FT 405 FMAJ Investment Advisor - Notes

FT 405 FMAJ Investment Advisor – Class Notes
Unit I Financial Planning
Introduction:
Financial planning is the process of meeting your life goals through the proper management
of your finances. Life goals can include buying a home, savings for your child’s education,
planning for your retirement or estate planning.
This process consists of six basic steps. Using these broad six steps, you can work out where you
are now, what you may need in the future and what you must do to reach your goal.
The process involves gathering relevant financial information, setting life goals, examining your
current financial status and coming up with a strategy for a plan on how you can meet with
your goals, and map the gap.
Financial Planning helps you give direction and meaning to your client’s financial decisions. It
allows him to understand how each financial decision affects other areas of finance. For
example, buying a particular investment product may help your client to pay off his mortgage
faster or may delay his retirement significantly.
By viewing each financial decision as a part of a whole, you may help your client consider the
long term and the short term effects on his life goals. You will help them feel more secure and
more adaptable to life changes, once they can measure that they are moving closer to the
realization of their goals.
Definition:
Financial Planning Definition:
Financial Planning is the process of identifying a person’s financial goals, evaluating existing
resources and designing the financial strategies that help the person to achieve those goals.
The key basic steps toward reaching this end as a financial advisor are:
 Organizing financial data.
 Goal setting.
 Financial Analysis.
 Developing appropriate strategies.
 Evaluating and choosing the best option amongst the various strategies.
 Implementation of the planned decisions.

Characteristics of Financial Planning:
1. Simplicity:
A financial plan should be so simple that it may be easily understood even by a layman. A
complicated financial structure creates complications and confusion.
2. Based on Clear-cut Objectives:
Financial planning should be done by keeping in view the overall objectives of the company. It
should aim to procure funds at the lowest cost so that profitability of the business is improved.
3. Less Dependence on Outside Sources:
A long-term financial planning should aim to reduce dependence on outside sources. This can
be possible by retaining a part of profits for ploughing back. The generation of own funds is the
way of financial operations. In the beginning, outside funds may be a necessity but financial
planning should be such that dependence on such funds may be reduced in due course of time.
4. Flexibility:
The financial plan should not be rigid. It should allow a scope for adjustments as and when new
situations emerge. There may be a scope for raising additional funds if fresh opportunities
occur. Similarly, idle funds, if any, may be invested in short-term and low-risk bearing securities.
Flexibility in a plan will be helpful in coping with the demands of the future.
5. Solvency and Liquidity:
Financial planning should ensure solvency and liquidity of the enterprise. Solvency requires that
short-term and long-term payments should be made on dates when these are due. This will
ensure credit worthiness and goodwill to the concern.
Solvency will be possible when liquidity of assets is maintained. There should be sufficient funds
whenever payments are to be made. Proper forecasting of future payments will be helpful in
planning liquidity.
6. Cost:
The cost of raising capital is an important consideration in selecting a financial plan. The
selection of various sources should be such that the cost burden should be minimum. As and
when possible interest bearing securities should be returned so that this burden is reduced.
7. Profitability:
A financial plan should adjust various securities in such a way that profitability of the enterprise
is not adversely affected. The interest bearing securities and other liabilities should be so
adjusted that business is able to improve its profitability.
Steps in Financial Planning:
To achieve the objective of a perfect financial plan, it needs to be prepared completely in sync
with his financial needs and his responsibilities. This can be best achieved by following the
processes:
Understanding the Basics:
Basic aspects of inflows and outflows of funds and resources like frequency and quantum
towards needs, desires to be calibrated with perfection.
Setting Measurable Goals:
Set specific targets of what your client wants to achieve with a specific time line. There can be
goals relating to Emergency Fund, Marriage, Car, Home, Vacation, Children Education and their
Marriage, Retirement Corpus etc. For example, “I need Rs.1, 00,000 pm income post retirement
for 25 years from the age of 60, considering the anticipated inflation rate at 5%. These plans
may have to be changed keeping in view the market scenario or a changed need.
Assessing Protection (Insurance) Needs:
Identifying and assessing the present and future insurance needs and planning for the same is
the first and foremost requirement for allocation of resources towards the same. Insurance
cover includes life cover and health cover plans.
Emergency Funds availability and requirement as per income and expense needs to be
calculated and proper allocation on that basis is another vital aspect of financial planning.
Understanding the Effect of Financial Decisions:
Realize that each financial decision (identification, setting of goals and allocation of resources)
that he takes will affect several other areas of life. For example, an investment decision may
have tax consequences that are harmful to his estate plans or a decision on the retirement
plans may affect his retirement goals. If investments in real estate to provide for retirement
income that would invite long term capital gains tax which can reduce the post-tax returns
needs to be adjusted for the same.
Allocation of Resources:
Once the goal planning is done, in needs to be matched with proper resource allocation in
consonance with time element along with commitment for the same.
Early Start:
Early start is the key because the time is limited with every one and time is more important
than timing. Consequences of waiting and any delay in financial planning affects the whole big
picture badly. Developing good habits like saving, budgeting, investing and regularly reviewing
one’s finances early in life, makes one better prepared to meet changes and handle
emergencies. If one starts investing Rs. 500, one can expect to have Rs.58 Lakhs at age 60.
Remember that every Rs.500 that you can save from the age of 21 can get you Rs. 58 Lakhs
towards your retirement, but if you start at age 41, you will get only Rs.5 Lakh.
Realistic Expectations:
Financial planning is a common sense oriented approach for managing one’s finances to reach
one’s life goals. It is a lifelong process. There are certain extraneous factors like inflation,
changes in macroeconomic policies or interest rates that may affect one’s financial results.
Periodic Review and Rebalancing:
Financial planning is a dynamic process. These goals may change over the years due to changes
in lifestyle or circumstances such as an inheritance, marriage, birth, house purchase or change
in job status. Revisiting these goals periodically is very important to keep track of how much our
client is on course, both from a long term perspective and a short term perspective. Sometimes
additional inflows and regular increments needs to be channelized towards inching ahead of
targeted goals.
Do’s and Don’ts of financial Planning:
1 . Listing and prioritizing one’s goals
Do- First things first. Listing of goals, setting hierarchy, allocation accordingly.
Don’t- Delay, change hierarchy unnecessarily.
2. Tracking expenses
Do- Set Expense Category, allocate percentage to each category of expenses.

Don’t- Overspend on any category, cross Credit Card limits.
3. Creating an emergency fund
Do- Calculate correctly and create immediately.
Don’t- Use the funds without emergency.
4. Retirement planning
Do- Start as early as possible, assess the corpus need correctly and start allocation
accordingly.
Don’t- Do not delay planning for your retirement.
5. Dealing with emotional and mental pressures
Do- Act and behave rationally.
Don’t- Fall prey of behavioral biases.
6. Overspending and re-visiting the plan
Do- Stick to the plan that you have come up with.
Don’t- Do not overspend. Stay within the brackets of spending that the plan allows. For
any urgent emergencies, you already have a savings account or your emergency fund.
Your daily and monthly expenditure must be closely tracked so you do not end up
spending more than you should.
Unit II Investment
Avenues
Investment Avenues:
Most investors want to make investments in such a way that they get sky-high returns as
quickly as possible without the risk of losing principal money. This is the reason why many are
always on the lookout for top investment plans where they can double their money in few
months or years with little or no risk. However, a high-return, low-risk combination in an
investment product, unfortunately, does not exist. Maybe in an ideal world but not at present.
In reality, risk and returns are directly related, they go hand-in-hand, i.e., the higher the
returns, higher the risk and vice versa. While selecting an investment avenue, you have to
match your own risk profile with the associated risks of the product before investing. There are
some investments that carry high risk but have the potential to generate higher inflation-
adjusted returns than other asset class in the long term while some investments come with
low-risk and therefore lower returns. There are two bucket0s that investment products fall
into and they are financial and non-financial assets. Financial assets can be divided into
market-linked products (like stocks and mutual fund) and fixed income products (like Public
Provident Fund, bank fixed deposits). Non-financial assets - many Indians invest via this mode -
are the likes of physical gold and real estate.
Bank fixed deposit (FD):
A bank fixed deposit is considered a comparatively safer (than equity or mutual funds) choice
for investing in India. It can be opened online as well as offline mode as well. For offline mode,
investor is required to fill the application form along with a cheque or debit mandate for
specified sum for investment in FD account. Online FD account can be opened with NET
Banking facility with menu driven mechanism. Under the deposit insurance and credit
guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs
5 lakh with effect from February 4, 2020 for both principal Earlier, the coverage was maximum
of Rs 1 lakh for both principal and interest amount. FD accounts have different maturity options
like 1,2,3,4,7,15 years as the case may be. They carry a fixed interest component payable as per
the options available. As per the need, one may opt for monthly, quarterly, half-yearly, yearly
or cumulative interest option in them. The interest rate earned is added to one's income and is
taxed as per one's income slab.
Recurring deposits (RDs):
Recurring deposits (RDs) are an investment instrument almost similar to fixed deposits. It can
be opened online as well as offline mode as well. For offline mode, investor is required to fill
the application form along with a cheque or debit mandate for specified sum for investment in
RD account. Online RD account can be opened with NET Banking facility with menu driven
mechanism. However, you have to make fixed monthly deposits in RDs, unlike a lump sum
amount in FDs. RDs create a habit of regular investment among earning individuals. These also
instill discipline when it comes to savings. Recurring deposits are offered by the majority of
banks and financial institutions. They carry a fixed interest component payable as per the
options available. Effective from June 1, the Finance Bill, 2015, has made TDS mandatory for all
recurring deposits. Typically, you may start an RD account with an amount as low as Rs. 500,
and deposit the same amount every month throughout the tenure. On a similar vein, there is
no limit on the maximum amount you may deposit. It is possible to close your RD account
before maturity in case of needs. Interest will be paid until the date of closing. Bank / financial
institution may also charge a penal fee. RD tenure starts at 6 months and stretches up to 10
years. You can choose tenure in multiples of 3 months after the first 6 months, i.e., 9 months,
12 months, 15 months, and so on.
National Pension System (NPS):
The National Pension System is a savings scheme which aims at providing monthly income after
the retirement of the investor. Here employees need to invest in NPS while they are employed.
The entire accumulated throughout the duration of the scheme is broken down through an
annuity plan, and then paid out to the investor every month post retirement.
This scheme is secure and reliable source of monthly income for retired employees of state and
central government organizations, employees of MNCs, and citizens who are employed in the
unorganized sectors.
 For employees of the central or state government organizations, 10% of monthly

income is deducted and an equal amount is contributed by the government.
 For employees of MNCs or those from the unorganized sectors, NPS is just like other
long-term saving schemes and it benefits them after the completion of the pre-
determined tenure, according to the scheme.
Public Provident Fund (PPF):
Public provident fund or PPF is an investment option that has been extremely popular with
Indians across generations. The reasons for its popularity are many. The major reason why PPF
is considered as a preferred choice can be attributed to it being a safe investment option.
The interest rate is an attractive 8 % PA and the invested amount can be claimed under Section
80C to lower your tax liability. Not only this, the interest earned on invested amount is also
exempt from tax.
The lock-in period is 15 Years, after which you can choose to withdraw your corpus. You can
keep the scheme live by extending it by 5 years thereafter as per your requirements. The
minimum amount that needs to be deposited is just Rs 500 and the maximum amount is
capped at Rs 1.5 Lakh annually. You can either deposit this amount in a lump sum mode or
choose to make deposits in 12 installments. Please note that an amount more than Rs 1.5 Lakh
will not be eligible to earn interest as well as can’t be used to claim tax exemption.
Any Indian citizen can avail benefits of this scheme, however, HUFs and NRIs are not eligible to
open a PPF account. You can hold only one PPF account per person and joint accounts are not
allowed. At the time of account opening however, you can assign a nominee.
A very interesting fact about PPF money saving scheme that many investors are unaware of is
that you can take a loan against the amount you invested in PPF. This loan can be availed
between the 3rd and 5th Year. The maximum loan amount you can avail is 25% of the 2nd year
immediately followed by the year in which application for loan has given. You can also avail a
second loan in the sixth year, provided the first loan has been paid in full.
Equity Mutual Funds:
Right since its inception, Mutual Funds have evolved into a preferred investment tool for many
investors. However, choosing the right Mutual Fund scheme can be a difficult task due to the
wide array of options available. Investment requires a careful and well-thought approach to
avoid potential losses. Hence, it is imperative to understand the basics of the different types of
schemes available to you. Here, we will explore Equity Mutual Funds and talk about the
different types of equity funds along with their benefits and a lot more.
Equity Funds:
As the name suggests, Equity Funds invest in the shares of different companies. The fund
manager tries to offer great returns by spreading his investment across companies from
different sectors or with varying market capitalizations. Typically, equity funds are known to
generate better returns than term deposits or debt-based funds. There is an amount of risk
associated with these funds since their performance depends on various market conditions.
Types of Equity Mutual Funds:
There are various ways of categorizing equity funds. Here is a look at the different
categorizations:
Investment Strategy-based Categorization
 Theme and Sectoral Funds: An Equity Fund might decide to follow a specific investment
theme like an international stock theme or emerging market theme, etc. Also, some
schemes might invest in a particular sector of the market like BFSI, IT, Pharmaceutical,
etc. Here, it is important to note that sector or theme-based funds carry a higher risk
since they focus on a specific sector or theme.
 Focused Equity Fund: This fund invests in a maximum of 30 stocks of companies having
market capitalization as specified at the time of the launch of the scheme.
 Contra Equity Fund: As the name suggests, these schemes follow a contrarian strategy
of investing. These schemes analyze the market to find under-performing stocks and
purchase them at low prices under the assumption that these stocks will recover in the
long term.
Market Capitalization-based Categorization
Some schemes might decide to invest in companies with specific market capitalizations only.
Here are the common types:
 Large-Cap Funds – which typically invest a minimum of 80% of their total assets in
equity shares of large-cap companies (the top 100). These schemes are considered to be
more stable than the mid-cap or small-cap focused funds.
 Mid-Cap Funds – which usually invest around 65% of their total assets in equity shares
of mid-cap companies (101-250th placed companies according to market capitalization).
These schemes tend to offer better returns than the large-cap schemes but are also
more volatile than them.
 Small-Cap Funds – which typically invest around 65% of their total assets in equity
shares of small-cap companies (251st and below placed companies according to market
capitalization). This is a huge list and more than 95% of all companies in India fall into
this category. These schemes tend to offer great returns than the large-cap and mid-cap
schemes but are also highly volatile.
 Multi-Cap Funds – which usually invest around 65% of their total assets in equity shares
of large-cap, mid-cap and small-cap companies in varying proportions. In these schemes,
the fund manager keeps rebalancing the portfolio to match the market and economic
conditions as well as the investment objective of the scheme.
 Large and Mid-Cap Funds – which usually invest around 35% of their total assets in
equity shares of mid-cap companies and 35% in large-cap companies. These schemes
offer a great blend of lower volatility and better returns.
Tax Treatment – Based Categorization
 Equity Linked Savings Scheme (ELSS) – ELSS Funds is the only equity scheme which offers
tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These
schemes invest a minimum of 80% of its total assets in equity and equity related
instruments. Further, these schemes have a lock-in period of 3 years.
 Non-Tax Saving Equity Funds – Except ELSS, all other Equity Funds are non-tax saving
schemes. This means that the returns are subject to capital gains tax.
Investment Style-based Categorization
 Active Funds – These schemes are actively managed by the fund managers who
handpick the stocks that they want to invest in.
 Passive Funds – These schemes usually track a market index or segment which
determines the list of stock that the scheme will invest in. In these schemes, the fund
manager has no active role in the selection of the stocks.
Debt Mutual Funds:
Debt is the major markets in which people invest their hard-earned money to make profits. The
debt market consists of various instruments which facilitate the buying and selling of loans in
exchange for interest. Considered to be less risky than equity investments, many investors with
a lower risk tolerance prefer buying in debt securities. However, debt investments offer lower
returns as compared to equity investments. Here, we will explore Debt Funds and talk about
different types of debt funds along with their benefits and a lot more.
A debt funds invest in securities which generate fixed income like treasury bills, corporate
bonds, commercial papers, government securities, and many other money market instruments.
All these instruments have a pre-decided maturity date and interest rate that the buyer can
earn on maturity – hence the name fixed-income securities. The returns are usually not affected
by fluctuations in the market. Therefore, debt securities are considered to be low-risk
investment options.
Functioning of Debt Funds work:
Every debt security has a credit rating which allows investors to understand the possibility of
default by the debt issuer in disbursing the principal and interest. Debt fund managers use
these ratings to select high-quality debt instruments. A higher rating implies that the issuer is
less likely to default.
Fund managers select securities based on various factors. Sometimes, choosing low-quality
debt security offers an opportunity to earn higher returns on debt investments and the fund
manager takes a calculated risk. However, a debt fund which has high-quality securities in its
portfolio will be more stable. Further, the fund manager can choose to invest in long-term or
short-term debt securities depending on whether the interest rate regime is falling or rising.
Debt funds are highly recommended to investors with lower risk tolerance. Debt funds usually
diversify across various securities to ensure stable returns. While there are no guarantees, the
returns are usually in an expected range. Hence, low-risk investors find them ideal.
 Short-term investors (3-12 months) – Rather than keeping your funds in a regular
savings account, you can invest in liquid funds which offer 7-9% returns. Also, you do
not compromise on liquidity.
 Medium-term investors (3-5 years) – If you want to invest in a low-risk instrument for
3-5 years, the first thing that probably comes to mind is a bank fixed deposit. Investing
in a dynamic bond fund for a similar tenure tend to offer better returns than FDs. Also, if
you need monthly payouts (like interest in FDs), you can opt for a Monthly Income Plan.
Types of Debt Funds
Based on the maturity period, debt funds can be classified into the following types:
 Liquid Fund – which invests in money market instruments having a maturity of
maximum 91 days. Liquid funds tend to offer better returns than savings accounts and
are a good alternative for short-term investments.
 Money Market Fund – which invests in money market instruments with a maximum
maturity of 1 year. These funds are good for investors seeking low-risk debt securities
for a short-term.
 Dynamic Bond Fund – which invests in debt instruments of varying maturities based on
the interest rate regime. These funds are good for investors with moderate risk
tolerance and an investment horizon of 3 to 5 years.
 Corporate Bond Fund – which invests a minimum of 80% of its total assets in corporate
bonds having the highest ratings. These funds are good for investors with lower risk
tolerance and seeking to invest in high-quality corporate bonds.
 Banking and PSU Fund – which invests at least 80& of its total assets in debt securities
of PSUs (public sector undertakings) and banks.
 Gilt Fund – which invests a minimum of 80% of its investible corpus in government
securities across varying maturities. These funds do not carry any credit risk. However,
the interest rate risk is high.
 Credit Risk Fund – which invests a minimum of 65% of its investible corpus in corporate
bonds having ratings below the highest quality corporate bonds. Therefore, these funds
carry an amount of credit risk and offer slightly better returns than the highest quality
bonds.
 Floater Fund – which invests a minimum of 65% of its investible corpus in floating rate
instruments. These funds carry a low interest-rate risk.
 Overnight Fund – which invests in debt securities having a maturity of 1 day. These
funds are considered to be extremely safe since both credit risk and interest rate risk is
negligible.
 Ultra-Short Duration Fund – which invests in money market instruments and debt
securities in a manner that the Macaulay duration of the scheme is between three and
six months.
 Low Duration Fund – which invests in money market instruments and debt securities in
a manner that the Macaulay duration of the scheme is between six and twelve months.
 Short Duration Fund – which invests in money market instruments and debt securities
in a manner that the Macaulay duration of the scheme is between one and three years.
 Medium Duration Fund – which invests in money market instruments and debt
securities in a manner that the Macaulay duration of the scheme is between three and
four years.
 Medium to Long Duration Fund – which invests in money market instruments and debt
securities in a manner that the Macaulay duration of the scheme is between four and
seven years.
 Long Duration Fund – which invests in money market instruments and debt securities in
a manner that the Macaulay duration of the scheme is more than seven years.
Risks in Debt Funds
Debts funds fundamentally carry three types of risks:
I. Credit Risk – which is the default risk of the issuer not repaying the principal and
interest.
II. Interest Rate Risk – which is the effect of changing interest rates on the value of the
scheme’s securities.
III. Liquidity Risk – which is the risk carried by the fund house of not having adequate
liquidity to meet redemption requests.
Returns
Debt funds offer lower returns as compared to equity funds. Also, there is no guarantee of the
returns. The NAV of debt funds fluctuates with changes in the interest rate. If the interest rates
rise, then the NAV of a debt fund falls and vice-versa.
Expense Ratio
This is an important aspect while investing in debt funds. The expense ratio is a percentage of
the fund’s total assets which a fee towards fund management services. Since the returns in
debt funds are not very high, a high expense ratio can dent your earnings. Look for schemes
with a lower expense ratio and stay invested for a longer-term.
Invest according to your Investment Plan
Debt funds are available for all durations – from 1 day (overnight funds) to 7+ years (long
duration funds). Therefore, you must choose as per your financial goals and investment
horizon. Many investors turn towards debt funds for regular income. Some savvy investors
dedicate a portion of their investment portfolio to debt for adding stability. Whatever be the
reason, ensure that you invest according to your investment plan.
Taxation for Debt Funds
In the case of Debt Funds, the taxation rules are as follows:
Capital Gains Tax
If you hold the units of the scheme for a period of up to three years, then the capital gains
earned by you are called short-term capital gains or STCG. STCG is added to your taxable
income and taxed as per the applicable income tax slab.
If you hold the units of the scheme for more than three years, then the capital gains earned by
you are called long-term capital gains or LTCG. LTCG is taxed at 20% with indexation benefits.
Hybrid Mutual Funds
Investments can be broadly classified into three types based on risk – equity (or high-risk)
investments, debt (or low-risk) investments, and hybrid investments. Most investment advisors
ask investors to create an investment plan based on their financial goals, risk tolerance, and
investment horizon. Every individual has different needs and aspirations and hence it is difficult
to classify an investor as a purely high-risk or low-risk-taker. This is where Hybrid Mutual Funds
step in. here, we will explore Hybrid Funds and talk about some essential features that you
need to know before investing in them.
As the name suggests, hybrid funds are a combination of equity and debt investments which
are designed to meet the investment objective of the scheme. Each hybrid fund has a different
combination of equity and debt targeted at different types of investors.
Functioning of Hybrid Fund work:
A hybrid fund endeavors to create a balanced portfolio to offer regular income to its investors
along with capital appreciation in the long-term. The fund manager creates a portfolio
according to the investment objective of the scheme and allocates the funds in equity and debt
instruments in varying proportions. Further, the fund manager also buys or sells assets if the
market movements are favorable.
Investor Preference:
Hybrid funds are considered to be riskier than debt funds but safer than equity funds. They
tend to offer better returns than debt funds and are preferred by many low-risk investors.
Further, new investors who are unsure about stepping into the equity markets tend to turn
towards hybrid funds. This is because the debt component offers stability while they test the
equity ‘waters’. Hybrid funds allow investors to make the most out of equity investments while
cushioning themselves against extreme volatility in the market.
Types of Hybrid Funds
Since every hybrid fund can have a different asset allocation between equity and debt, they can
be classified into the following types:
 Equity-oriented Hybrid Funds
An equity-oriented hybrid fund invests at least 65% of its total assets in equity and
equity-related instruments of companies across various market capitalizations and
sectors. The remaining 35% is invested in debt securities and money market
instruments.
 Debt-oriented Hybrid Funds
A debt-oriented hybrid fund invests at least 60% of its total assets in fixed-income
securities like bonds, debentures, government securities, etc. The remaining 40% is
invested in equity. Some funds also invest a small part of their corpus in liquid schemes.
 Balanced Funds
These funds invest a minimum of 65% of their total assets in equity and equity-related
instruments and the rest in debt securities and cash. For taxation, they are considered
to be equity funds and offer tax exemption on long-term capital gains of up to Rs. 1 lakh.
The fixed income component makes it a good option for equity investors as it helps
mitigate the volatility of equity investments.
 Monthly Income Plans
Monthly Income Plans are hybrid funds which primarily invest in fixed income securities
and allocate a small portion of their corpus to equity and equity-related instruments.
This allows these plans to generate better returns than pure debt schemes and allows
the fund to offer regular income to investors. Most plans also offer a growth option
where the income grows in the fund’s corpus.
 Arbitrage Funds
Arbitrage funds buy stocks at a lower price in one market and sell it at a higher price in
another. The fund manager constantly keeps looking for arbitrage opportunities and
maximize the fund’s returns. However, there are times when good arbitrage
opportunities are not available. During such times, the fund invests primarily in debt
securities and cash. Arbitrage funds are considered to be as safe as debt funds.
However, long-term capital gains are taxed like equity funds.
Factors to consider before investing in Hybrid Mutual Funds in India
Here are some important aspects that you must consider before investing in hybrid funds in
India:
 The Risk-Return Assessment
Hybrid funds carry an investment risk proportionate to the allocation of assets in its
portfolio. Hence, it is important to analyze the portfolio of the scheme carefully to get a
good understanding of the risks involved. For example, if you are investing in an equity-
oriented hybrid fund, then you must look at the kind of stocks the fund owns. Are the
majorly large-caps or small/mid-caps? This helps you understand the risks better.
Further, it will also give you an idea of the kind of returns that you can expect.
 Choose the right Hybrid Fund
Since hybrid funds come in different types, it is important to consider your risk
tolerance, financial goals, and investment horizon before choosing a scheme. If you
need regular income, then opting for a debt-oriented hybrid fund might offer better
returns than a pure debt fund due to the added equity component.
 Tax
In hybrid funds, the tax on gains is as follows:
Equity component of the Hybrid Fund
This is taxed like equity funds:
 Long-term capital gains (LTCG) of more than Rs. 1 lakh are taxed at 10% without
indexation
 Short-term capital gains (STCG) are taxed at 15%
Debt component of the Hybrid Fund
This is taxed like any pure debt fund. The capital gains are added to your income and taxed as
per the applicable income tax slab.
Long-term capital gains from the debt component are taxed at 20% after indexation and 10%
without indexation benefits.
Tax Saving Fixed Deposits
Tax Saving fixed deposits are suitable for investors looking for lower risk and a fixed and
guaranteed return on a long- term basis. Deposit made is allowed as a deduction under Section
80C up to Rs 1.5 lakh. If you invest say Rs 50000, and your total income is taxed in the 20% tax
slab rate, a deduction of Rs 10000 (Rs 50000 * 20%) will be allowed.
 Lock-in period is 5 years
 Minimum Investment required is Rs 100
 No Limit on the maximum investment
 Interest rate: Differs from bank to bank. Currently around 6.50% – 7.25%.
 Deduction on Principal is allowed

 Interest taxable at normal tax rates
Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) is a type of mutual fund, with the shortest lock-in period of
just 3 years, investing at least 80% of assets in equity (stocks) offering a higher compounding
potential in the long term among other tax-saving schemes
 Minimum Investment Amount differs for fund houses
 No limit on Maximum Investment
 Deduction on Principal allowed under section 80C up to Rs 1.5 lakh
 Interest is taxable at 10% (LTCG)
 Dividend earned is taxable at 10% as dividend distribution tax
Additional Reading:
Exchange Traded Funds (ETF):
Exchange traded funds pool the financial resources of several people and use it to purchase
various tradable monetary assets such as shares, debt securities such as bonds and derivatives.
Most ETFs are registered with the Securities and Exchange Board of India (SEBI). It is an
appealing option for investors with limited expertise of the stock market.
ETFs share characteristic features of both shares and mutual funds. They are generally traded in
the stock market in the form of shares produced via creation blocks. ETF funds are listed on all
major stock exchanges and can be bought and sold as per requirement during the equity
trading time.
Changes in the share price of an ETF depend on the costs of the underlying assets present in the
pool of resources. If the price of one or more asset rises, the share price of the ETF rises
proportionately, and vice-versa.
The value of the dividend received by the share-holders of ETFs depends upon the performance
and asset management of the concerned ETF Company.
They can be actively or passively managed, as per company norms. Actively managed ETFs are
operated by a portfolio manager, after carefully assessing the stock market conditions and
undertaking a calculated risk by investing in the companies with high potential. Passively
managed ETFs, on the other hand, follow the trends of specific market indices, only investing in
those companies listed on the rising charts.
There are several advantages of investing in an ETF rather than opting for mutual funds or
shares of a company.
Benefits over Investing in Companies: A Diversified Pool of Securities
Purchasing shares of a company keeps you limited to the performance of that company itself,
subjecting you to a higher degree of risk. On the other hand, investing in exchange traded
funds allow you to keep your finances spread over equities of different companies – diluting
your risk significantly. Even if one asset underperforms in the pool of resources in an ETF, it can
be compensated by the exceptional growth of other assets.
 One of the significant benefits of investing in an ETF over mutual funds is the reduced
expenses. There are various charges involved in mutual funds, such as entry and exit
load, management fees, etc. This increases your total cost incurred, and thereby the
total expense ratio of mutual funds.
As ETFs are traded like shares in the stock market, its expense ratio is considerably lower.
 The value of a mutual fund depends upon the performance of the NAV and can only be
determined after the market closes for the day.
Any changes in the value of an ETF can be observed instantly and can be bought and sold
throughout the business day.
Thus, we can conclude that ETFs have much higher liquidity than mutual funds. This enables
you to have flexibility in your choices of investing, allowing you to shift to another security with
ease in case a particular asset is not generating adequate profits.
 ETF funds are more tax-friendly than mutual funds. Even though both are subjected to
capital gains tax and dividend taxes, the relative amount of fee charged on ETFs is much
lower than the one levied on mutual funds.
 Investing in ETFs is generally less risky than mutual funds as they are passively managed.
They only invest in the best-performing companies listed in a particular stock exchange,
while mutual funds thoroughly asses all the businesses with a potential for growth. This
subjects mutual funds to a greater risk as newly formed small scale companies have
higher chances of incurring a loss.
Limitations of ETF
ETFs have certain shortcomings which you should be aware of before investing in an ETF trading
company.
I. Brokerage fees and DEMAT account
Since ETFs are traded like shares, there are several expenses which have to be incurred to
purchase them. This is generally done by the fund managers, who charge a nominal commission
fee for such transactions.
You can also opt to transact by yourself on the share market and not involve any fund managers
in the process. A DEMAT account has to be opened in such a situation. Operating a Demat
account requires basic knowledge of stock market transactions and its associated technique,
which might be difficult for a novice.
II. The volatility of the stock market
ETF companies listed on a stock exchange are subject to price fluctuations as per market trends.
They are not stable like government bonds. Earning a profit or incurring a loss depends heavily
on the stock market conditions.
III. Diversification
Exchange traded funds have moderate diversity. As most ETFs are passively managed, they
generally invest in best-performing companies listed on a particular stock exchange. ETF
organizations often overlook small scale companies with huge potential.
Gold ETF vs Gold funds
Gold ETF refer to those mutual funds which invest primarily in physical gold assets. The asset
base of the company comprises of 90-100% gold.
Gold funds, on the other hand, refer to mutual funds which invest in the shares of these ETFs. It
is not tangible and represents a financial asset purchased by you. A benefit of investing in a
gold-based mutual fund is that it does not require a Demat account for transactions.
ETF Category:
I. Equity ETF – These represent companies investing in shares and other forms of equity of
various organizations.
II. Gold ETF – This is a commodity exchange-traded fund primarily involving physical gold
assets. Purchasing shares of this company allows you to become the owner of gold on
paper, without the burden of asset protection.
III. Debt ETF – Enterprises trading in fixed return securities such as debentures and
government bonds are often called Debt ETFs.
IV. Currency ETF – Currency ETF funds mainly profit due to the fluctuation of the exchange
rates. They purchase the currency of different countries based on calculated predictions
about the future performance of that currency. Currency ETFs follow not only the stock
exchange trends but also the political and economic scenario of the respective
countries.
Sukanya Samriddhi Yojana (SSY):

The SSY is a government savings scheme created with the intention to benefit the girl a child
who is 10 years of age or younger. A parent or legal guardian can open maximum of 2 accounts
for 2 girl child. The account matures after 21 years of opening the account or in the event of the
marriage of the girl child after she gains the age of 18 years. A premature withdraw up to 50%
of investment is allowed after the child gains the age of 18 years even if she is not getting
married.
 Interest rate- 8.5%
 Duration of investment- 21 years
 Minimum Investment: Rs 1,000 per annum
 Maximum Investment: Rs 1.5 lakh per annum
 Tax Deduction on Principal allowed under section 80C up to Rs 1.5 lakh
 Interest received is not taxable
Pradhan Mantri Vaya Vandhana Yojana (PMVVY):
Pradhan PMVVY is a pension plan run by Life Insurance Corporation LIC for senior citizens aged
minimum of 60 years. An assured return of 8% per annum is provided monthly (equivalent
to 8.3% per annum) for 10 years. However, the investor can choose for monthly/quarterly/
half-yearly or yearly payment of his pension.
 Tenure is 10 years
 Minimum Investment amount- Rs 1,000
 Maximum limit on investment- Rs 15 lakh
 Tax deduction on Principal is allowed
 Interest earned is tax-exempt
Senior Citizen Saving Scheme (SCSS):

SCSS is aimed to provide a regular income for senior citizens aged above 60 years available at a
certified bank and post offices across India.
This scheme is applicable to 3 categories of investors
I. Senior citizens who are of age 60 years or above
II. Retirees being in the age bracket of 55- 60 years opted for Voluntary Retirement
Scheme (VRS) or Superannuation and invested the retirement benefits in SCSS received
within a month
III. Retired defense personnel aged 50 years or above
Few other pointers are listed below:
I. Interest Rate is 8.7%
II. Tenure being 5 years
III. Minimum Investment required is Rs 1000
IV. Maximum Investment allowed is Rs 15 lakh
V. The principal amount invested is allowed as a tax deduction
VI. Interest earned is also tax-exempt
National Savings Certificate (NSC):
NSC is a great investment option that comes with the advantage of tax saving. NSC can be
obtained from any post office by Indian citizens. This investment option is a preferred choice of
individuals who are looking for safer investment avenues as it is backed by the Government of
India, consequently carrying a low risk.
Currently NSC VIII with a tenure of 5 years is available for subscription. The interest rates for
NSC range between 7-8% PA and is fixed by the Ministry of Finance every financial year. For
instance, the NSC interest rate for FY 2019-20 is at 8% compounded annually.
While the minimum investment amount is Rs 100, unlike PPF there is no limit to the maximum
amount that can be deposited. However, only Rs 1.5 Lakh Rs qualify for a tax exemption under
Section 80 C annually.
Another important point to note is that NSC interest is not tax exempt. However, the interest
amount accumulates in the account and is not paid to the depositor. So technically, the interest
earned each year can be considered as a reinvested amount, and hence is eligible as a fresh
deduction under Section 80 C, thereby making it tax free.
Post Office Savings Account:
Post office savings account can be considered as a regular savings account offering a slightly
better rate of return. It is safe as well as offers the flexibility of partial and complete withdrawal
of invested amount at short notice for financial emergencies. Post office savings scheme
account boasts of guaranteed returns and is suitable for investors who have a low risk appetite,
and senior citizens seeking an assured source of income source with minimal risk exposure. The
interest rate offered by this scheme is 4 % applicable for both joint and single account holders.
Interest amount upto Rs 10,000 is tax exempt.
Post Office Time Deposit:
Post office time deposit scheme is one of best saving schemes run by the Indian post office. This
scheme is popular mostly among the rural population of India where better known investment
products haven’t reached yet. As the name suggests the time deposit scheme can be of 1 , 2, ,3
or 5 years in tenure. The scheme is suited for investors seeking assured returns with minimal
risk. . It is also transferable from one post office to another. The interest rates are revised
periodically, periodically and for FY 2019-20 it stands at 7% for the first three years and 7.8%
thereafter. A depositor can open multiple time deposits, there is no cap. As soon as the tenure
of a time deposit ends, if the money is not withdrawn it gets renewed for the original amount
at whatever interest rate is applicable on maturity date. Please note that an investor can claim
tax benefit under Section 80 C for investment in 5 year post office time deposit.
Post Office Recurring Deposit:
One of the most popular schemes amongst other post office saving schemes is the post office
recurring deposit (post office RD). This scheme is best for individuals who have small investible
amounts; the scheme can be started with Rs 10 per month and subsequent amounts in
multiples of Rs 5. There is no maximum amount that can be invested.
The scheme commands an interest rate of 7.3% annually. The scheme also offers high flexibility,
the depositors can partially withdraw upto 50% of the total balance after one year. You can also
keep extending the amount by 5 years at the end of investment tenure. RD is transferable
between post offices, can be opened as a joint account as well as allows flexibility of opening
multiple accounts. Recurring deposits are a great way to cultivate regular investing and saving
habits amongst small investors who want to build a corpus over time with minimum risk to
capital.
Post Office Monthly Income Scheme (POMIS):
As the name suggests Post Office Monthly Income scheme offers fixed income in the form of
interest based on the lump sum deposit made by the investor. Needless to say this scheme is
ideal for investors with low risk appetite looking for a regular assured sum. While this scheme is
eligible to be invested in by resident individuals, it can be used by minors as well. Infact, minors
above the age of 10 can even operate his account. The depositor can open multiple accounts of
this monthly saving scheme however, the net amount in all schemes combined shouldn’t
exceed Rs 4.5 Lakh.
Offering liquidity benefits, investors can withdraw the deposited corpus one year from first
deposit. However, please be aware that a withdrawal between 1 and 3 years attracts 1 %
penalty and a withdrawal post 3 years attracts 1 % penalty respectively. One major downside is
that unlike other saving schemes that offer dual benefits of wealth creation as well as tax
saving, POMIS does not come with any tax benefits. Interest received monthly will be
considered as part of the taxable income ; the monthly interest amount received as well the
deposit amount are free from TDS.
Kisan Vikas Patra(KVP):

KVP is a small savings certificate scheme launched by India Post In 1988. Like all other
government schemes, KVP was also launched as a long term wealth creation avenue for
farmers. Over the years it has emerged as a safe wealth creation option that Indian citizens with
low risk appetites can opt for. The scheme spans for 118 months or 9 years and 10 months.
What’s special about the scheme is that if you deposit a sum today at the end of the tenure
your amount will get doubled. The minimum investment amount required is Rs 1000 and there
is no cap to the maximum limit. Also it is mandatory to produce a PAN card for deposits more
than Rs 50,000 for safety reasons. For deposits exceeding Rs 10 Lakh, the depositor needs to
furnish other income proofs such as income tax return, salary slips, bank statement etc.
Furthermore, depositors are mandated to furnish AADHAAR number as an identity proof as
well.
Comparative analysis of different Schemes
Scheme Plan Eligible Minimum Maximum Interest Rate Tax Deduction
Investment Investment Earned
Public Individual Rs 500 per Rs 1.5 lakh per 8% p.a. Allowed up to Rs
Provident year year (Annually 1.5 lakh
fund (PPF) Compounded)
National Individual Rs 100 No Limit 8.0 % p.a. Deduction on
Savings (Compounded deposit made up
Certificate Annually) to Rs 1.5 lakh
(NSC)
P.O. Savings Resident Rs 20 No Limit 4% p.a. Tax free interest
Account Individual
P.O. Time Individual Rs 200 No Limit First 3 years- Deduction up to 5
Deposit 7% years on deposit
Fourth year-
7.8%
P.O. Recurring Individual Rs 10 No Limit 7.3% Interest taxable,
Deposit no deduction on
deposit
P.O. Monthly Individual Rs 1500 Single 7.3 % per Interest taxable,
Income account- Rs annum payable no deduction on
Scheme 4.5 lakh monthly deposit
(POMIS) Joint account-
Rs 9 lakh
Kisan Vikas Individual Rs 1000 No Limit 7.7% p.a. Interest Tax,
Patra (KVP) (Compounded amount received
Annually) on maturity
exempt
(Precious Metal)Gold Investment:
While people in India have brought gold over for various reasons, usually cultural or religious, it
has found appeal as an investment option as well. Here are a few things that work in favor of
gold:
 Long-term store of value – For centuries, gold has been the best store of value for the
long-term (store of value is an asset that maintains its value without depreciating). The
fact that it can play the role of money adds to its superiority and its outperformance of
the currency value make it attractive.
 It will always have value – Currency is a ‘promise to pay’. Gold, on the other hand,
requires no such promise. It is the only financial asset that is not someone else’s liability
at the same time. In its 3000+ year history, gold prices have never dropped to zero.
Hence, it will always have value and stand strong even if the market collapses.
 Inflation hedge – When inflation rates rise, the value of currency drops. However, over
the last five years, despite the rise in inflation rates, gold prices have doubled. In India,
where inflation rates tend to exceed interest rates, investing in gold is a hedge against
inflation.
 Liquidity – One of the most important features of gold investment is liquidity. Gold can
be bought and sold in a very short time.
 No specialized knowledge needed – When you buy stocks or invest in mutual funds,
you need some knowledge of the market and economy to make the right decision. With
gold, no such knowledge is needed. It is simple and straightforward making it easy to
invest in for all kinds of investors.
 Helps diversify your investment portfolio – As an asset class, gold has a low/negative
correlation with other asset classes. Hence, it is helpful in diversifying or hedging your
investment portfolio against market volatility.
Different Ways of Investing in Gold:
Traditionally, the only way to invest in gold was by purchasing jewelry. Over the years, different
ways of owning gold have emerged including different variants of physical gold and paper gold
along with its variants. Here are some ways in which you can invest in gold:
1. Digital Gold
One of the most convenient and cost-effective ways of investing in gold online is Digital Gold.
This product allows you to buy and sell gold in fractions at any time. You can invest in gold with
as little as Rs.10! Every bit of digital gold purchased by you is backed by physical 24k gold and
linked to the real-time gold prices. Here are some features and benefits of buying digital gold:
 Invest small amounts – Gold investment was traditionally associated with a sizable sum
of money. With ten grams being sold at close to Rs.50000, investors needed a
reasonable sum before they could invest in the precious metal. With digital gold, you
can invest as low as Rs.10!
 Maximum security – Most companies offering digital gold ensure that it is stored in
secured vaults and is insured.
 Liquidate within two days – If you own digital gold, you can sell it anytime and receive
funds in your account typically within two working days.
 Zero making charges – Unlike jewelry or other physical gold options, digital gold has
zero making charges.
 View your gold holdings online – If you invest small amounts regularly, you will soon
have a sizable amount of gold in your account. With digital gold, most platforms allow
you the option of viewing your holdings online.
 Convert to physical gold – Many digital gold platforms also allow you to convert your
digital gold holdings into physical gold on demand.
2. Gold coins or Bars
To save on ‘making charges’ that are applicable to gold jewelry, many investors opt for gold
coins or bars. Since these coins/bars do not require skilled artistry, the making charges are not
applicable. Today, you can buy these coins or bars from jewelers, banks, ecommerce websites,
and many non-banking finance companies.
3. Gold Savings Schemes
Jewelers across India offer various schemes to help people invest in gold in installments.
Typically, a jeweler allows you to deposit a pre-determined amount every month for a specific
period. At the end of the tenure, they can buy gold from the same jeweler at a value equal to
the amount deposited plus a bonus (if offered by the jeweler). The gold can be purchased at the
prevalent gold price on maturity.
4. Gold Sovereign Bonds
Issued by the Reserve bank of India (RBI), Gold Sovereign Bonds are the safest way to purchase
digital gold. The RBI issues them on behalf of the Indian Government. These bonds have an
assured interest of 2.50% per annum. The bonds have a lock-in period of five years and an
overall tenure of eight years.
5. Gold Mutual Funds
These funds invest in gold reserves directly or indirectly. They invest usually invest in stocks of
mining companies, physical gold, and stocks of gold producing and distribution syndicates. The
performance of these funds is usually linked with the performance of gold prices in the country.
6. Gold Exchange Traded Funds (ETFs)
These are ETFs that invest in gold as an asset class and allow you to trade the units on the stock
exchange. They carry the pros and cons of ETFs with the benefit of investing in gold.
7. Jewelry
As Indians, we love owning gold jewelry. Whether it is for religious, cultural, or financial
reasons, gold jewelry has always found a place in most households in our country. However,
being a valuable metal, the safety of the jewelry is of high concern to investors. Further, gold
jewelry includes making charges which can go up to 25 percent if the design is intricate. These
making charges are irrecoverable once you decide to sell the jewelry
Gold: A Historical Overview.
If you turn the pages of history and look at the performance of gold versus a stock market
index, you will discover that on most occasions, when the stock markets fall – gold prices rise
and vice versa. This inverse relationship between gold and stocks can have many explanations.
The most common explanation is that people treat gold as an alternative for currency. Hence,
when the stock markets crash, there is an inclination towards a hard asset like gold.
This inverse relationship is important since it makes gold a perfect hedge against market
volatility. Here is a quick look at the returns offered by gold and BSE SENSEX over the last three
decades (1991-2019)
As you can see in the chart above, when the SENSEX generates good returns, gold offers
reasonable returns too. The interesting thing to be observed is that whenever the stock
markets have crashed, gold has managed to offer reasonable returns.
Tax Rates for Gold Investments
Keep yourself abreast of the tax rates applicable for profits earned from gold investments. In
India, when you sell gold, you attract capital gains tax. If you have held the gold for three years
or less, then the gains made will be called short-term capital gains or STCG and will be taxed at
the income tax slab applicable to you. On the other hand, if you hold the gold for more than
three years, then the gains will be called long-term capital gains or LTCG and taxed at 20%.
Things to Keep in Mind Before Investing in Gold
 The performance of gold stocks and mutual funds can differ from that of physical gold.
The price of gold is determined by a lot of factors including the demand and supply of
the commodity, economic conditions of the country, etc. While a company belonging to
the gold industry gets directly impacted by the change in gold prices, there are other
factors that influence the price of stocks of these companies. Hence, before buying gold
stocks or mutual funds, ensure that you research the company or the scheme
thoroughly.
 If you are investing in physical gold, then ensure that it is in a place that is safe and
secure.
 Gold prices tend to move inversely to the stock markets. However, it is not always true.
Hence, it is important to ensure that you have an investment portfolio that is designed
to weather all storms.
Real Estate Investment Trusts (REIT):
Most people who have actually gone through the process of buying real estate can readily
vouch for the fact that it can be extremely tedious. Right from identifying a suitable property
within one's budget, to negotiating with the builder/vendor, conducting due diligence on the
property documents, followed by a lot more, the process can get really tiring. And in case you
are getting a loan to finance the purchase of the property (which most people need to take
given their high unit cost), then one can expect it to be even more exhausting. Moreover, if the
property is bought for the purpose of investment, one has to put continuous effort throughout
the investment's lifetime in finding tenants, dealing with errant tenants, and periodic
maintenance/refurbishing.
Thankfully, there is a modern way of purchasing real estate for investment purposes. It's
through an instrument known as REIT. In her Budget speech, the finance minister announced
two key proposals for REITs. One, to allow foreign investors to purchase debt securities of
REITs, and second, to exempt REIT dividends from TDS. This has put spotlight on REITs, Let's
understand them.
Investors can think of REITs in a similar manner to a mutual fund. In effect, you give your money
to a manager who not only invests it on your behalf, but also takes care of any associated
problems such as finding tenants, collecting rent, paying any taxes, taking care of maintenance,
etc. Of course she charges a management fee, but in return she ensures that all the rent
collected is returned to you (after deducting certain expenses) every quarter.
REIT Investment:
Theoretically, REITS can invest in residential, office or commercial properties but current SEBI
regulations restrict them from purchasing vacant plots or agricultural land. Also, since they are
mandated to have a minimum of 80 per cent of their corpus invested in
rent-yielding/completed properties and a maximum of 20 per cent on under-construction
property/other real estate related securities, REITS are effectively instruments which allow the
public at large to invest in rent-yielding properties.
Investment Options:
Investors can directly purchase units of these REITs on the stock exchanges (BSE and NSE).
Another option for investors is the indirect route, i.e., purchasing the REIT Fund of Funds, which
invests in not only Indian REITs but also international REITs.
There are many advantages to the idea of investing in real estate through REITs. For starters, it
can be done from the ease of your house without any hassles. Also, the investment can be
made with a small amount of money, thereby reducing/eliminating the need to take out big
loans. Moreover, these transactions are subjected to a fraction of stamp duty as compared to
purchasing actual real estate. Needless to say, selling these investments is a lot easier than
selling a house. Since both of the listed REITs have long-term rental agreements, they have
become quite popular with even international investors who are looking for yields in an ultra-
low-interest scenario.
In spite of the above-mentioned advantages, there is no direct answer to the million dollar
question of whether one should invest in them or not. It depends entirely on each individual's
asset allocation needs. One also needs to consider the fact that SEBI regulations require a
minimum purchase value of Rs 50,000, therefore it won't be possible to invest in small portions
at regular intervals.
Investors need to realise that adoption of the REIT route does not mean doing away with the
requirement of undertaking careful research. Every investment decision should be evaluated
thoroughly in order to understand the risks associated with the underlying properties.
The basic risk-return tradeoff and investment characteristics of real estate will not change by
much just because investors choose a REIT. Most investors can do without these instruments as
their unique nature requires a considerable amount of time and effort in order to gain a
thorough understanding of it.
Portfolio Management Services: (PMS)

Portfolio Management Services (PMS), service offered by the Portfolio Manager, Individuals and
Non-Individuals such as HUFs, partnerships firms, sole proprietorship firms and Body Corporate
can invest in them. It is an investment portfolio in stocks, fixed income, debt, cash, structured
products and other individual securities, managed by a professional money manager that can
potentially be tailored to meet specific investment objectives. When you invest in PMS, you
own individual securities unlike a mutual fund investor, who owns units of the fund. You have
the freedom and flexibility to tailor your portfolio to address personal preferences and financial
goals. Although portfolio managers may oversee hundreds of portfolios, your account may be
unique.
Discretionary:
Under these services, the choice as well as the timings of the investment decisions rest solely
with the Portfolio Manager.
Non-Discretionary
Under these services, the portfolio manager only suggests the investment ideas. The choice as
well as the timings of the investment decisions rest solely with the Investor. However the
execution of trade is done by the portfolio manager.
Advisory
Under these services, the portfolio manager only suggests the investment ideas. The choice as
well as the execution of the investment decisions rest solely with the Investor. Note: In India
majority of Portfolio Managers offer Discretionary Services.
The Investment solutions provided by PMS cater to a niche segment of clients. The clients can
be Individuals or Institutions entities with high net worth.
The offerings are usually ideal for investors: who are looking to invest in asset classes like
equity, fixed income, and structured products etc., who desire personalized investment
solutions, who desire long-term wealth creation, who appreciate a high level of service.
Apart from cash, the client can also hand over an existing portfolio of stocks, bonds or mutual
funds to a Portfolio Manager that could be revamped to suit his profile. However the Portfolio
Manager may at his own sole discretion sell the said existing securities in favour of fresh
investments.
The tax liability of a PMS investor would remain the same as if the investor is accessing the
capital market directly. However, the investor should consult his tax advisor for the same. The
Portfolio Manager ideally provides audited statement of accounts at the end of the financial
year to aid the investor in assessing his/ her tax liabilities.
Benefits of PMS:
Professional Management:
The service provides professional management of portfolios with the objective of delivering
consistent long-term performance while controlling risk.
Continuous Monitoring
It is important to recognize that portfolios need to be constantly monitored and periodic
changes made to optimize the results.
Risk Control
A research team responsible for establishing the client's investment strategy and providing the
PMS provider real time information to support it, backs any firm's portfolio managers.
Hassle Free Operation
Portfolio Management Service provider gives the client a customised service. The company
takes care of all the administrative aspects of the client's portfolio with a periodic reporting
(usually daily) on the overall status of the portfolio and performance.
Flexibility
The Portfolio Manager has fair amount of flexibility in terms of holding cash (can go up to 100%
also depending on the market conditions). He can create a reasonable concentration in the
investor portfolios by investing disproportionate amounts in favour of compelling
opportunities.
Transparency
PMS provide comprehensive communications and performance reporting. Investors will get
regular statements and updates from the firm. Web-enabled access will ensure that client is
just a click away from all information relating to his investment. Your account statements will
give you a complete picture of which individual securities you hold, as well as the number of
shares you own. It will also usually provide:
 the current value of the securities you own;
 the cost basis of each security;
 details of account activity (such as purchases, sales and dividends paid out or
reinvested);
 portfolio's asset allocation;
 portfolio's performance in comparison to a benchmark;
 market commentary from Portfolio Manager
Customized Advice
PMS give select clients the benefit of tailor made investment advice designed to achieve his
financial objectives. It can be structured to automatically exclude investments you may own in
another account or investments you would prefer not to own. For example, if you are a long-
term employee in a company and you have acquired concentrated stock positions over the
years and have become over exposed to few company's stock, a separately managed account
provides you with the ability to exclude that stock from your portfolio.
Risk Factors:
All investments involve a certain amount of risk, including the possible erosion of the principal
amount invested, which varies depending on the security selected. For example, investments in
small and mid-sized companies tend to involve more risk than investments in larger companies.
Unit III Estate Planning
Introduction:
Estate consists of everything an individual own, it may be car, home, other real estate, checking
and savings accounts, investments, life insurance, furniture, personal possessions. No matter
how large or how modest, everyone has an estate and something in common one cannot take
it with they die.
When that happens (and it is if not when), the people would probably want to control how
those things are given to the people or organizations you care most about. To ensure that their
wishes are carried out, they need to provide instructions stating whom they want to receive
something, what, and when to receive it. A will, of course, need to be done, drafted and
executed with the least amount paid in taxes, legal fees, and court costs. Estate planning is also
taking steps now to make carrying out plan as easy as possible later.
However, good estate planning is much more than that. It should also do the following:
 Include instructions for individuals care and financial affairs if you become incapacitated
before they die.
 Include arrangements for disability income insurance to replace your income if
individual cannot work due to illness or injury, long-term care insurance to help pay for
your care in case of an extended illness or injury, and life insurance to provide for family
in case of death of breadwinner of the family.
 Provide for the transfer of business at retirement, disability, incapacity, or death.
 Name a guardian for your minor children’s care and inheritance.
 Provide for family members with special needs without disqualifying them from
government benefits.
 Provide for loved ones who might be irresponsible with money or who may need
protection from creditors or in the event of divorce.
 Minimize taxes, court costs, and unnecessary legal fees, which may include funding
assets into a living trust, completing or updating beneficiary designations, or otherwise
aligning your assets with your estate plan.
Importantly, estate planning is also an ongoing process, not a one-time event. One should
review and update plan as family and financial circumstances (and the relevant laws) change
over lifetime.
It is not just for retirees, although people do tend to think about it more as they get older.
Unfortunately, we cannot successfully predict how long we will live, and illness and accidents
happen to people of all ages.
Estate planning is not just for the wealthy either, although people who have accumulated
wealth may think more about how to preserve it. Good estate planning is often more impactful
for families with modest assets because the loss of time and funds as a result of poor estate
planning is more detrimental.
Benefits if Estate Planning:
 Prevents financial and legal grief to your loved ones
 Avoids complications, disagreement, bitterness and drift in the family
 Ensures that all assets are passed on to your loved ones
 Can provide for, or address to a family member or a loved with special needs
 Estate planning can also help pass accolades bestowed on you to a specific individual
 Helps to prepare for contingencies
 Estate planning helps the beneficiary reduce tax outgo on account of inheritance
Will:
A Will is legal declaration of the intention by the one making it – the testator –with respect to
property that he/she desires to be carried into effect after his death. A will can be prepared by
anyone who is 18 years of age, of sound mind, and free from any coercion, fraud and undue
influence.
Often, we hear: “I am too young to prepare a will” or “I don't need to prepare a will”. But amid
a materialistic world, unwanted complications are common and we’re sure you don’t want to
leave your family with grave inconvenience. People become incapacitated or even lose their
ability to comprehend. A Will created at such an age, when a person might not be in his or her
right senses might create misunderstandings, doubts and disputes in the family later. Hence it is
advisable to prepare your Will at a relatively young age when you are fit, in order to avoid
conflicts later.
So, there’s no specific age when you should make a Will as long as you’re a major (18 years of
age and above).
Benefits of having a Will:
There are host of benefits of writing a Will. Some of them are highlighted below:
 It provides you, the testator, a sense of sense of understanding current financial
strength (and even an opportunity to improvise in the remaining life span, especially if
you’ve made a Will in the initial accumulation phase of your economic life cycle)
 The above also brings in clarity while passing assets amongst loved ones
 Avoids disputes within the family, if explicit and rational distribution is done
 Helps you make provisions for minor children and children with special needs as per
your wish
 Disinherit certain relatives who may be troublemakers
 Help you address transfer of online assets
 Help you address transfer of offshore assets
 You can choose your executor
 Specify even funeral wishes
 Prevents financial and legal grief
 Brings in peace of mind and happiness
Hence, a Will can be said to be the corner stone of estate planning. Hence plan and make a Will.
Registration of Will
It is not mandatory to register a Will. However, If you wish your Will can be registered with the
registrar/sub-registrar by paying a nominal registration fee.
For registering your Will as a testator, you are required to be personally present at the
registrar's office along with the witnesses. If the registrar/sub-registrar is satisfied with the
documents furnished, an entry will be made in the register with the year, month and date
mentioned, and you, the testator, will be issued a certified copy. If the registrar/sub-registrar
refuses to register the Will, as a testator you can always file a civil suit in a court of law (with
jurisdiction) and the Court will pass a decree of registration of the Will if it is satisfied with the
evidence produced. But remember, a suit can be filed only within 30 days from the date of
refusal.
It is vital to note that once you Will is registered, it is in the custody of the registrar. Therefore it
cannot be tampered, mutilated, stolen or destroyed. Now in case you’ve thought of amending
your registered Will, it would be better to re-register the amended Will, although it is not
compulsory.
A registered Will cannot provide legal sanctity to Will nor does it give any special status. A Will
can always be challenged in the court of law. However, registration can serve as an evidence of
genuineness of the Will.
2. Trusts
A trust is an agreement between the settlor and the trustees to transfer the legal ownership of
assets / property to the trustee with the obligation that the same should be held for the benefit
of the beneficiaries as specified in the trust deed.
A Trust has four components:
1. Author of the Trust/settlor: He’s the one who settles the Trust or in other words is the
author of the Trust
2. Trustee: An individual / entity appointed by the Settlor to administer the Trust and
accept the responsibility to act as Trustee.
3. Beneficiary: The person(s) for whose benefit the Trust is created is called the
Beneficiary.
4. Trust-property or Trust money: This the subject matter of the Trust and can comprise of
both, movable and immovable property viz. cash, jewellery, land, investment
instruments etc.
For creating a Trust, legally it is necessary for the Settlor i.e. the person who creates a Trust, to
ensure that four conditions are complied with:
 Make an unequivocal declaration binding on him;
 Outline the purpose / objects of the Trust
 Clearly specify the beneficiaries of the Trust; and
 Transfer the identifiable property under an irrevocable arrangement to the beneficiaries

Types of Trusts:
Well, there are various types classified as per the Indian law depending on the purpose they’ve
been formed.
Public Trust – Such a Trust is constituted wholly or mainly for the public at large. Thus,
beneficiaries are incapable of ascertainment. Usually such trusts are in the nature of religious or
charitable trust.
Private Trust – A trust is said to be private when it is constituted for the benefit of one or more
individuals who are, or within a given time maybe definitely ascertained. A Private Trust is
governed by the Indian Trust Act, 1882, but if such a Trust is created by will, it shall be subject
to the provisions of the Indian Succession Act, 1925.
Wills vs. Trusts
By adopting a Trust route, a person can avoid the issues which arise in a Will, such as—
authenticity of the Will, mental soundness of the person making the Will and alleged forgery
etc. The grounds on which a Will can be challenged are numerous.
Moreover, the probable time to get a probate on a contested Will could take several years and
can be expensive.
On the other hand, a Trust deed is never disclosed to anyone and is highly confidential and
there is no need to obtain probate.
Creating a Private Trust resolves most of the problems and can be beneficial in the
management and distribution of assets.
Although the best way to bequeath the assets to the beneficiaries seems to be creating a
Private Trust, it is ideal to have a combination of both—Will and Trust. It will all boil down to
the individual, the extent of his assets, his objectives and constitution of the family.
A Private Trust has its own set of limitations too:
 Cost: The cost paid towards stamp duty in case of transfer of immovable property
differs from one state to the other.
 Trustee: The success of a Trust depends upon the right selection of the Trustees. A
wrong selection can defeat the entire purpose of setting up the Trust in the first place.
 Trust Deed: Drafting a Trust Deed is more difficult than writing a Will. If not drafted
clearly, a trust deed is difficult to execute. Also, there’s less flexibility to a Trust as
against writing a Will.
Sample Will
This is the last will executed by me, AB, etc., this the _______ day in the city of
__________________.
1. I hereby revoke all former wills and codicils heretofore made by me.
2. I appoint CD, etc., EF, and GH, etc., to be the executors and trustees of my this will.
3. I appoint the said trustees as guardian of my children jointly with my wife.
4. I bequeath –
(i) to my wife OP Shares Nos. ______ in Company Limited’
(ii) to my son MN my gold watch, chain and my sign ring ;
(iii) to my daughter KL my motor car;
(iv) to my friend XY all my books.
5. I bequeath the following pecuniary legacies :
(i) the sum of Rs. _______ to each of the trustees who shall prove my will and act in trust
thereof.
(ii) Rs. _______ to each of my servants MN and Rs.
6. I bequeath the following charitable legacies ;
(i) to the __________ Hospital Rs. ___________,
(ii) to the___________ College Rs. ___________.
(iii) to the __________ Orphanage Rs. ___________.
(iv) to the __________ Temple Rs. ___________.
7. I give to my sister PQ, the wife of TU, during her life an annuity of Rs. _____ payable my
equal monthly installments on the first day of each month after my death without power of
anticipation during her coverture.
8. I release and forgive to IJ or to his representative if he dies before me the amount that may
be due at the time of my death to me on his bond for Rs. ______ dated _______ and direct my
trustees to cancel and deliver up the bond to him.
9. I devise and bequeath all my property, movable and immovable, existing at the time of my
death (except property disposed of by this will) unto my trustees upon trust to sell all the
covert the same into money, and after payment of all my debts, funeral expenses, legacies and
annuities hereinbefore provided, to invest the net proceeds thereof in any investment they in
their absolute discretion think fit and to hold the same and income thereof upon trust
hereinafter declared and specified.
10. My trustees shall pay the income of the trust estate to my wife during her lifetime without
power of anticipation until her re-marriage and after her remarriage, one moiety to her and the
other moiety to my children in equal shares.
11. Subject to aforesaid my trustees shall divide the corpus of the trust estate among my
children equally, who being sons attain the age of majority and in the case of daughters attain
majority or marry under age :
Provided that if any child of mine dies during my life-time, then his children shall take equally
between them and share of such child.
12. I hereby give power to my wife, the said OP to appoint a new trustee or new trustees on the
occurrence of any vacancy in the office of the trustees.
13. I direct that if there is any difference of opinion between the trustees on any matter
concerning this will, or the management of the property hereby bequeathed, or the execution
of trust hereby created, the opinion of the majority shall prevail.
IN WITNESS WHEREOF I, the said AB, have executed this will in the presence of the witnesses
hereunder who have attested the same in my present.
(Sd.)
Testator
Witnesses:
1. ________________
2. ________________

FT 405 FMAJ Investment Advisor - Notes

Uploaded by

Copyright:

Available Formats

FT 405 FMAJ Investment Advisor - Notes

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FT 405 FMAJ Investment Advisor - Notes

Uploaded by

Copyright:

Available Formats

FT 405 FMAJ Investment Advisor – Class Notes

Unit I Financial Planning

 Implementation of the planned decisions.

Do- Set Expense Category, allocate percentage to each category of expenses.

 For employees of the central or state government organizations, 10% of monthly

 Deduction on Principal is allowed

Sukanya Samriddhi Yojana (SSY):

Senior Citizen Saving Scheme (SCSS):

Kisan Vikas Patra(KVP):

Portfolio Management Services: (PMS)

Unit III Estate Planning

 Transfer the identifiable property under an irrevocable arrangement to the beneficiaries

You might also like