Monday, 27 August 2018

Mutual funds short notes 6

Chapter 11
• The costs mentioned above, in today’s terms, need to be translated into the rupee
requirement in future. This is done using the formula A = P X (1 + i)n, where, A = Rupee
requirement in future, P = Cost in today’s terms, i = inflation & n = Number of years into
the future, when the expense will be incurred.
• The steps in creating a comprehensive financial plan, as proposed by the
Certified Financial Planner – Board of Standards (USA) are as follows:
a. Establish and Define the Client-Planner Relationship
b. Gather Client Data, Define Client Goals
c. Analyse and Evaluate Client’s Financial Status
d. Develop and Present Financial Planning Recommendations and / or
Options
e. Implement the Financial Planning Recommendations
f. Monitor the Financial Planning Recommendations
• During the Childhood stage, focus is on education in most cases. Children
are dependents, rather than earning members. Pocket money, cash gifts
and scholarships are potential sources of income during this phase. Parents

and seniors need to groom children to imbibe the virtues of savings,
balance and prudence. Values imbibed during this phase set the foundation
of their life in future.
• Equity SIPs and Whole-life insurance plans are great ways to force the
young unmarried into the habit of regular savings, rather than lavish the
money away.
• Young Married,where both spouses have decent jobs, life can be financially
comfortable. They can plan where to stay in / buy a house, based on job
imperatives, life style aspirations and personal comfort. Insurance is
required, but not so critical. Where only one spouse is working, life
insurance to provide for contingencies associated with the earning spouse
are absolutely critical. In case the earning spouse is not so well placed,
ability to pay insurance premia can be an issue, competing with other basic
needs of food, clothing and shelter. In such cases, term insurance (where
premium is lower) possibilities have to be seriously explored and locked
into.
• Accumulation is the stage when the investor gets to build his wealth. It
covers the earning years of the investor i.e. the phases of the life cycle from
Young Unmarried to Pre-Retirement.
• Transition is a phase when financial goals are in the horizon. E.g. house to
be purchased, children’s higher education / marriage approaching etc.
Given the impending requirement of funds, investors tend to increase the
proportion of their portfolio in liquid assets viz. money in bank, liquid
schemes etc.
• During inter-generational transfer, the investor starts thinking about
orderly transfer of wealth to the next generation, in the event of death.
The financial planner can help the investor understand various inheritance
and tax issues, and help in preparing Will and validating various documents
and structures related to assets and liabilities of the investor.
• Reaping/Distribution is the stage when the investor needs regular money.
Hence, investors in this stage need to have higher allocation to income
generating assets. It is the parallel of retirement phase in the Life Cycle.
• Winning lotteries, unexpected inheritance of wealth, unusually high capital
gains earned – all these are occasions of sudden wealth, that need to be
celebrated. However, given the human nature of frittering away such
sudden wealth, the financial planner can channelize the wealth into
investments, for the long term benefit of the investor’s family.

Chapter 12
• Risk profiling is an approach to understand the risk appetite of investors
- an essential pre-requisite to advise investors on their investments.
• The investment advice is dependent on understanding both aspects of
risk: Risk appetite of the investor & Risk level of the investment options
being considered.
• Risk appetite increases as the number of earning member increases and
vice-versa.
• Risk appetite is higher if life expectancy is longer
• Lower the age, higher the risk that can be taken and vice-versa
• Well qualified and multi-skilled professionals can afford to take more
risk.
• Those with steady jobs are better positioned to take risk
• Higher the capital base, better the ability to take financially the
downsides that come with risk.
• The distribution of an investor’s portfolio between different asset
classes is called asset allocation.
• Strategic Asset Allocation is the ideal that comes out of the risk profile
of the individual. Risk profiling is key to deciding on the strategic asset
allocation. The most simplistic risk profiling thumb rule is to have as
much debt in the portfolio, as the number of years of age.
• Tactical Asset Allocation is the decision that comes out of calls on the
likely behaviour of the market. An investor who decides to go
overweight on equities i.e. take higher exposure to equities, because of
expectations of buoyancy in industry and share markets, is taking a
tactical asset allocation call. Tactical asset allocation is suitable only for
seasoned investors operating with large investible surpluses.

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