6. Time horizon, usually more than a few years is
considered long term
Rate of return required or desired
Ability to handle uncertain results
7. “Education is not onlya ladderof
opportunitybut also an investment in
one’sfuture -ED Markey
8. The ultimate success with any client
relationship comes with the appropriate
education of client
The importance of educating client about the
process of wealth management and various
building blocks cannot be overemphasized.
Client should to be made aware of-
Investment process
Risk-Return relationship
Importance of diversification
Relevance of assets allocation
9. An understanding of investment process is
critical for every investor and advisors should
communicate the functions of the process.
There are four stages in investment process
Understanding Needs, limitations And risk
preferences
planning for investment
Implementing the investment plan
Performance evaluation
10. The investment process starts with the
investor. For an individual investor creating a
personal portfolio, the first step of
understanding one’s needs, financial
limitations , and risk appetite is just as
imperative as it for a portfolio manager
The most critical component of this stage is
risk assessment . Willingness and capacity to
bear risk vary widely among investors and
each portfolio should reflect the owner’s risk
preference
Needs limitations and risk
preferences
11. investment planning deals
with the selection of
investment strategy that takes
advantages of opportunities
afforded by each location and
meets the goals and needs of
the investor
12. Implementing investment plan is
principally concerned with manager
selection and management . It
involves many issues like, market –
timing, initial portfolio funding and
etc. And investor may have to
exchange transaction cost against
transaction speed .
13. Performance evaluation is the final stage of
the investment management process. The
measurement of portfolio performance allows
the investors to determine the success of the
portfolio management process and of the
portfolio manager. Its enable investors to
evaluate the risks that are being taken.
14. The objective of investors is to maximize
expected returns ,although high return come
with risks.
Return is an reward an investor gets for taking
risks and investing in certain classes of assets.
Return is an inspirinf force behind every
investment decisions.
15. Return on a typical investment consists of
two components:
YIELD. The fundamental component that one
can think of when discussing investment
returns is the income on investments ,either
investment or dividends.
Unique feature: Issuer makes the payments in
cash to the holder of the asset
Relate cash flows to a price for the security
16. Capital gain(loss).It is not only for common
stocks and long term bonds and other fixed
income securities.
Appreciation or depriciation in the asset price
Price change
There are 2 cases:
Long position- difference between the
purchase price and and the price at which the
asset can be or is sold
Short position-difference between the sale
price and the subsequent price at which the
short position is closed out. In either case a
gain or loss occur.
17. We know that different clients
have different risk profiles.
Some are conservative, some
are moderate, and other may
be more aggressive
19. This risk occurs due to changes in the economic
factors such as interest rates , unemployment ,
etc. systematic risk effects all corporates , thus
all investments; it is a system-wide risk that
cannot be diversified away. Thus risk is also
known as non-diversifiable risk or market risk.
20. These risks are firm-specific , i.e., an
unsystematic risk does not impact the entire
economic environment. Actions by a firm
such as management decisions , labor
characteristics ,and so forth are the major
causes of unsystematic risk.
21. Interest risk = when interest fall in the
market then it effects the market are it
brought some changes in market
Inflation risk = the higher the inflation rate,
the faster the money loses its value
Maturity risk = the greater the maturity of
an investment , greater the change in price
for the given change in interest rates
22. Liquidity risk = liquidity refers to the ability
of an assets to convert into cash in a short
span of time through buying and selling
without a major movement in price
Exchange risk = this is an uncertainty
associated with possible change in the value
of a currency
There are two types of FER.
Translation risk
Transaction risk
23. Business risk = the uncertainty associated
with a firm's operating environment and
reflected in the variation of earning before
interest and taxes
Financial risk = it is also associated with a
firm’s financing methods and reflected in the
variability of EBT
24. Default risk = In simple words, default risk is
the risk of non payment of any financial dues.
25. The basic tenet of good portfolio
management is to diversify the portfolio.
By holding an array of assets ,the wealth
manager can lower the risk without
necessarily having to reduce the returns.
Clients do not need to calculate the SD of the
return of their assets.
Diversification across investments is a way to
reduce the portfolio risk.
26. EXAMPLE: There are two securities P and Q
having a potential return of 10% each and a SD of
20% each .Further the returns of both these
securities are independent of each others
performance.
Let us assume that the wealth manager inverse
equally in both of these securities .the weighted
potential return (0.5*10%+ 0.5*10%) will be equal
to 10% ;which is same as debt of the individual
securities. But since the risk is now spread over
to uncorrelated securities,The SD (i.e. ,risk ) of
your portfolio will be 14.1% (lower than 20% for
each individual assets)
27. In the above example explained ,the wealth
manager was able to lower the risk profile
keeping the returns same by diversifying into
a couple of assets whose returns are
independents like say stock P, a banking
company and stock Q, an engineering
company. Here care should be taken that
diversification is into stocks that are not
corelated.
28. To be precise ,there are two crucial aspects to
keep in mind while investing:
Every asset has a risk attached to it. The
higher the risk ,the higher should be its
expected returns and vice versa.
Do not put all the eggs in one basket. To
minimize risk through diversification ,spread
the portfolio across different assets classes
like fixed income ,equity,gold,commodities
real estate etc. Whose returns are not
corelated.
29. Asset allocation is the art of creating a portfolio
of assets to meet the financial objectives of an
investor.
It involves holding a diversified portfolio which
are spread or allocated across different types of
investments such as equities
i. Shares
ii. Bonds
iii. Cash
30. Studies indicate that around 90% of the
difference in returns between portfolios is due to
assets allocation decisions
Constructing a portfolio without an appropriate
asset allocation strategy is a bit like having a
business chart without a business plan
Once assets have been purchased as per the
client’s financial objectives and a sound portfolio
has been created , it need not be reviewed every
day. Such a portfolio does not require high
frequency rebalancing
31. The importance of asset allocation as
opposed to the selection of individual
equities. But it does not mean that the
selection of the underlying assets is
unimportant, rather that the investment
process needs to be balanced
Assets allocation not only facilitates in
calculating the expected returns from a
portfolio but also govern a portfolio’s risk
levels
32. The assets allocation decision starts with
determining the relative importance of
income and capital appreciation to the
investor
The four conventional asset classes i.e.
equities
fixed income
real estate
cash or cash equivalents
Differ in their total income and capital growth
return.
33. Assets allocation is an intricate process of
selecting investment assets so that their income
and return characteristics are in sync with an
investor’s risk tolerance
The major mistake an investor undertakes during
assets allocation is to take on more risk then
required to accomplish a desired return
For instance, an investor may hold more equities
than necessary to achieve his/her desired return
and may be increased risk unnecessarily, and
hence the need for balancing the risk with
expected return from the portfolio.
