Transcript Document

WHAT REALLY MATTERS
Perspectives on Investing
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Some questions we will try to address today
What, when,
how do I buy
financial
products?
What are the
factors that
determine
Are market levels
relevant??
What is better:
buy and hold or
trade?
returns?
I always seem to buy when the
market has peaked, is there a better
way?
Are you Saving or are you Investing?
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Profession vs. Investments
PROFESSION
INVESTMENTS
INCOME
CREATION/
ACCUMULATION
OF WEALTH
NURTURE/
PRESERVATION
OF WEALTH
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Profession vs. Investments
PROFESSION
INVESTMENTS
INCOME
YOU KNOW
BEST
TRUST YOUR
ADVISOR TO
KNOW BEST
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Consider the rising cost of living!
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RISING COST OF LIVING
Planning a wedding today
Wedding at the Taj
Guests :
Price per plate:
500
Rs. 2,000
Decoration:
Rs. 10,00,000
Other Expenses / Gifts, etc:
Rs. 15,00,000
Total Expenses
Rs. 35,00,000
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RISING COST OF LIVING
Planning a wedding for your child in 20 years
Wedding at the Taj
Guests :
Price per plate:
500
Rs. 6,414
Decoration:
Rs. 32,07,135
Other Expenses / Gifts, etc:
Rs. 48,10,703
Total Expenses
Assuming Inflation @ 6% for 20 years
Rs. 1,12,24,838
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RISING COST OF LIVING
Household expenses are on the rise
Inflation will further shrink your buying power!
A Loaf of Bread
1 Liter Carton Milk
1 Kg Apples
Year
Amount
Year
Amount
Year
Amount
2000
Rs. 10
2000
Rs. 25
2000
Rs. 25
2010
Rs. 16
2010
Rs. 40
2010
Rs. 80
2020*
Rs. 29
2020*
Rs. 72
2020*
Rs. 143
2030*
Rs. 51
2030*
Rs. 128
2030*
Rs. 257
Assuming Inflation @ 6% for years 2020 and 2030
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RISING COST OF LIVING
Yesterday’s luxuries are becoming today’s necessities
Products previously thought as luxuries are the norm today
Items
Cable T. V.
LCD T. V.
Mobile
Washing Machine
Microwave
Car
Home Theatre
System
No
No
No
No
No
No
No
1991 Today
Yes
Yes
Yes
Yes
Yes
Yes
Yes
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RISING COST OF LIVING
Our life cycle: Focused on meeting current needs only
Can we ignore planning for the future?
Retirement
Child 2’s
Marriage
Child 1’s
Marriage
House
Child 2’s
e
Incom
Child 2
College
Child 1’s
College
Child 1
Car
Marriage
0
Birth and
Education
Working Life
25
Age
60
Retired Life
75 +
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Failing to plan today is as good as
planning to fail in the future!
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What typically drives us to invest?
Greed / Fear?
News, hot tips, gut feeling?
Macro-economic or global scenario?
Political environment?
Should these
be the main
motivators to
invest?
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Creating long term wealth: What really matters?
5% of the return
– Relative performance of selected funds
95% of the return
– Asset Allocation
– Ability to handle emotional & financial stress
– Monitoring and tracking your portfolio periodically
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Importance of Asset Allocation
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ASSET ALLOCATION
Asset Allocation

Diversifies your investments across asset classes like equities /
stocks, bonds / debt, cash, real estate, etc

A common sense investment strategy

Tailored to your needs and goals
RISK PROFILE
ASSET
ALLOCATION
FINANCIAL
GOALS
ASSET ALLOCATION
Benefits of Asset Allocation

May reduce overall risk

May improve your chances to earn more consistent returns over time

Helps keep you focused on your goals
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ASSET ALLOCATION
Asset Allocation: Need based strategy
Capital Growth
Risk: Medium to High
Period: 3 to 5 years
Stocks
Growth
Funds
Income
Risk: Medium to Low
Bonds
Debentures
Period: 1 to 3 years
Income/Bond Funds
Company Fixed Deposits
Capital Preservation
Risk: Low to Medium
Period: Less than 1 year
Money Market Funds
Short-term deposits / Government Paper
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ASSET ALLOCATION
Asset Allocation: Age based strategy
Age Group 25-40
Age Group 41-50
10.00%
15.00%
15.00%
Growth (Equity)
Growth (Equity)
Income (Bonds)
Income (Bonds)
Liquidity (Banks)
35.00%
Liquidity (Banks)
50.00%
75.00%
Age Group 51-60
Age Group Above 60 yrs
20.00%
Income (Bonds)
25.00%
Income (Bonds)
Growth (Equity)
Growth (Equity)
Liquidity (Banks)
Liquidity (Banks)
25.00%
35.00%
45.00%
The above are only hypothetical examples and are not necessarily indicative of the strategies to follow for the age groups
mentioned above
50.00%
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ASSET ALLOCATION
Making asset allocation work
Periodic Rebalancing
EXAMPLE
EXAMPLE
Equity
EquityFunds Income
IncomeFunds
Funds
Funds
Profile & objective based allocation 70%
Profile & objective based allocation
70%
Bull Market fluctuation
80%
Bull Market fluctuation
80%
Rebalance
70%
Rebalance
70%
30%
30%
20%
20%
30%
30%
Rebalancing helps investors enter equities at ‘lows’ and exit at
‘highs’ without having to ‘time’ the market
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ASSET ALLOCATION
Making asset allocation work
Periodic Review
EXAMPLE
Today
After 5 yrs
After 7 yrs
After 9 yrs
Years to goal
Equity Allocation %
10
5
3
1
Periodic review of objectives can ensure an investor is not left at the
vagaries of equity markets when he needs his money
70%
60%
40%
10%
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Creating long-term wealth:
What really matters?
WHAT REALLY MATTERS
Where you invest
Equities can outperform other asset classes over time
Average inflation figures for the past 5, 10 & 15 years were 5.29%, 5.03% & 4.98% respectively
As of 31 March, 2011. *Compounded Annualized Growth Rate (CAGR), Gold Data: International Spot Gold Prices;
# Average of 10yr GOI yield to maturity, N.A.: Not Available. FD rate shown above is rate effective from 14.02.2011 for
deposits below Rs. 1 crore as offered by State Bank of India (Source: www.sbi.co.in). Bank Fixed Deposits are
relatively safer as they are covered under Deposit Insurance and Credit Guarantee Corporation of India to the extent of
Rs. 1 lakh per account. GOI bond offers fixed and assured returns.
Source: BSE, Newswire18. Past performance may or may not be sustained in future.
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When you invest
Consider the case of Franklin India Bluechip Fund (FIBCF)
 Over the 17 period December 01 1993 – March 31 2011, spanning 4186 business
days, Franklin India Bluechip Fund grew at an annualized rate of 25.67% p.a.
 If in the process of timing, an investor had been out of the market on the 10 best
days, his returns would be 4.89%.
 Staying out on the 30 best days, his returns would be 1.86%.
Past performance may or may not be sustained in future. Returns of FIBCF and
benchmark (BSE Sensex): 1 yr, 3 yr, 5 yr , since inception: FIBCF: 12.77%, 14.20%,
14.38%, 25.67%; BSE Sensex: 10.94%, 7.52%, 11.50%, 10.79%. Returns are
compounded and annualized based on 31 Mar 2011 Growth Plan NAV of Rs.
219.1105. Inception Date: 01 Dec 1993. The scheme became open-ended in Jan
1997. Dividends are assumed to be reinvested and bonus has been adjusted. Load is
not taken into consideration.
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WHAT REALLY MATTERS
When you invest
Take another example, the BSE Sensex
For the 20 year period ended March 31 2011 if you had:
Stayed fully invested, your returns would be:
15.10%
Missed the 10 best days, your returns would be:
9.23%
Missed the 20 best days, your returns would be:
5.68%
Missed the 30 best days, your returns would be:
2.75%
Missed the 40 best days, your returns would be:
0.02%
The example given above is purely hypothetical and illustrative only since one
cannot invest directly in the BSE Sensex. Past performance may or may not be
sustained in future.
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WHAT REALLY MATTERS
When you invest
Points to ponder
Perfect market timing requires one to get two things right: the right exit
point and the right re-entry point
Getting even one of these wrong can affect one’s returns
Mathematically, the odds are heavily against one being able to
perfectly time the market
The probability of getting the timing right is 0.23%*
So what’s a better way to invest?
* 10 best days from 4186 as shown in the example of FIBFC
WHAT REALLY MATTERS
Not market timing but time in the market matters!
Consider the example of Franklin India Bluechip Fund, a fund
with a 17 year track record across market cycles
Assumed Rs. 10000 invested at Inception in FIBCF and BSE Sensex. Past performance may or
may not be sustained in future. Dividends are assumed to be reinvested and Bonus is adjusted.
Load is not taken into consideration. Period: Since Inception (01 Dec 1993) to 31 March 2011
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Staying invested helps!
While equities may be volatile in the short-term, over the
long term, the probability of loss decreases. Consider the
example of FIBCF
11Year
Year
33Year
Year
5 Year
5 Year
10 Year
10 Year
Maximum
Maximum
Returns
Returns
199.42%
199.42%
Minimum
Minimum
Returns
Returns
-50.60%
-50.60%
Average
Average
Returns
Returns
31.86%
31.86%
79.75%
79.75%
56.08%
56.08%
40.19%
40.19%
-9.57%
-9.57%
9.66%
9.66%
19.47%
19.47%
26.89%
26.89%
28.81%
28.81%
28.42%
28.42%
Possibility
of of
Possibility
of of
Possibility
Possibility
Making
Money
Money
Making
Money Losing
Losing
Money
75.72%
24.28%
75.72%
24.28%
88.63%
11.37%
88.63%
11.37%
100.00%
100.00%
100.00%
100.00%
0.00%
0.00%
0.00%
0.00%
Past performance may or may not be sustained in future. Annualized Compounded returns based on
Growth Plan NAVs. Period - Inception date to 31 March 2011; BSE Sensex rolling returns for the same
period: Maximum returns, Minimum returns, Average returns, Possibility of making money, Possibility of
losing money: 1 Year: 110.38%, -56.26%, 14.93%, 62.24%, 37.76%; 3 Year: 62.30%, -18.52%, 11.98%,
71.90%, 28.10%; 5 Year: 47.22%, -7.81%, 12.91%, 80.67%, 19.33%; 10 Year: 19.85%, 0.92%, 11.80%,
100.00%, 0.00%. Sales load has not been taken into consideration. Dividend/Bonus are adjusted. Inception
Date: 01 December 1993.
Over a 5 year horizon, investors have made money!
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WHAT REALLY MATTERS
How you invest
Cycle of market emotions should not rule you…
“Has been one of my best
EXUBERANCE
investment decisions…"
"Markets are on a roll…"
EXCITEMENT
"Should be a temporary
correction"
"I can withstand this, things
should turn around…"
"I've finally recovered my
principal. But should I exit
now?"
RELIEF
ANXIETY
FEAR
"Should I have exited when I
was making money"
"Once I recover my principal
I'll exit"
"Will the market ever go up?"
RELIEF
"How long will this correction
last?"
HOPE
PANIC
There is often no relationship between performance of a fund
and an investor’s performance
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WHAT REALLY MATTERS
When you start
Starting early can make a difference to your wealth
Gita, Age 30
Sita, Age 40
So what do you think is their
retirement corpus at age 60
assuming a return of 10%
annually on their investments?
10,000 p.m
10,000 p.m
Rs. 76.56 lacs
Rs. 2.27 Crores
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WHAT REALLY MATTERS
What are the returns you earn
The returns you earn over time can make a difference
Rs.4.97 Crores
Rs. 2.67 Crores
Rs. 1.20 Crores
8%
Value at age 60 of Rs. 100,000 invested every year at age 30 upto 58
at different rates of returns
12%
15%
SYSTEMATIC INVESTMENT PLAN
What is a Systematic Investment Plan (SIP)?


The term “systematic investing” applies to the process of investing
regularly i.e. at fixed intervals, say monthly or quarterly
Why invest systematically?
– Most of us get a monthly remuneration or salary
– Most of us pay monthly EMIs on a car, house, etc
– Isn’t it obvious we should also invest monthly?
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SYSTEMATIC INVESTMENT PLAN
Two basic principles on which SIP works

Power of Compounding

Rupee Cost Averaging
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SYSTEMATIC INVESTMENT PLAN
Rupee Cost Averaging at work
NAV = 12.00
Units = 83.3
NAV = 10.0
Units = 100
1-Jan-10
1-Feb-10
1-Mar-10
NAV = 8.0
Units = 125
Average Price per unit: Rs. 10.00
Average Cost per unit : Rs. 9.79
Assume Rs. 1,000 invested per month
NAV = 10.0
Units = 100
1-Apr-10
1-May-10
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SYSTEMATIC INVESTMENT PLAN
How SIP has worked
If you had invested Rs. 1,00,000 every month through an SIP
in FIBCF, it would have grown to:
Rs. 1,00,000
1,00,000 per
over
Rs.
perMonth
Month
over
FIBCF
FIBCF
BSESensex
Sensex
BSE
Rs. 1,00,000 per Month over
Rs.
Rs.
CAGR
CAGR
Rs.
Rs.
CAGR
CAGR
11year
12,00,000)
year (Rs.
(Rs. 12,00,000)
12,65,300
12,65,300
10.30%
10.30%
12,61,000
12,61,000
9.61%
9.61%
33years
36,00,000)
years (Rs.
(Rs. 36,00,000)
51,82,800
51,82,800
25.22%
25.22%
47,93,400
47,93,400
19.56%
19.56%
55years
60,00,000)
years (Rs.
(Rs. 60,00,000)
91,52,800
91,52,800
16.94%
16.94%
81,57,500
81,57,500
12.26%
12.26%
77years
84,00,000)
years (Rs.
(Rs. 84,00,000)
1,74,01,600
1,74,01,600
20.46%
20.46%
1,52,06,000
1,52,06,000
16.67%
16.67%
10
(Rs.1,20,00,000)
1,20,00,000)
10 years
years (Rs.
5,06,37,900
5,06,37,900
27.14%
27.14%
3,51,13,300
3,51,13,300
20.37%
20.37%
Since
Jan 97* (Rs. 1,71,00,000)
Since Jan 97* (Rs. 1,71,00,000)
15,84,36,200
15,84,36,200
27.83%
27.83%
6,09,01,600
6,09,01,600
16.32%
16.32%
Past performance may or may not be sustained in future. Annualized and compounded returns based on 31
March 2011 Growth Plan NAV of 219.1105. Load is not taken into consideration. Dividends assumed to be
reinvested and Bonus adjusted. *The scheme became open end in January 1997. Monthly investment of
equal amounts invested on the 1st day of every month has been considered. Inception Date: 01 December
1993.
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To put it in perspective
Where you invest: Equities can outperform other asset classes over
time
When you invest: Time in the market and not market timing matters!
How you invest: Avoid market emotions and market noise
When you start: Starting early can help in the long-run
What are the returns you earn: A small difference over the long term
can make the difference to your overall corpus
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A word on risk…
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We all view risks in our own way
There is a risk to investing
There is a risk to not investing, as well
There is a risk to investing in equities
There is a risk to not investing in equities, as well
There is no such thing as a ‘risk-free’ investment
It is important that you are comfortable with the risks
associated with whatever investment avenue you choose
Here’s wishing you all success in investing!
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Thank You