Determinants of Risk Appetite

• Stage in life – Lifestyle

Investments

• Net-worth

• Earlier experience with

investments

• Investment Objective

• Time Horizon
 Concepts of return

• Interest
• Dividend
• Short Term capital gains
– At applicable Tax Slab
• Long Term capital gains
– @ 10% w/o Indexation
– @ 20% with Indexation
Do we have a Nostradamus
amongst us?

The man who could tell

tomorrow?
 Uncertain Interest rates

In 1965 interest rate was 4.8%

In 1995 interest rates were 14%

In 2003 interest rates are 6.5%

2006?
 Uncertain Times

1984 Bhopal Gas Tragedy

1996 Saudi – Kazak Mid Air Collision

2000 Gujarat Earthquake

2007 Mumbai Blast

2008 ?

? ?
 But tomorrow will come

… and with each “tomorrow” the world

changes
Inflation – Understanding actual return

Inflation
Return

Market Returns

SAV Returns

Risk
Will this create Value?
 Education & Marriage expenses
Rs. Lacs

1990 2000 2010 2020

Education
Engg1.00 3.2 8.3 21.5
Medicine0.50 5.0 12.9 33.6
MBA0.30 2.4 6.2 16.2

Marriage 0.80 2.0 5.2 13.5

2.2 5.0 13.0 33.6
4.0 10.0 25.9 67.3
 Return vs. Risk
Where will you place the following on the graph?

1. Fixed Deposit
2. Gold
3. Land

Return
4. Shares
5. Chit Funds
6. Lottery
7. Bank Deposit
8. Cash Risk
 Tax Planning is the Key
• Tax Incentives for Investment
– Sec 80C
– Sec 80CCC(I) for pension
policies
• Tax status of returns
– 80 L for interest income on
bonds and deposits
– Tax free returns from
Insurance Plans, PPF , RBI
Relief Bond, Dividends etc
• TDS
 A Multi Layered Decision
• Determine Savings available for Investing ?
– How much to keep aside for contingencies/
liquidity?
– How much to save for planned Asset Purchases ?
• Self –Manage Investments or Outsource
Investments ?
– Choice of Financial Intermediary / Issuer
• How to execute the investment decision ?
– Horizon/Objective
– Risk Appetite
– Tax Planning
Prudently Assess Need For Liquidity

• To meet emergencies or exigencies

– Be realistic about amount needed
– Insurance should be the major tool
• Keeping Money Liquid has a cost
• Lower Yield
• Fixed Exit Charge
– SO instead hold assets that can be sold
• Easily
• At a reasonable price
• Rest is Invested for Long Term
 The Choice is Yours ?
• Do you have access to information
– Awareness & access to Instruments
• Do you have time to manage investments
– Continuous review of Investments
• Do you have the expertise to manage
them
– Tax Planning
– Asset Allocation
– Security Selection
– Market Timing
 Critical needs
Stage I: Family
Protection of the family in case of death of the
breadwinner

Stage II: Children

Providing for children’s education, marriage and start-up
in life

Stage III: Old Age

Providing oneself a comfortable and independent
retirement

Stage IV: Special Needs

Providing for disability, medical conditions, ailments etc.

Stage V: Appreciation of Wealth

Long-term savings for building a house, combating
inflation etc.
 The Client …
…wants
Products for Savings, Investments & Protection with the
following features
Speed in service
Convenience
Transparency
Security
Safety
Returns
Protection
Liquidity
Flexibility
Tax benefits

Makes choices on his own … … one stop solution.

 Solution
The right balance of protection
and investment with Flexibility

Protection Investment/Savings

Riders
 An Ideal Insurance product

• Makes the customer in control to choose premium, risk cover,

riders, liquidity
– Flexibility
• Combination of Life Insurance and Investment similar to a
mutual fund
– With Tax Benefits
• Good markets - good returns, bad markets - stable returns
• Allows to plan for an unpredictable future
– Interest rate
– Inflation
– Money supply changes of the customer
– Not paying premium / Withdrawing money / Depositing extra money
 Tax Advantages
• Tax benefits u/s 88 at entry level & 10 (10D) at maturity

• Capital gains are taxed as long term capital gains @ 20%

in mutual funds but in a ULIP the money is tax exempted .

• Reallocation to different funds allowed which is not

allowed in a mutual fund

• Life cover not available in Mutual Funds

• Unique 3-in-1 policy: risk cover, returns, liquidity

• Investor knows where the investments have been made -

stated in the National Daily’s.

• Being an insurance company the investments are more

strictly monitored ( IRDA and SEBI ) & carry lower risk
 Planning cash requirements
Customer needs Retirement
• Saving Holiday
• Investmen Children
Car Future
t
Childre
• Protection House
n
Marriag
e
Job

@ Different Life
Stages
 Holistic Financial
Planning
Retirement

Children Education

Protection Savings Asset creation

Integrated
Family Protection
Integrated
Financial
Protection against Planning
disability
Protection against
Dreaded diseases

Investment Various investment

options to create wealth
 Life Stage Needs

Retirement –Less P, More

S&I
Education –More P, S &
More I

Children – More P, S
&I
Marriage – more P &
S
Job – P & S
 Life Circumstances
 Risky Job – High risk, High Income
 Newly married
 Mortgage
 Children –Education & Marriage
 Medical expenses and uncertainties
 Inherit wealth
 Retirement
 VRS
 Widow
Needs As a Result of Circumstances

1. High risk job 1. save for lean periods

2. Mortgage 2. save for repayment incase of
premature death
3. Bonus 3. invest it for better returns
4. Old age 4. save for financial
independence after retirement
5. income + savings
5. VRS
6. regular income + emergency
6. Widow
fund + lump sums in future
Needs As a Result of Circumstances

1. Married 1. Want to buy a house

2. Children
2. Education and marriage
3. Dependent Parents
3. Medical Requirements
 Solution

Circumstances & needs may be similar, but

solutions will vary.
 Professional – MNC - High Risk High income
 Business – High risk – fluctuating income
 Govt. Employee – secured job – definite
income
Why is The Right Solution Important

 To avoid lapsation
 To prevent under commitment or over
commitment
 Periodicity of payments
 Any likely changes in cash flows
Why is it important to sell the Right Solution

 Right solutions create satisfied clients

 Satisfied clients provide referrals
 Referrals result in business growth.

Pitfalls:
 Mis-selling due to own pressures:
 Targets/ Product launches/ Incentives
 Key Aspects of Financial
Planning

• Identification of key goals

• Advance provisioning
• Right amount of money
• Right time
• Periodic review of plan.
 Investment Planning

• Investment means putting your money to

work to earn more money.
• The basic investment objective of most
people is to earn the maximum possible
total post-tax rate of return on the funds
available for investment, consistent with
the person’s investment objectives, risk
appetite and the investment limitations
under which he must operate
 Investment Objective

 Income
 Growth
 Capital Preservation
Investment –Key Considerations

SAFETY

Also,
•Inflation
•Taxation

RETURN LIQUIDITY
 Key Investment Considerations

Liquidity
Safety You get your money back
You get your When you want it
Money back

Plus Convenience
How easy is it to invest, disinvest
and adjust to your needs

Post-tax Returns
How much is really left post tax ?

For the same liquidity – higher the safety, lower the returns
For the same safety – higher the liquidity, lower the returns
 Growth Across All Asset Classes
Cumulative Annualized Returns (1980-98)
25.00%
Real Growth = Growth - Inflation
20.16%
20.00%

14.47%
15.00%

9.74% 10.97%
10.00% 9.19%
7.62%
5.28%
5.00%

0.55%
0.00%
Inflation Gold BankFD CompanyFD Equities
-1.57%
-5.00%

Source : RBI report on Currency and Finance (1997-

98)
BSE Sensitive Index on Equity Prices-BSE

History favors equities!

 Time Horizons
Risk Reduction Over Time
150%
One year Holding Periods
125%
Five Year Holding Periods
100%
Twenty Year Holding Periods
75%
Average Compounded Annual Return
50%

25%
12.4% 11.2% 5.3 3.8%
0% %

-25%

-50%
Government Cash
-75% Small Large
Company StocksCompany Stocks Bonds
Source : Ibbotson Associates Inc.

longer time reduces variability

Investment Strategies

Conservative
Take only limited risk by concentrating on secure,
fixed-income investments etc.

Moderate
Take moderate risk by investing in mutual funds,
bonds,select blue-chip equity shares etc.

Aggressive
Take major risk on investments in order to have high
(above-average) returns like speculative or
unpredictable equity shares etc.
Investment Approaches

Aggressive Investor Moderate

Investor

Conservative Investor
Lets capture the market
together

……….Good Luck