIVERSIFIED
NONDIVERSIFIED SECTORAL
GROWTH
VALUE
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Investment Philosophy
Value Manager
Looks to buy companies they believe are undervalued in the current market, but whose worth (as estimated by the fund manager) eventually will be recognised by the market.
Growth Manager
Looks for companies with above average earnings growth and profits, which they believe could be even more valuable tomorrow in the stock market than today.
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Growth Vs Value
Another dimension for looking at an equity fund is whether it's following a value or growth style of investing. Both growth- and value-oriented investments can be important components of a diversified portfolio. Value investing:- Value managers tend to look for companies trading below their intrinsic value, but whose true worth they believe will eventually be recognized. These securities typically have low prices relative to earnings or book value, and often have a higher dividend yield. For example, these companies are found in out-of-favor industries. Growth investing. Growth managers look for companies with aboveaverage earnings growth and profits which they believe will be even more valuable in the future. They also look for companies that are well position to capitalize on long-term growth trends that may drive earnings higher. Because these companies tend to grow earnings at a fast pace, they typically have higher prices relative to earnings.
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Capital Gain
Short-Term (not exceeding 12 months) Marginal Tax Rate
25% + SC + EC
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INVESTMENT HORIZION
RETURN
SECTORAL FUNDS INDEX FUNDS EQUITY FUNDS
LIQUID FUNDS
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ST DEBT FUNDS
BOND FUNDS
RISK
Capital Appreciation
As the value of securities in the fund increases, the fund's unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought
Income Distribution
The fund passes on the profits it has earned in the form of dividends
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Investment Options
Funds offer 3 options: Dividend income is distributed to unit-holders Dividend re-investment income is reinvested at prevailing NAV; this leads to increase in no of units Growth the investment income is ploughed back into more investments; no of units remains same and value increases Both Dividend re-investment and Growth options allow compounding; automatic reinvestment plans can be used for the purpose.
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Investment Strategies
Buy and Hold Rupee Cost Averaging Value Averaging Combined Approach Active Switching Triggers
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Value Averaging
Value Averaging (VA) involves A fixed amount is targeted as desired portfolio value at regular intervals If market moves up, the units are sold and the target value is restored If market moves down, additional units are bought at the lower prices Over a period of time, the average purchase price of the investors holding will be lower than if one tries to guess the market highs and lows VA is superior to RCA because it enables the investor to book profits and rebalance the portfolio Investors can use the systematic withdrawal and automatic withdrawal plan to implement value averaging Investors can also use an equity and a money market mutual fund to implement value averaging.
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Value Averaging
Month # 1 2 3 4 5 6 7 8 9 10 11 12 Target Value 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 NAV (Rs) 10.00 12.50 14.25 11.75 10.50 9.00 8.50 7.65 8.80 9.25 12.00 15.00 Value of Holding 100.00 1,250.00 2,280.00 2,473.68 3,574.47 4,285.71 5,666.67 6,300.00 9,202.61 9,460.23 12,972.97 13,750.00 Units to invest 100.00 60.00 50.53 129.90 135.76 190.48 156.86 222.22 (23.02) 58.35 (164.41) (116.67) Cum no of units 100.00 160.00 210.53 340.43 476.19 666.67 823.53 1,045.75 1,022.73 1,081.08 916.67 800.00
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Asset Allocation
INSURANCE
REAL ESTATE
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COMMODITY
ASSET ALLOCATION
SAFETY
LIQUIDITY
Asset Allocation
Diversifying portfolio among asset classes such as bonds, stocks, real estate, or cash
Referred to in terms of the target percentages for each asset class. For example, a portfolio could have a mix of 60 percent stocks, 30 percent bonds and 10 percent cash.
Financial representation of an investors personality. The ideal asset allocation is one that best balances an investors profile and objectives
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Asset Allocation
Distributing investments among various asset classes (e.g., stocks, bonds, real estate, art, gold). Referred to in terms of the target percentages for each asset class. A large part of financial planning is finding an asset allocation that is appropriate for a given person in terms of their appetite for and ability to shoulder risk.
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Asset Allocation
Myth If you choose the best performing scheme without proper asset allocation you will unlikely generate optimum return. Reality 80% of optimum portfolio return is generate through proper asset allocation. Rest is dependent on other factors such as scheme selection etc.
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RISK PROFILE
ASSET ALLOCATION
FINANCIAL GOALS
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Asset Allocation
Asset allocation differs from investor to investor and depends upon their situation, their financial goals and risk appetite The asset allocation for an investor depends upon his life and wealth cycle stage A model portfolio creates an ideal approach for an investor situation and is a sensible way to invest.
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Dream vacation in Europe or an exotic location Buying a BMW Buying Rolex watches or any lifestyle products
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Investment Strategy
Short-term 10% Bonds 15%
Planning to purchase a
house in the next ten years Creating long-term wealth for retirement / house
Stocks 75%
Asset allocation - based on life cycle. This is just for illustration purpose This does not suggest any ideal allocation .
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Balanced Portfolio
Investment Strategy
Short-term 20%
Stocks education (5 - 8 years) Planning for childs wedding 50% (15 - 20 years) Planning for retirement
Asset allocation - based on life cycle. This is just for illustration purpose This does not suggest any ideal allocation .
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Bonds 30%
Investment Strategy
Stocks 20% Bank Deposits 40%
Planning for
Asset allocation - based on life cycle. This is just for illustration purpose .This does not suggest any ideal allocation .
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The ownership of the Mutual Fund is thus joint or mutual; the fund belongs to all A single investors ownership of the fund is in the same proportion as the amount
of contribution made by him or her bears to the total amount of the fund A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objectives, e.g. Equity fund buys equity assets, Debt funds buys debt instruments, etc. Professional management - Expertise has become key as the dynamics of the capital markets in India has undergone sea change over the past few years. Service - Over time the differentiation would come down to servicing Diversification - helps reduce risks Affordability - potential for reaching out to a large populace
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Sales Pitch
There are a wide range of good performing funds available and based on the investment horizon and risk-return profile of the investors, they can select from amongst large cap, flexi-cap, thematic funds to capitalize on the growth opportunities available. Portfolio allocation to Equity through Systematic Investment Plan in good performing diversified equity funds for a long term investment horizon of at least 3 years, Systematic transfer plans from debt to equity at dips in equity markets, disciplined approach of investments by investing early and regularly to benefit from the power of compounding, regular booking of profits and systematically transferring gains to debt (STP from Equity to debt) should be the ways . Conservative investors too can start building equity gradually in the portfolio by investing in blended products, specially the MIPs . Look at consistency in terms of dividend paying record. Short-term debt plans & dynamically managed debt funds, which invest across maturities and volatilities and gradually look to transfer the monies in good performing equity funds are also the options available to invest. In this way investors can participate in both debt and equity allocation.
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Investment Fundamentals
So, Pl remember, to :Save Regularly Invest Regularly for a long term basis Invest in good performing funds, with proven track record, on systematic basis Start investing early in life with goal based/target based investment approach Benefit from the power of compounding on a long term basis Investors need to be realistically optimistic, have investment horizon of at least 3-5 years and make use of every dip in market as an investment opportunity to build equity portfolio, skip fear and sentiment based motive of investment, focus on consistent past performance of the funds and benefit from the diversification through Mutual Funds investing. Yes, its that SIMPLE!
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This document is prepared by ICICI Prudential Asset Management Company Limited for general information and educational purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of ICICI Prudential Mutual Fund.The contents are based on publicly available information and are not intended to provide professional advice and should not be relied upon in that regard. Statutory Details: ICICI Prudential Mutual Fund (the Fund) was set up as a Trust sponsored by Prudential plc (through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) and ICICI Bank Ltd. ICICI Prudential Trust Limited (the Trust Company), a company incorporated under the Companies Act, 1956, is the Trustee to the Fund. ICICI Prudential Asset Management Company Ltd (the AMC), a company incorporated under the Companies Act, 1956, is the Investment Manager to the Fund. ICICI Bank Ltd and Prudential Plc (acting through its wholly owned subsidiary namely Prudential Corporation Holdings Ltd) are the promoters of the AMC and the Trust Company. Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market and there can be no assurance that the fund's objectives will be achieved.. Past performance of the Sponsors, AMC/Fund does not indicate the future performance of the Schemes of the Fund. The Sponsors are not responsible or liable for any loss resulting from the operation of the Schemes beyond the contribution of an amount of Rs.22.2 lacs, collectively made by them towards setting up the Fund and such other accretions and additions to the corpus set up by the Sponsors. All figures and other data given in this document is dated. The same may or may not be relevant at a future date. Prospective investors are therefore advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund.
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Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/are liable for any decision taken on this material.
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