Basic Training New

'SARTHAK''SARTHAK'Training ModuleTraining Module

TopicsTopics

Understanding Savings & Investments

Basics of Mutual Funds

Basics on Equity and India Growth Story

Different Types of Equity Funds & Tax Treatment

Goal Achievement Program (GAP)

Usage of Different Calculators

Debt Market

Different Types of Debt Funds & Taxation

NJ Platform

Objection Handling

Basics of Savings & InvestmentBasics of Savings & Investment

Saving is nothing but putting some money aside from your income.

We Save For:

Future Emergencies

For Liquidity

Savings = Income – Expenditure

At NJ we say

Expenditure = Income - Savings

Concept of SavingsConcept of Savings

Investment is nothing but putting aside money from savings to grow for future consumption

Avoiding Current Consumption to Make Money Available for Future Need

Why Do We Have to Invest ?

< To Create Wealth >

< To Fulfill Future Financial Goals >

< To Buy Assets >

Concept of InvestmentConcept of Investment

Rate Of Return : To Beat Inflation Liquidity : How Easy/Tough To Take Your

Money Back Risk : Risk of Principal, Risk of Real Return Taxation : ''As It Is Said There Are Two Things

Which You Can't Avoid – Death & Tax” Charges/Cost of Entry & Exit Safety Transparency

Things To Consider In InvestmentThings To Consider In Investment

Inflation : In Simple terms Rise in Prices Money looses it's value due to inflation As seen in previous slide, we make investment

for future consumption/to meet future goals. Cost of this consumption/goal will keep on rising due to inflation

It is very important for any investment to beat inflation rate to generate positive return.

Inflation : The Biggest EnemyInflation : The Biggest Enemy

How Money Looses Value Due To How Money Looses Value Due To InflationInflation

How Money Looses Value Due To How Money Looses Value Due To InflationInflation

Product 1992 2002 2012

Petrol 15.71 28.91 73.18 8.00% 158 232

Movie Ticket 30 100 300 12.20% 949 1687

Masala Dosa 10 25 100 12.20% 316 562

Toothpaste 5 35 100 16.16% 447 946

Milk 4 15 40 12.20% 126 225

MBA Fees - 150000 700000 16.65% 3266667 7056807

Avg Inflation 12.90%

Annual Price Rise

Projected Price 2022

Projected Price 2027

If inflation is at around 11 to 12%, Do You Think Is It Worth Investing In a Product Giving Less Than This Rate of Return ?

Inflation Impact On Your Monthly Inflation Impact On Your Monthly ExpenseExpense

Inflation Assumed @ 7%

Compounding is nothing but earning interest on interest

Reinvestment of interest/dividend to generate additional return in future at the same rate

e.g. Rs.1 lakh will become Rs.1.1 lakh at the end of 1 year @ 10% return. In 2nd year, return will be generated on Rs.1.1 lakh & not on Rs.1 lakh.

Compounding – Your Weapon To Compounding – Your Weapon To Fight InflationFight Inflation

e.g. Suresh & Mahesh are two friends. Suresh opted for a job which pays him Rs.1 lakh per month.

Mahesh asked for a package which starts with 0.10 (Yes, 10 paisa) on 1st day and then keep on doubling every day.

Any guesses who will make more money at the end of 30th day and how much ?

Effect of CompoundingEffect of Compounding

Suresh will get his decided salary of Rs.1 lakh at the end of the month.

Mahesh will get Rs.5.36 cr at the end of 30th day.

The same logic applies to your investment.

Effect of CompoundingEffect of Compounding

It takes 8 years to double your money if money grows @9%, whereas you can double your money in less than 5 years @15% compounding.

Effect of Compounding on Effect of Compounding on InvestmentsInvestments

Year End Value @9%Value @15%1 1,09,000 1,15,0002 1,18,810 1,32,2503 1,29,503 1,52,0884 1,41,158 1,74,9015 1,53,862 2,01,1366 1,67,710 2,31,3067 1,82,804 2,66,0028 1,99,256 3,05,9029 2,17,189 3,51,78810 2,36,736 4,04,556

1 2 3 4 5 6 7 8 9 10

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Compounding Impact

Year End Value @9% Value @15%

Initial Investment is Rs.1 lakhs

Effect of Compounding Increases as Investment Period Increases

How To Create Wealth From Your How To Create Wealth From Your Investment ?Investment ?

Wealth creation is nothing but enhancement of future valueWealth creation is nothing but enhancement of future value

FV = PV (1 + r)nPV r nThe more you The more you save, makes a save, makes a

differencedifferenceThe more you The more you earn, makes a earn, makes a

differencedifference

The sooner you The sooner you start, makes a start, makes a

differencedifference

Different Investment AvenuesDifferent Investment Avenues

Investment Avenues Taxability Liquidity Tenure Risk Feature

Financial Investment Avenues

Bank Fixed Deposits# 6% - 7% Interest Taxable Very Low No. of days to years Low -

Senoir Citizen Saving Scheme 9.00% Interest Taxable Medium 5 Years^^^ Low -

National Savings Certificate 8.00% Interest Taxable Medium 6 Years Very Low

PPF 8.80% Tax Free Very Low 15 Years Low -

Kisan Vikas Patra 8.25% Medium 8 Years 7 months Very Low Deposits are exempt from Wealth tax.

Post Office Recurring Deposits 7.50% Low 5 Years Very Low -

Monthly Income Savings 8.00% High 6 Years Very Low Deposits are exempt from Wealth tax.

Company F D 11-12.5% Interest Taxable Low Ranges from 3 – 5Years High -

Mutual Fund Debt Variable^^ Low Low -

Mutual Fund Equity 15.00% Nil High Ideally 5 Years or more High -

Direct Equity 15.00% Nil High Ideally 5 Years or more Very High -

Physical Investment Avenues

Gold - - Very High - Medium

Real Estate - Low - Medium

Range of Returns

Investment eligible for rebate U/S 80C of I.T. Act. (I) Annual accrued Interest is also eligible for rebate U/S 80C of I.T. Act 1961

Interest Taxable, no TDS



10% (20% with indexation)*

Ranges from 1 month – 5 Years

Gold has always proved as a good hedge against inflation

LT Capital Gain Tax applicable on

Indexation cost

* LT Capital Gain Tax# 5 yr Bank FD eligible u/s 80C^^ Depending on Product^^^ Tenure is extendable by another 3 years

Equity Investment : Wealth Creation Equity Investment : Wealth Creation Through CompoundingThrough Compounding

Inflation Gold Silver Bank Deposits Co. Deposit Sensex-2

0

2

4

6

8

10

12

14

16

18

6.8

9.810.8

8.89.8

15.7

2.83.7

1.92.8

8.3Actual GainReal Gain

Blue Bar Chart indicates Actual return and red indicates return over inflation ( Real Return).

Analysis From 1981-82 to 2011-12

Equity Has Outperformed Other Equity Has Outperformed Other Asset ClassesAsset Classes

Inflation Gold Silver Co Deposits Bank Deposits Sensex0

10000

20000

30000

40000

50000

60000

70000

80000

90000

7,218

16,44721,591

16,68212,678

79,942

Growth of Rs.1,000 in Different Asset Classes

Source: RBI, BSE, INTERNAL, For Bank FD, median rate is taken for 1-3 year period. For Co FD Return is assumed 1% higher than bank F.D. Data Period: March 1981 – March 2012

Mutual Funds BasicsMutual Funds Basics

Mutual Fund ConceptMutual Fund Concept

• MF is a common pool of money.

• Investors with common investment objective place their contribution.

• This money is invested according to pre-stated objective of the scheme.

• Ownership of the fund is mutual, joint amongst all investors.

• Every investor is allocated units of the scheme based on amount of investment & NAV

Mutual Fund StructureMutual Fund Structure

SEBI

AMC

Unit holders

Savings

Units

Trust Investments

Returns

Trust

AMC Custodian

Registrar

MF AdvantagesMF Advantages

• NAV = Net Assets of the Scheme / Number of outstanding units i.e.

(Market Value of Investments + Receivables + Other Accrued Income + Other Assets – Accrued Expenses – Other Payable – Liabilities)

_______________________________________________

Number of Outstanding Units

What is NAV ?What is NAV ?

MF US ExperienceMF US Experience

• United States is the world's largest MF market.

• US accounts for 49% of global MF assets

• US MF Size at the end of 2011 was $11.6 trillion

• Total worldwide mutual fund assets : $23.8 trillion

• Equity Funds account for 45% of total assets ($5.22 trillion)

• Mutual Funds manage 23% of US household financial savings.

• 52.3 million – Number of households owning MF

• 44% households own MF

Source: Investment Company Institute 2012 Fact Book. ICI is a national association of US investment companies.

MF US ExperienceMF US Experience

Source: Investment Company Institute 2012 Fact Book. ICI is a national association of US investment companies.

MF Global PerspectiveMF Global Perspective

Country AUM No of AMC/SchemesUSA $11.6 trillion >650 AMCUK $1.02 trillion

Japan $675 bn 3937 fundsChina $380 bn 1000 schemes

Canada $834 bn 150 AMCThailand $93 bn 23 AMCFrance $1.56 bn 608 AMC

Hong Kong $743 bn Dominated by Equity Funds with entry load of 5%Australia $1.72 trillion

Italy $1.27 bn 302 AMCIndia $150 bn 43 AMC

Global AUM $23.8 trillion

Indian MF industry offers HUGE potential both in terms of AUM and AMC growth.

Break Up of Indian Household Break Up of Indian Household Financial AssetsFinancial Assets

Break Up of Household Financial Assets

Bank FD 46.8 45.00%

20.8 20.00%

Life Insurance 15.6 15.00%

Cash 10.4 10.00%

Direct Equity & Equity MF 7.28 7.00%

Other Debt Papers 3.12 3.00%

Total 104 100.00%

(in Rs. Lakh Cr)

% of Total Financial Assets

PPF, NSC & Other Postal Schemes

Source: Business Standard Sept 2012

Opportunity of >Rs.67 lakh cr for advisor community.

Why MF Investments Are Safe ?Why MF Investments Are Safe ?

• Trustees are appointed by Sponsor. At least 2/3rd of trustees/board of trustees have to be independent.

• If any sponsor wants to wind up business in India, they've to bring in new sponsor & has to give an exit option to investors without any charges for 30 days. e.x. L&T buying Fidelity business.

• The structure of MF in India makes it impossible to go bankrupt.

• Investors' money is managed by AMC and Fund Manager. Fund Manager only plays role of advisor to the scheme.

• Assets of the schemes are held by custodian. Custodian is independent to the AMC & controlled by trustees.

• Fund Managers also have to work within broad investment framework and can not behave as per his own wishes. e.g. fund manager of large cap fund having investment mandate of investing only in stocks belong to BSE100 has to pick stocks only from that index.

• The entire structure is monitor by SEBI

Why MF Investments Are Safe ?Why MF Investments Are Safe ?

EquityEquity

• Equity consists of two words : 'Equal Ownership'

• All equity holders are equal owners in the business to the extent of number of shares held by them.

• e.g. As an investor you believe that hospitality business has great future in India. What will you do to get benefited from that ? Can you build a five star hotel ? The answer is 'No' but you can buy shares of 'Indian Hotels' & become part owner of Taj Group of Hotels.

You are convinced that more & more people will buy four wheelers in India in coming 5 years. So you will go and buy shares of 'Maruti' or 'Mahindra & Mahindra'.

EquityEquity

• Each Share Trades at a Particular Price

• 'Price' is a result of 'Demand – Supply' among other many important factors.

• 'Price' is nothing but present value of all future expected profit.

• Value of all assets of the company – tangible and intangible (like goodwill, human capital etc.)

• Price can never be 'Zero' or 'Negative'.

PricePrice

• It consists of two things : 'Earnings' and 'No of Shares'

• It is nothing but amount of earnings, net profit available for each share.

• EPS = PAT (Profit After Tax or Net Profit) / No of Equity Shares

Earning Per Share (EPS)Earning Per Share (EPS)

Example of Earning Per Share (EPS)Example of Earning Per Share (EPS)

Reliance Inds. ACC

Number of Shares (crores) 157.38 18.77

PAT (crores) Trailing 4 qrts 16,111.54 1,189.90

Therefore, EPS = 16111.54 / 157.38 1189.90 / 18.77

EPS in Rs. (unit) 102.37 63.41

Figures are hypothetical.

• PE is a valuation measure.

• It indicates how expensive/cheap a stock is.

• It indicates how much price, market is willing to pay for each rupee earning of the company.

• So PE Ratio = Market Price / EPS

• PE can be trailing PE (based on past performance) or forward PE (based on future expected growth).

Price to Earning Ratio (PE) RatioPrice to Earning Ratio (PE) Ratio

Example of PEExample of PE

Reliance Inds. ACC

Current Price (25th Nov 08) 1,071.70 397.15

EPS 102.37 63.41

Therefore, P/E = 1071.7 / 102.37 397.15 / 69.7

Price to Earnings Ratio 10.47 6.26

Figures are hypothetical.

• Mr. Antony runs 'Pearl Beach Cafe' in Goa.

• The cafe is ideally located and very famous for it's food among tourists.

• The cafe made net profit of Rs.2.5 lakh on revenue of Rs.12 lakhs in 2010. Margin of 20%. The cafe is 2 year old.

Understanding PEUnderstanding PE

• In 2010 Mr. Antony decides to sell his cafe.

• How much will you pay for this business ?

• For some reason Mr. Antony cancels his decision to sell the cafe.

• To increase business he decides to introduce live music band in the cafe & increase the area.

• 3 years later, the business & footfall increase manifold.

'Pearl Beach Cafe' Continues...'Pearl Beach Cafe' Continues...

• Now in 2013 the cafe made Rs.25 lakhs as net profit. (10 fold rise from 3 years back) on revenue of Rs.80 lakhs. Translating into profit margin of 30% compared to 20% earlier.

• Now how much will you pay for this business ?

• Now Mr. Antony will demand premium for his business because of higher revenue and profit.

• As an investor or businessman you will also don't mind paying higher valuation in 2013 compared to 2010 as profit margin as well as revenue have gone up.

• As profit and profit margin both have gone up of the business in 3 years, so as it's valuation.

'Pearl Beach Cafe' Continues...'Pearl Beach Cafe' Continues...

• This gives an idea about the size of the company in terms of market value.

• Based on Market Capitalization, companies can be divided in : Large Cap, Mid Cap & Small Cap companies.

• Market Cap = Market Price of Share * No of Outstanding Shares

Market CapitalizationMarket Capitalization

Example of Market CapitalizationExample of Market Capitalization

Large Cap Stock Mid Cap Stock

Reliance Inds. Apollo Tyres

Current Price 1,071.70 22.30

Number of Shares (crores) 157.38 50.40

Therefore, MKt. Capt. 157.38*1071.7 50.40 * 22.3

168,663.07 1,123.96Market Capitalisation (crores)

What Drives Equity Return ?What Drives Equity Return ?

• In Short Term:

• Sentiment

• Liquidity

• News Flow

• Emotions

• Rumors

• Volume

• Demand & Supply

• And Many More

• In Long Run:

Equity prices are driven only by growth in profitability.

As it is said : In long term, equity prices are slaves of corporate earning.

Stock Prices follow earning growth. If company is delivering consistent earning growth then sooner or later this growth gets reflected in stock price.

Price – Earning Relation of Reliance Price – Earning Relation of Reliance Industries LtdIndustries Ltd

03/02 03/03 03/04 03/05 03/06 03/07 03/08 03/09 03/10 03/11 03/12

0

100

200

300

400

500

600

700

800

900

1000

Reliance Industries

Net Prof it Price

RIL 1 year 2 years 3 years 5 years 7 years 10 yearsNP Growth 26.57% 26.15% 32.67% 29.79% 24.82% 19.98%Stock Price Growth -8.07% 33.76% 21.99% 41.12% 29.87% 19.86%

Price – Earning Relation of HDFC BankPrice – Earning Relation of HDFC Bank

03/02 03/03 03/04 03/05 03/06 03/07 03/08 03/09 03/10 03/11 03/12

0

200

400

600

800

1000

1200

1400

1600

1800

2000

HDFC Bank

Net Prof it Price

HDFC 1 year 2 years 3 years 5 years 7 years 10 yearsNP Growth 30.49% 30.97% 30.86% 30.90% 33.50% 33.06%Stock Price Growth -0.60% 26.85% 32.28% 32.20% 22.40% 27.16%

Price – Earning Movement of SENSEXPrice – Earning Movement of SENSEX Just as we saw for individual stocks, it's true for SENSEX also.

Dec/90

Dec/91

Dec/92

Dec/93

Dec/94

Dec/95

Dec/96

Dec/97

Dec/98

Dec/99

Dec/00

Dec/01

Dec/02

Dec/03

Dec/04

Dec/05

Dec/06

Dec/07

Dec/08

Dec/09

Dec/10

Dec/11

Dec/12

Sensex ValueSensex Earnings

Months Sensex Value

Dec-90 999.26 59.02Dec-12 19,426.71 1,108.20CAGR 14.44% 14.26%Co-relation coefficient 0.96

Sensex Earnings

HarshadMehta Bubble

Crash After IT Bubble

Sub Prime Crisis

Market Went Ahead of Earning Growth in early 08 & 11

Despite volatility, scams and Sub Prime Crisis, SENSEX has followed earning growth over a period of last 22 years.

Nobody Makes Money in Equity MarketNobody Makes Money in Equity MarketYear SENSEX Amount (INR)

1979 100 1 lakh

2012 19500 1.95 cr

Return 17.33%

Major Events of Last 33 Years:

• Assassination of 2 Prime Ministers

• Asian Currency Crisis, IT Bubble Burst & Sub Prime Crisis

• Harshad Mehta & Ketan Parekh Securities Scam

• Balance of Payment Crisis of 1991

• Gulf War & Kargil War

• 10 Different Governments

Despite All These Major Events, SENSEX

has delivered close to 18% annualized return in last 33 years

Equity Not Risky in Long TermEquity Not Risky in Long TermPERFORMANCE OF BSE SENSITIVITY INDEX - Equities not risky in long run

Yrs YEAR END SENSEX level 1 year 3 years 5 years 7 years 10 years 12 years 15 years 20 years

0 31-Mar-79 100.00

1 31-Mar-80 128.57 28.57%

2 31-Mar-81 173.44 34.90%

3 31-Mar-82 217.71 25.52% 29.61%

4 31-Mar-83 211.51 -2.85% 18.05%

5 31-Mar-84 245.33 15.99% 12.25% 19.66%

6 31-Mar-85 353.86 44.24% 17.58% 22.44%

7 31-Mar-86 574.11 62.24% 39.49% 27.05% 28.36%

8 31-Mar-87 510.36 -11.10% 27.66% 18.58% 21.77%

9 31-Mar-88 398.37 -21.94% 4.03% 13.50% 12.61%

10 31-Mar-89 713.60 79.13% 7.52% 23.81% 18.48% 21.72%

11 31-Mar-90 781.05 9.45% 15.24% 17.16% 20.52% 19.77%

12 31-Mar-91 1167.97 49.54% 43.12% 15.26% 24.97% 21.01% 22.73%

13 31-Mar-92 4285.00 266.88% 81.76% 53.04% 42.80% 34.71% 33.94%

14 31-Mar-93 2280.52 -46.78% 42.93% 41.76% 21.78% 26.84% 23.95%

15 31-Mar-94 3778.99 65.71% 47.90% 39.57% 33.11% 31.45% 26.85% 27.40%

16 31-Mar-95 3260.96 -13.71% -8.70% 33.09% 35.03% 24.87% 25.60% 24.05%

17 31-Mar-96 3366.61 3.24% 13.86% 23.58% 24.81% 19.35% 24.39% 21.86%

18 31-Mar-97 3360.89 -0.17% -3.83% -4.74% 23.18% 20.74% 20.63% 20.02%

19 31-Mar-98 3892.75 15.82% 6.08% 11.29% 18.77% 25.60% 17.29% 21.43%

20 31-Mar-99 3739.96 -3.92% 3.57% -0.21% -1.92% 18.02% 18.05% 19.92% 19.85%

21 31-Mar-00 5001.28 33.73% 14.17% 8.93% 11.87% 20.40% 23.47% 19.31% 20.09%

22 31-Mar-01 3604.38 -27.93% -2.53% 1.37% -0.67% 11.93% 14.45% 13.03% 16.38%

23 31-Mar-02 3469.35 -3.75% -2.47% 0.64% 0.89% -2.09% 13.23% 13.63% 14.85%

24 31-Mar-03 3048.72 -12.12% -15.21% -4.77% -1.41% 2.95% 8.32% 14.53% 14.27%

25 31-Mar-04 5590.60 83.38% 15.76% 8.37% 7.54% 3.99% 2.24% 14.71% 16.92%

26 31-Mar-05 6492.82 16.14% 23.23% 5.36% 7.58% 7.13% 9.11% 15.16% 15.66%

27 31-Mar-06 11279.96 73.73% 54.67% 25.63% 17.08% 12.85% 9.54% 16.32% 16.06%

28 31-Mar-07 13072.10 15.89% 32.73% 30.38% 14.71% 14.55% 12.27% 7.72% 17.60%

29 31-Mar-08 15644.44 19.68% 34.06% 38.69% 23.33% 14.92% 13.66% 13.70% 20.14%

30 31-Mar-09 9708.50 -37.94% -4.88% 11.67% 15.84% 10.01% 9.24% 6.49% 13.94%

31 31-Mar-10 17527.77 80.54% 10.27% 21.97% 28.39% 13.36% 13.36% 11.86% 16.83%

32 31-Mar-11 19445.22 10.94% 7.52% 11.51% 19.49% 18.36% 14.73% 12.40% 15.10%

33 31-Mar-12 17404.20 -10.50% 21.48% 5.89% 15.13% 17.50% 10.95% 11.59% 7.26%

Probability of Loss 12/33 6/31 3/29 3/27 1/24 0/22 0/19 0/14

Probability of Loss (%) 36.36% 19.35% 10.34% 11.11% 4.17% 0.00% 0.00% 0.00%

As Time Increases, Volatility Decreases

Give Time To The Market than Timing Give Time To The Market than Timing The MarketThe Market

Fixed investment at highest sensex value every cal-endar year

Fixed investment at low est sensex value every cal-endar year

Systematic In-vestment on first day of every month

11.98%

14.96%

13.56%

Data source: www.bseindia.com; capitalmarket; Data for period from Jan 1988 to Sep 2012

You can not time the market to perfection. Even if you do, end result in return is not substantial, making market timing a wasteful exercise.

One Who Can Control Emotions, Can One Who Can Control Emotions, Can Make Money in Equity MarketMake Money in Equity Market

Typical Retail Investors Psychology of Fear, Greed & Hope.

Cycle of Market EmotionsCycle of Market Emotions

Optimism

Excitement

Wow, I feel great

About my decision.

I knew market will go up.

Euphoria.Greed Anxiety.

Let me Average here.

It's Temporary.I'm a long term investor.

Emotion of Hope

Panic

Depression/Capitulation

Panic Selling byInvestor

Equity Market is

Just Not for Me

Hope

Optimism

Great InvestmentOpportunity

Best Returns Are Made When Best Returns Are Made When Investment is Done in Bad TimesInvestment is Done in Bad Times

Fall after Tech Bubble Burst.

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

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13,000

Feb-

00

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06

May

-06

Aug-

06

Sensex fell by 56%

1 Year; 16%

3 Years; 29%

5 Years; 36%

Market Correcting due to NDA loosing elections.

4,000

5,000

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8,000

9,000

10,000

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Jan-

04

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-04

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4

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Sep-

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Jan-

07

Mar

-07

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-07

Sensex fell by 27%

1 Year; 44%

2 Years; 65%

3 Years; 47%

In 2004, market fell by 27% when NDA lost election but gave 47% return in next 3 years from low of May, 2004.

In 2000, market fell by 56% after technology bubble burst, only to give stunning return of 29% in next 3 years.

Best Returns Are Made When Best Returns Are Made When Investment is Done in Bad TimesInvestment is Done in Bad Times

0

5000

10000

15000

20000

25000

SENSEX Since Sub Prime Crisis of 08-09

SENSEX fell by 61% from Jan 08 to March 09

In 3 years since March 09, SENSEX Delivered 29% CAGR by rising from 8200 To 17500 level.

India Has Long History of Equity Fund India Has Long History of Equity Fund PerformancePerformance

Performance of equity schemes with more than 10 year of track record.

Initial Investment Assumed at Rs.1 lakh.

Years 10 15Current Value (in Rs) 912,411 1,632,794Avg Return of Diversified Equity Funds (CAGR %) 24.74 20.47BSE SENSEX 19.19 11.77Nifty 18.41 12.00Total Number of Schemes Covered 55 15Number of Times Money is Multiplied 9 16

CAGR Return of Lumpsum Investment of Rs.1 lakh as on 31st Dec, 2012

Why FII Can't Ignore IndiaWhy FII Can't Ignore India

• India is one of the fastest growing economies in the world. Second only to China.

• Well diversified equity market with representation from multiple sectors (unlike Brazil & Russia which are commodity heavy)

• Efficient and transparent capital market

• Vast pool of entrepreneurs, offering vast opportunity of investment

• Strong demographic and domestic consumption driven economy.

FII Investment TrendFII Investment Trend

CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12

-15

-10

-5

0

5

10

15

20

25

30

35

1.52.7

0.7

6.78.6

10.8

8.1

17.8

-12.2

17.6

29.3

-0.5

25

FII Investment in US$ BN

Only 2 years in last 13 years when FIIs have remained net sellers in Indian market.

India Growth StoryIndia Growth Story

India Infrastructure GrowthIndia Infrastructure Growth

(2002-06) (2007-12)

Actual Infra Investment Rs.9,19,225 cr Rs.20,54,205 cr

Pvt Sector Share 25.00% 35.00%

As % of GDP 5.00% 9.00%

10th Five Yr Plan11th Five Yr Plan

(Revised Projection) (2012-17)

Projected Infra Invst $1 trillionPvt Sector Share 50.00%

As % of GDP 10.00%

12th Five Year Plan

Government is committed to spend $1 trillion on infrastructure during 12th plan (2012-17)

50% of this investment ($500 bn) is expected to come from private sector.

India Infrastructure - PowerIndia Infrastructure - Power

• Total Installed capacity is 2.10 lakh MW, 57% is coal based.

• Power Deficit – 11400 MW, close to 9% of demand.

• Installed capacity in China : over 10 lakh MW (1140 GW), will surpass USA.

• 120000 MW power capacity to be added in 12th plan.

• After modernization of Delhi, Mumbai, B'lore and Hyderabad airports, many smaller airports are to be modernized

• 13 major ports handling 1011 million tonnes of cargo every year. Additional investment of Rs.5 lakh cr planned by 2020. (Chinese ports handle 10 billion tonnes in a year)

• Average speed of truck on Indian highway is just 35 km (22 miles) per hour compared to 75 km (47 miles) in the USA.

India Infrastructure - $1 trillion India Infrastructure - $1 trillion OpportunityOpportunity

300

120

1013

Infrastrcuture Spending 12th Plan (2012-17)

Pow er

Higw ay

Airport

Seaport

India Infrastructure - $1 trillion India Infrastructure - $1 trillion OpportunityOpportunity

• Consumption in India will grow from Rs.17 trillion to Rs.34 trillion by 2015 and Rs.70 trillion by 2025.

• India will overtake Germany and Italy by 2025.

• Middle Class consumers will multiply manifold from 50 million to 583 million by 2025.

India Consumption Led EconomyIndia Consumption Led Economy

17.00%

27.00%56.00%

Composition of Indian Economy

Agriculture Industry/Manufacturing Services

Composition of Indian EconomyComposition of Indian Economy

India is predominantly a service & domestic consumption oriented economy.

Corporate Earning & Nominal EconomyCorporate Earning & Nominal Economy Qty Produced (Shirts) Price Sales

Year 1 1000 Rs. 200 Rs. 200000

Economic growth takes place

And production increases. 7% 6% 13.42%

(Real GDP) (inflation) (Nominal GDP)

Year 2 1070 Rs. 212 Rs.226840

As we can see with increase in production activity by 7% and price rise of 6% company’s revenue (Nominal GDP) grows by 13.42% which can get reflected in corporate profitability with little higher growth rate.

SENSEX ProjectionsSENSEX Projections

Closing Value of Sensex as on April 30, 2011 19136, PE 20.52, Future Earning assumed at constant 20% CAGR

Closing Value of Sensex as on April 30, 2011 19136, PE 20.52, Future Earning assumed at constant 15% CAGR

Equity FundsEquity Funds

• As per definition of SEBI, the fund with equity holding of more than 65% is treated as equity funds.

Classification of Equity FundsClassification of Equity Funds

Blend Funds Midcap Funds

Theme Funds Sector Funds

Equity Oriented Funds

Balanced Funds

Index Funds

International Funds

Diversified Equity Fund

Largecap Funds

• Large Cap Funds

• This type of funds invest in bluechip/large cap stocks

• Less volatile compared to mid cap funds

• Provides stability to the portfolio.

• Small & Mid Cap Funds

• This type of funds invest in mid cap/small sized stocks

• Volatility is normally higher than large cap funds

• Return potential is also high.

Types of Equity FundsTypes of Equity Funds

Another category is 'Blend Fund' which invests across market cap, both large cap and mid cap stocks.

• Advantages:

• Suitable for conservative investors

• Lower expense ratio

• Ease to take investment call as return will replicate index.

• Disadvantages:

• Limited role of a fund manager.

• No possibility of generating 'alpha'

• In India, index funds have underperformed diversified funds.

Index FundsIndex Funds Index fund is also called 'passive fund' as it simple replicates a particular index. Index fund invests in stocks and sectors exactly as it is represented by an index.

Sector FundsSector Funds

• Theme funds invest generally in one or couple of sectors based on the objective of the fund. In other words these funds concentrate on one or two industries

• Example

- IT Funds: Franklin Infotech Fund

- Pharma Funds: Reliance, UTI Pharma & Healthcare

- Banking Funds: Reliance Banking Fund

- FMCG Funds : ICICI Prudential FMCG Fund

Theme FundsTheme Funds Theme funds invest in securities which meet a specific

criterion or which have the same characteristics. These types of funds can be diversified funds or sector funds.

• Example,

- Dividend Yield Funds – these funds invest in stocks where dividend yield is high as compared to market/index average.

- Infrastructure Funds - these funds invest in stocks which are related to infrastructure like roads, ports, railways, aviation, electricity, etc., thus these type of funds invest in number of sectors

International FundsInternational Funds

• International funds invest towards the global equities with the main objective of diversifying the portfolio geographically

• By investing in these funds, investor can diversify his portfolio across various international markets.

• Examples:

- Birla Sun Life International Equity Fund

- AIG World Gold Fund

- Principal Global Opportunity Fund

Balanced FundsBalanced Funds• These types of funds buy a combination of common

stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.

• The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents

• These funds are generally for moderate investors who don’t want to take complete risk of equity but also want attractive returns from the investment

• Example:

- HDFC Prudence Fund

- Tata Balanced Fund

Taxbility of Equity FundsTaxbility of Equity Funds

Taxbility of Equity Oriented Funds (2012-13)

STCG Tax LTCG Tax Dividend Income DDT TDS

Resident Individual/HUF 15.00% NIL Tax Free NIL NILPartnership Firm/AOP/BOI 15.00% NIL Tax Free NIL NIL

Domestic Cos 15.00% NIL Tax Free NIL NIL

NRI 15.00% NIL Tax Free NILSTCG : 15%LTCG : Nil

ELSS

• Equity Linked Saving Scheme (ELSS) is the diversified equity scheme where normally equity investments are around 80%-100% and rest in cash

• The scheme has added advantage of tax deduction u/s 80C upto Rs. 1 Lac, but investments will be locked-in for 3 years which quite low as compared to traditional avenues

• E.g. gross income = Rs. 5 Lacs & investment of Rs. 1 Lac is done in ELSS, then Income tax has to be paid on Rs. 4 Lacs

ELSS Vs PPFELSS Vs PPF

PPF Compsite Avg. of ELSS

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ELSS vs PPF

Value of 9.10 Lacs (As of 30-Sep-12)

(Rs

. La

cs

)

It is assumed that investment of Rs. 70,000 is done every year on 31st of March since year 2000. Current Value is as on September 30, 2012

ELSS PerformanceELSS Performance

Starting January Month of 2012 2010 2008 2003 1998Years 1 3 5 10 15Invested Amount (in Rs) 1,20,000 3,60,000 6,00,000 12,00,000 18,00,000Current Value (in Rs) 1,36,020 4,09,707 8,08,576 29,33,385 1,13,38,097Avg Return of Diversified Equity Funds (CAGR %) 26.95% 8.68% 11.90% 16.74% 21.39%BSE SENSEX 21.05% 5.88% 8.70% 13.93% 13.99%Nifty 21.68% 6.54% 9.05% 13.70% 13.88%Total Number of Schemes Covered 27 27 24 15 5

SIP Return as on 31st Dec, 2012

Note: SIP of Rs.10000 per month.

Goal Achievement ProgrammeGoal Achievement Programme

Achieving Your Goals in Life

Defining GoalDefining Goal

Goal gives direction to your investment process.

Important Goals in LifeImportant Goals in Life

Higher EducationHigher Education

What is the Average Age when a child needs Higher Education?

20 Years

What is the Average Cost ofHigher Education Today?

Engineer : Rs.10 LacsMedical : Rs.15 LacsForeign Study : Rs.25 Lacs

Planning For Higher EducationPlanning For Higher Education

Assuming Current Age is 3 years: (17 yrs remaining)Engineer : Rs.27 LacsMedical : Rs.41 LacsForeign Study : Rs.67 Lacs

How much would the Higher Education cost you at the maturity?

Assuming inflation @ 6%

Planning For Higher EducationPlanning For Higher Education

24 Years

What is the Average Age when a child gets married?

Planning For MarriagePlanning For Marriage


What is the Average Expense ofMarriage Today?

Rs.10 Lacs


How much would your child’s Marriagecost you at maturity?

Rs.34 Lacs

Assuming inflation @ 6%. Current Age is 3 years & Marriage Age is 24 years

Rs.34 Lacs

Are you on the right path to arrangea decent marriage for your child?

Assuming inflation @ 6%. Current Age is 3 yrs & Marriage Age is 24 yrs.

Retirement PlanningRetirement Planning

What is the Average Retirement Age?

60 Years

Retirement PlanningRetirement PlanningRetirement PlanningRetirement PlanningRetirement PlanningRetirement Planning

Rs.20000/- p.m.

What is an Average Monthly Expense of a Middle-class House Hold?


How much Retirement Kitty would you need at Retirement?

Rs.3.55 Crores

Monthly Expenses would grow from Rs.20,000/- to over Rs.129000/- at Retirement & would continue to grow thereafter…

Current Age: 28 years. Retirement Age - 60 yrs. Life Expectancy - 90 yrs. Assuming inflation @ 6%. Returns on Retirement Kitty – 8%


Are you on the path to a Peaceful Retirement?

Rs.3.55 Crores

Current Age: 28 years. Retirement Age - 60 yrs. Life Expectancy - 90 yrs. Assuming inflation @ 6%. Returns on Retirement Kitty – 8%

Financial Goals SummaryFinancial Goals SummaryBrief Look at Our Life Goals

Assuming: Current AgeSelf : 28 yrs Child: 3 yrs

Child’s Education : 20 yrsEngineer : Rs.27 LacsMedical : Rs.41 LacsForeign Study : Rs.67 Lacs

Child’s Marriage : 24 yrsMarriage : Rs.34 Lacs

Retirement: : 60 yrs (Self)Retirement Kitty : Rs.3.55 Crores

Are You On Track To Achieve These Are You On Track To Achieve These Life Goals ?Life Goals ?

Creating Wealth To Achieve GoalsCreating Wealth To Achieve Goals

How much can a personsave on a regular basis?How much can a personsave on a regular basis?How much can a personsave on a regular basis?How much can a personsave on a regular basis?

Rs.5,000/- p.m.


If a person can save Rs.5,000/- per monthWhat will be his wealth when he retires?

Assuming: Current Age: 28 yrs. Retirement Age: 60 yrs.

Invests in an Asset class that gives returns of 8%


At 60 years of age his wealth would have been

Rs.84 Lacs

Amount Invested: Rs. 19.20 Lacs. Times amount gets rolled over: 4.37.

We Need to Create Wealth

Creating Wealth is Easy

We can all Become Wealthy

The Truth Is...The Truth Is...

3 Simple Steps of Wealth Creation3 Simple Steps of Wealth Creation

How can we create wealth?

Start Saving Early

The longer you save, the more you make

Save in the Right Asset Class

This will dictate how much wealth you create …

Save Regularly

Even a small amount saved regularly, is good

1.33 Crores*

5.71 Crores*

40 years25 years 60 years

Ram Shyam

Investment Starting Age 25 40

Investment - Monthly SIP Rs.5,000/- Rs.10,000/-

Saving Years till age 60 35 years 20 years

Total Investment Made Rs.21 lacs Rs.24 lacs

Starting Early

Give time to your investments rather than timing

* Constant Savings

Note: The above figures are for illustrative purpose only. There is no guarantee that the projection given would materialize.

Invest In Right Asset ClassInvest In Right Asset Class

Equity market (represented by BSE Sensex) has outperformed all other investment avenues

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Gold Silver Sensex Co Deposits Bank Deposits Inf lation

Save RegularlySave Regularly

Twin Benefits of Investing Regularly

Disciplined Investing through Systematic Investment Plans (SIPs) is the ideal way to reduce risk

Market Units Purchased MarketUnits Purchased

Rupee Cost Averaging Average Purchase cost will be less

Automatic Timing At higher prices - less unitsAt lower prices – more units

Rising Market Falling Market

Save Regularly

Creating Wealth Through Right Asset Creating Wealth Through Right Asset ClassClass

If a person can save Rs.5,000/- per monthWhat will be his wealth when he retires?

Assuming: Current Age: 28 yrs. Retirement Age: 60 yrs.

Invests in an Asset class than give returns of 20%

Any Guesses ???Any Guesses ???

At Age 60 his wealth can beAt Age 60 his wealth can be

Rs.11.30 Crores

Amount Invested: Rs. 19.20 Lacs. Times amount gets rolled over: 58.86.

Past Performance of Equity SchemesPast Performance of Equity Schemes

SIP Return in % as on 30th September 2012 Starting-October Month of 2011 2007 2002 1997Years 1 5 10 15Invested Amount : 1,20,000 6,00,000 12,00,000 18,00,000Current Value (in Rs) 1,33,878 7,90,710 31,76,767 1,09,84,968Average Return of Diversified Equity Schemes (CAGR in %) 23.51 10.96 18.3 20.93BSE 30 (SENSEX) 20.93 7.30 14.47 13.86NSE 50 (NIFTY) 22.24 7.69 14.17 13.77Total Number of Schemes Covered 114 105 38 15

SIP of Rs.10,000 per month

Investment WisdomInvestment WisdomWisdom

• The Right way to create wealth …

Buying potential big winning stocksSuccessfully timing the marketsFollowing Expert Advisors recommendationsSaving a lot of money

• Wealth can be successfully created if we follow the three principles ...

Starting early and saving for longInvesting in the right asset classInvesting Regularly – big or small

“We do not need to be wealthy to be an investor …But we can be wealthy if we are investors”

Using The WisdomUsing The WisdomUsing the Wisdom

• We all have goals and objectives in life to achieve like …Child EducationChild MarriagePurchase of House, CarRetirement, etc

• We can direct our savings to achieve our goals!!

Disciplined Savings

Sufficient Time

Right Asset Class

Goal Achievement

NJ Goal Achievement Programme (GAP)NJ Goal Achievement Programme (GAP)

• NJ GAP is a unique goal based investment programme through a Systematic Investment Plan (SIP)

• Investors in this programme have the flexibility of choosing a monthly investment amount as well as the investment duration of their choice

• This should enable the investors to plan for their goals without needing to review, re-invest or for that matter, time the markets.

Monthly Investment Options Investment Horizons

Rs.2,000/- Rs.5,000/- 5 years 10 years

Rs.10,000/- Rs.15,000/- 15 years

NJ Goal Achievement Programme (GAP)NJ Goal Achievement Programme (GAP)

Advantages to the Investors …

Investments in the right asset class …In Equities with potential to earn very attractive returns

• Investment at lower risk…By Diversification, professional management, and investing by the way of SIP

• Hassle-free process of wealth creation You only have to fill the GAP Application form and the Auto Debit (ECS)

form and submit it with one cheque*

Helping You Achieve Your GoalsHelping You Achieve Your Goals

Child Education - Saving years: 17 yrs

Helping you achieve your goals in life …

Education Target GAP Amt.

Engineer Rs.27 Lacs Rs.2,000

Medical Rs.41 Lacs Rs.3,000

Foreign Study` Rs.67 Lacs Rs.5,000

Child Marriage - Saving years: 21 yrs

Target : Rs.34 LacsGAP Amount : Rs.1,500

Assuming returns of 20%. GAP figures are rounded off .

Amount Actually paid: 3.78 Lacs

Amount Actually paid: 4.08 Lacs (for 2,000)


Retirement - Saving years: 32 yrs

Target : Rs.3.55 CroresGAP Amount : Rs.1,038

Amount Actually paid: 4 Lacs

Small monthly investments of few thousand rupees can help you Achieve your goals & Relax in life!

Assuming returns of 20%. GAP figures are rounded off .


Systematic Investment Plan (SIP)

Very Effective & Proven

Way of Wealth Creation &

Goal Achievement

Why SIP ?Why SIP ?

Paifa kamane ke do rafte hote hai.....ek fortcut aur doofra chota fortcut

• But Unfortunately in Investment There is no 'fortcut' or 'chota fortcut'

• There is only 'longcut' and investors need to be patience and have to invest for a long period to create wealth and achieve goals.

• To gain the most from 'SIP' one needs to keep investing through market cycle of 'Bull' and 'Bear' without stopping in between due to short term market volatility.

Why SIP ?Why SIP ?

Why SIP ?Why SIP ?

• There are some things that money can't buy. For everything else there's mastercard.

Similarly in equity investment, there are some things which you can't do i.e. market timing & that's why we've 'SIP'

Why SIP ?Why SIP ?

24/07/98 06/12/99 19/04/01 01/09/02 14/01/04

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SENSEX Movement Feb 99 to Jan 03

Total CAGR of 0.127% in 4 years.

Total CAGR of 0.127% in 4 years.

01/11/98 09/02/99 20/05/99 28/08/99 06/12/99 15/03/00

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SENSEX - Feb 99 to Jan 2000

06/12/99 15/03/00 23/06/00 01/10/00 09/01/01

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SENSEX CY2000

Up by 61%

Fall of 23%

SENSEX remained flat from3233 to 3250 level for 4 yrs from Feb 99 to Jan 03. But it was up by 61% from Feb 99 to Jan 2000.Only to fall by 23.7% from Jan 2000 to Dec 2000

Can You Time Your Entry & Exit ?

Why SIP ?Why SIP ?

Feb 99 to Jan 03

Scheme Name % Return

Franklin India Bluechip Fund 10

Franklin India Prima Fund 16.79

Reliance Growth Fund 14.65

Reliance Vision Fund 22.61

Average Return 16.01

Although SENSEX has not gone anywhere during this period, SIP investors have benefited during this flat market period by generating 16% return.

Note: Schemes mentioned here are only for explanation purpose. This does not indicate any recommendations from NJ India Invest Pvt Ltd. Returns are on % CAGR Basis.

SIP in Recent Market Volatility ?SIP in Recent Market Volatility ?

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SENSEX from Feb 08 to Jan 13

CAGR of 2.8% in 5 years.

03/01/08 22/02/08 12/04/08 01/06/08 21/07/08 09/09/08 29/10/08 18/12/08 06/02/09 28/03/09

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SENSEX Feb 08 - Feb 09

Market fall of 50% in 1 year from 18000 to 9000

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SENSEX from Feb 09 to Jan 13

CAGR of 22.5% in 4 years.

SENSEX has delivered 22.5% CAGR from Feb 09 to Jan 13. How many investors able to participate ?

SIP Performance : Action Speaks SIP Performance : Action Speaks Louder Than WordsLouder Than Words

Starting January Month of 2012 2010 2008 2003 1998

Years 1 3 5 10 15

Invested Amount (in Rs) 1,20,000 3,60,000 6,00,000 12,00,000 18,00,000

Current Value (in Rs) 1,36,700 4,13,880 8,37,092 31,27,381 1,08,63,857

Avg Return of Diversified Equity Funds (CAGR %) 28.17% 9.36% 13.25% 18.05% 20.73%

BSE SENSEX 21.05% 5.88% 8.70% 13.93% 13.99%

Nifty 21.68% 6.54% 9.05% 13.70% 13.88%

Total Number of Schemes Covered 112 112 105 39 13

SIP Return as on 31st Dec, 2012

SIP has outperformed both benchmark indices across time frame, more so as investment horizon increases.Note: SIP of Rs.10000 per month.

SIP : Partner EarningSIP : Partner Earning

Using Financial CalculatorsUsing Financial Calculators

Use of SIP Dynamic CalculatorUse of SIP Dynamic CalculatorSIP Return Calculator (sheet name “Dynamic”)

• This calculator helps to find out value of investment done through SIP

• It also indirectly helps to find out the value of investment with

1) same SIP amount with different rate of return and

2) different SIP amount with same rate of return

15%

10

10,000

2,630,182

2,630,182

Use of SIP Dynamic CalculatorUse of SIP Dynamic CalculatorSIP Table (sheet name “SIP Returns”)

• This calculator helps to find out value of investment done through SIP for different periods and different rates of return

• This calculator can also be used to find out the importance of amount of investment, i.e., with higher amount of SIP, advisors can show a huge difference in the value of investment for long term

SIP Need CalculatorSIP Need CalculatorSIP Need Calculator

• This is important and useful tool as number of investors want to know the SIP amount for the target amount and period

• This tool also helps to show the importance of rate of return and amount to be invested

• This tool gives SIP amount with different rates of return which remain handy to chose appropriate asset class to achieve the target amount

SIP Delay Cost CalculatorSIP Delay Cost CalculatorDelay Cost Calculator

• This is a unique calculator which helps to show investors the importance of timely investment

• Advisor can use this tool across the investor and show how much is the impact of the delaying the SIP.

• As we can see in example, mere 6 months delay in SIP of Rs.10000 can cost investor Rs.4.5 lakh at the end of 25 years.

Use of SIP + FP CalculatorUse of SIP + FP Calculator• Generally, for Indian investors following are the prime

goals in life. - Child’s Education- Child’s Marriage- Retirement of the Investor

• This tool is helpful to make financial plan for the above goals. This tool helps to find out investment amount needed for each goal as well as total amount for fulfilment of all goals.

• Details of investor’s goal have to be added in the “Client Details”.

• This tool has a facility to add details of advisor also.• After adding all necessary information, financial plan will

be ready without manual calculation. Letter is also generated.

Use of SIP + FP CalculatorUse of SIP + FP CalculatorUse of SIP + FP CalculatorUse of SIP + FP Calculator

Advisors Details

Name X Y Z Firm Name ABC Pvt Ltd.

Address Surat

Contact Details Ring Road, Surat

• Advisor’s detail

Use of SIP + FP CalculatorUse of SIP + FP Calculator• Client Details

Advisors Details


Address Surat


Cell No. 9876543210

Fixed Line 0261-2345678

Email address [email protected]

Use of SIP + FP CalculatorUse of SIP + FP Calculator• Financial Plan

Advisors Details


Address Surat


Cell No. 9876543210

Fixed Line 0261-2345678

Email address [email protected]

Why Use FP CalculatorWhy Use FP Calculator

• Advantage of using SIP-FP-Calculator- This tool will give you an edge over other competitors

- This tool will help you to prepare financial plan very fast and may be across your investor which make you more effective

- You can make an investor loyal to you and thus beneficial to investor and you in the long term

- You can increase SIP input amount and there by increase revenue for you

Use of FP CalculatorUse of FP Calculator

• Generally, for Indian investors following are the prime goals in life. - Child’s Education- Child’s Marriage- Retirement of the Investor

• This tool is helpful to make financial plan for the above goals. This tool help to find out investment amount needed for each goal as well as total amount for fulfilment of all goals.

• Details of investor’s goal has to be added in the “Client Details”.

• This tool has a facility to add details of advisor also.• After adding all necessary information, financial plan will be

ready without manual calculation. Letter is also generated.

DEBT MARKETDEBT MARKET

Importance of Money & Debt MarketImportance of Money & Debt Market

Money & Debt markets fulfil the basic needs of borrowing and lending of the market participants

Borrowers… who are in need of cash Lenders… who have surplus cash

Importance of Money & Debt MarketImportance of Money & Debt Market

Public Sector Units (PSU) Bonds

Debt Market Segments in India

Government Securities

Corporate Securities

The market for Govt. Securities comprises the Centre, State & State-sponsored securities. This is the oldest & most dominant in terms of Market Cap, Outstanding Securities, Trading Volumes & no. of Participants.

Corporate Securities comprises of commercial paper & bonds. This market has been in vogue since the early 1980s. After the de-regulation of interest rates on corporate bonds in 1992, a variety of structures and instruments have been introduced like securitized products, floating rate instruments with caps and floors etc. The major part of the corporate debt is privately placed with tenors of 1-12 years.

Market ParticipantsMarket Participants Borrowers: Who are the major borrowers?

The Government of India is the largest borrower in the market

Corporates

Why does the Central Government Borrow?Financing of gross fiscal deficitCapital expenditureRepayment of external borrowingServicing of outstanding borrowings

How does the Government borrow?The Government /Corporate borrows by

issuing Fixed income securities

Market ParticipantsMarket Participants

Investors: Who are the Investors?

Banks,

Mutual funds and

Insurance Companies

Why do they invest ?

Surplus money for a certain period/s

Participants & Products in Debt MarketParticipants & Products in Debt MarketIssuer Instrument Maturity Investors

Central Government T bills

Corporates/PDs

PSUs 0-7 years

Corporates Debenture 1-12 years

Bank Bonds 1-10 years

Central Government 2-30 years

PSUs Bonds 5-10 years

State Government 5-13 years

91/364 days

RBI, Banks, Insurance Cos, Provident Funds, Mutual Funds.

Commercial Paper

15days to 1 year

Banks, Corporate, Financial Institution, Mutual Funds, Individual, FIIs.

Scheduled Commercial Bank

Financial Institutions

Certificate of Deposit (CDs)

15 days to 1 year 1

year to 10 years

Banks, Corporate, Financial Institution, Mutual Funds, Individual, NRI, Trusts

Municipal Bonds

Banks, Corporate, Individuals, Trusts, Mutual Funds, Financial Institutions, NRI.

Banks, Mutual Funds, Institutions, Individuals

Scheduled Commercial Bank

Corporations, Trusts, Mutual Funds, Associations, FI, NRIs.

Dated Securities

RBI, Banks, Insurance Cos, Provident Funds, Mutual Funds.

Banks, Insurance Companies, Corporates, PF, Mutual Funds, Individuals.

Dated Securities

Banks, Insurance Companies, Provident Funds.

Bond MarketBond Market

The market for newly-issued bonds is referred to as the Primary market.

After the bond has been issued, investors can

sell their bonds at any time until maturity.

The market where bonds are bought and sold

(exchanged or traded) among investors is called

the Secondary market.

Fixed Income SecuritiesFixed Income Securities The Government and the Corporate borrow by

issuing Fixed Income Securities.

What are Fixed Income Securities? Fixed income securities are investments that

provide a return in the form of fixed periodic payments. Credit Quality, Yield & Maturity are key components of Fixed Income Securities.

issuerMaturity date

coupon

9.81% GOI 2013

Bond DefinitionBond Definition❐ A bond is a written conditional promise to pay a specific

principal sum at a determined future date and interest (coupon payments) on fixed dates

❐ Bonds are secured loans that investors make to corporations and governments. Corporations and governments issue bonds when they want to raise capital.

❐ One of the factors that make bonds appealing is that they pay a set amount of interest on a regular basis.

❐ Bonds are a type of investment vehicle that can provide investors with two kinds of return: current income (coupon payments) and capital gains. Bonds are considered one of the main sources for refinancing.

Bond TerminologyBond Terminology

❐ The issue date is the day on which the life of a bond starts. The term to maturity defines the period of time, or the life of the bond. The bond's maturity date is the date on which the last payment is due.

❐ The face value (also called par value or principal sum) of a bond & represents the amount that will be repaid to the bondholder at maturity.

❐ The coupon is the nominal annual rate of interest that is paid to the bondholder on a regular basis. It is usually expressed as a percentage of the face value (coupon rate). The coupon rate is either fixed or variable.

Bond TerminologyBond Terminology

❐ The purchase price is the price the investor pays to buy the bond, i.e., to receive this series of cash flows (coupon and face value). The coupon period is not necessarily the same for all the bonds. The coupon payments are made semi-annually, or annually.

❐ Yield on Security is the implied interest rate offered by a security over its life, given its current market price.

❐ Difference between Yield & Coupon: The difference between yield and coupon arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

Yield To Maturity (YTM)Yield To Maturity (YTM)

❐ The Yield to Maturity or YTM refers to the percentage rate of return paid on a bond, note or other fixed income security if the investor buys and holds the security till its maturity date.

In other words, it equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).

It is the internal rate of return of the valuation equation

Yield To Maturity (YTM)Yield To Maturity (YTM)❐ Example: An 11.68% ICICI Bond maturing on 06 -Dec-2010, is

being priced in the market on 06-Dec-2008 at Rs 104.20. Face Value is 100. Interest payment is done Annual.

In this example,

Face Value (FC) = Rs. 100;

Coupon Payment (CP) = 11.68%; Purchase Price(PP)= 104.20

Current Yield = (11.68/104.20)*100 = 11.20%

Yield to Maturity (YTM)

current price =

104.20 =

By trial & error, r ( YTM) will be 9.28%

Fixed Rate BondFixed Rate Bond

Coupon is 5% payable semi annually

Purchase Price

Term to Maturity Maturity Date

Fixed Rate Coupon Payments (Rs. 2.50)

Last Coupon

Face Value

Issue Date

15 September 2003 15 September 2008

Coupon is 5% payable semi annually

Rs 100

Floating Rate BondFloating Rate Bond

Purchase Price

Term to maturity Maturity Date

Floating rate Coupon Payments

Last Coupon

Face Value

Issue Date

15 September 2003

3 year bond annual resets

Rs 100

Mibor+0.50%

Mibor+0.50%

15 September 2006

Zero Coupon BondZero Coupon Bond

Purchase = Rs 70Price

Term to Maturity Maturity Date

Face Value =Rs 100

Issue Date

15 September 200315 September 2006

Accrued Interest

Purchase Price=90

Risk Factors in DebtRisk Factors in DebtImportant Risk associated with Bond Market• Credit Risk• Interest Rate Risk• Liquidity Risk• Call Risk• Inflation Risk• Re-investment Risk

Credit RiskCredit Risk❐ For a bond investor, there are primarily two types of credit

risk: default risk and downgrade risk.❐ Default risk is the risk of non-payment of Principal or

interest or both.❐ Downgrade risk is the risk that a bond is reclassified as

a riskier security by a credit rating agency. When an issue is re-categorized or its credit rating is changed, the yield adjusts immediately to reflect the new rating.

❐ This kind of risk in the context of a Government security is always zero.

Credit RiskCredit Risk❐ To find out credit risk, Credit Rating agencies give rating to different

corporate papers (bonds) based on many factors. This includes the economic environment at large, the ability of the issuer to make good on its promise and the general political condition in the country.

❐ Rating Agencies: CRISIL, CARE, ICRA, FITCH, etc.❐ For ex., CRISIL’s Long Term Ratings Scale

❐ ST Ratings Scale is given by P1 TO P5❐ '+' (plus) or '-' (minus) signs to reflect comparative standing

Investment Grade Ratings Speculative Grade Ratings

AAA Highest Safety BB Inadequate Safety

AA High Safety B High Risk

A Adequate Safety C Substantial Risk

BBB Moderate Safety D Default

Interest Rate RiskInterest Rate Risk INTEREST RATE RISK

- Higher the maturity of the Bond higher the Interest Rate sensitivity (Risk)

- Prices of bonds with higher maturity will go down more if the interest rate risess and vice versa

Price

Bond Price Movements

Interest

Maturity 1

Maturity 2

Price change 1Price

change 2

ExampleExample

7% ICICI Bonds 2009 for Rs. 100

NO!

He would get the higher price

To his surprise on 2 Feb 2004

Interest Rate on ICICI Bond is down 1 %

Do you think he would get Rs 100 if he sells his bond?

Mr. Vijay buys on 2 Feb 2003

Example Continues....Example Continues....

• How Much Less he would get for his Bond ????

• To understand that we need to know the Modified Duration of the Bond

Modified DurationModified Duration

- Modified Duration is the direct measure of the interest rate sensitivity of a bond

% Change in Price of a bond =

(-) Modified duration * Change in Yield (in %)

- Higher the maturity – higher the modified duration – higher interest rate sensitivity

How Much Less ?How Much Less ?Percentage change in the Price of Bond

= Percentage change in the Interest Rate * Modified Duration of Bond

So Mr. Vijay would get = -1% *- 5( Assumed Modified Duration) = 5 % higher price

He would realize Rs. 105 if he sells the Bonds

Other RisksOther RisksLiquidity Risk: It is the risk that a given security cannot be

traded quickly enough in the market to prevent a loss (or make the required Profit)

Call Risk: This is the risk faced by the holder of a Callable Bond. Typically, bond issuers will call a bond because of the high rate they are paying on the bond. If interest rates have declined since it first issued the bonds, issuers will often call the bond once it becomes callable and will create a new issue at a lower rate. The bondholders will then lose out on the high rate of their bond and will have to invest in a lower rate environment.

Re-investment Risk: This "reinvestment risk" is especially evident during periods of falling interest rates where the coupon payments are reinvested at less than the yield to maturity at the time of purchase.

Inflation Risk: The uncertainty over the future real value (after inflation) of your investment.

Risk ProfileRisk Profile

Investment horizon

Days 1 year

Short Term Plans

Liquid/Liquid Plus

Floating Rate Funds

ST FMPs

Arbitrage Funds

LT FMPs

Income Funds

Gilt Funds

MIPs

Risk

3 – 6 Mths

Debt FundsDebt Funds

Type of FundsType of Funds

Type of Funds Liquidity Expected Return Suitability Target Investor Underlying Asset

Liquid Funds Very High 6 – 8% Short Term Parking Substitute to Savings A/C

Liquid Plus Very High 7 – 9% Short Term Parking Substitute to Savings A/C CP, CD, Call Money Mkt

Short Term Funds Very High 8- 9% 3 months – 1 yr FD Client in falling interest rate market CP, CD,Debenture

Income Funds 3 working days 9 – 12% 1 – 2 years FD Client in falling interest rate market

Gilt Funds 3 working days 9 – 12% 1 – 2 years FD Client in falling interest rate market Only GOI Securities

MIP 3 working days Around 10% 1 – 3 years Conservative Debt Investors

CP, CD, Call Money Mkt Less than 90 days

CP, CD, Debenture, NCD, G Sec More than 1 yr maturity

All of income funds + Equity (15 to 30%)

Note: Return mentioned here is only for indicative purpose. This does not guarantee rate of return. Return depends on market movement.

Taxbility of Debt FundsTaxbility of Debt Funds

Taxbility of Equity Oriented Funds (2012-13)

STCG Tax LTCG Tax TDS

Resident Individual/HUF As per Slab Tax Free NIL

As per Slab Tax Free NIL

Domestic Cos Tax Free NIL

NRI As per Slab Tax FreeSTCG : 15%

LTCG : Nil

Dividend Income

DDT – Other Than Liquid/Money

Market Schemes

DDT – Liquid/Money

Market Schemes

10% (20% with indexation)

13.519% (12.5% + 5% Surcharge + 3%

Cess)

27.038% (25% + 5% Surcharge +

3% Cess)

Partnership Firm/AOP/BOI


32.44% (30% + 5% Surcharge + 3%

Cess)

32.445% (30% + 5% Surcharge +

3% Cess)32.445% (30%

+ 5% Surcharge + 3% Cess)


32.44% (30% + 5% Surcharge + 3%

Cess)

32.445% (30% + 5% Surcharge +

3% Cess)


13.519% (12.5% + 5% Surcharge + 3%

Cess)

27.038% (25% + 5% Surcharge +

3% Cess)

Fixed Maturity PlanFixed Maturity Plan• Investment Objective : FMPs are close-ended debt

funds with a fixed maturity horizon ranging from three months to five years. The objective of such a scheme is to generate nearly fixed type of returns over a fixed-maturity period.

• Liquidity : 3 business days

• Risk : Credit risk, Interest Rate Risk (low if redeem at maturity)

• Applicable Loads : Entry Load – NIL Exit Load – NIL if held till maturity

Tax Efficient Return Compared to Bank Tax Efficient Return Compared to Bank F.D.F.D.

Particulars Income Fund Bank FDInvestment Amt (Rs) 1,00,000 1,00,000

Rate of Return/Interest Rate (%) 10.00% 10.00%Tenure (Days) 366 366

Value After 1 Year (Rs) 1,10,000 1,10,000Gain on Investment 10000 10000

Long Term Capital Gain Tax (10.3%) 1030 N.A.Tax on Interest Income (30.9%) N.A. 3090

Net Value After Tax (Rs) 1,08,970 1,06,910

Effective Rate of Return 8.97% 6.91%

- It can be seen that even if the Bank FD gives the same rate of return as of MF debt scheme, post tax return is considerably higher in MF debt scheme

Suitability of Debt FundsSuitability of Debt Funds

Category Suitability Target against

Very ST FDs (< 1 month)

Liquid Plus Funds

ST FMPs (less than a year) FDs < 1 year

ST Gilt Funds FDs < 1 year

FDs < 1 year

Arbitrage Funds FDs < 2 years

LT FMPs (more than a year)

Income Funds

LT Gilt Funds

Liquid & ST Floating Rate Funds

Surplus in Current account & short term parking, especially for Non Individuals

Surplus in Current account & short term parking, especially for Non Individuals

Very ST FDs (< 3 months)

Surplus availability for specific periods & nearly fixed type of returns required

Surplus availability for more than 6 months & up to 1 year without credit risk

Short Term Funds & LT Floating Rate Funds

Surplus availability for more than 6 months; ready for variable returns

Surplus availability for more than 6 months & up to 2 years

Surplus availability for specific periods more than a year & nearly fixed type of returns required

FDs, Post Term Deposit, RBI Bonds

For investors who understand interest rate cycle & credit risk and want to gain from it


For investors who understand interest rate cycle and want to gain from it without credit risk


Asset AllocationAsset Allocation


• It works on simple principle of diversifying your risk

across asset class.

• Asset Allocation is a process of selecting the right

mix of asset class depending on investor’s risk

profile and investment goals.

• Asset Allocation is a primarily important element in

wealth creation process. An appropriate asset

allocation is very critical to be decided and

followed.


92%Asset Allocation

2% Market Timing

6% Security Selection

• 92% of investment performance is

asset allocation.

• Security selection accounts for 6% and

market timing only 2%

• Unfortunately we spend maximum time

on something which contributes

minimum to investment performance.

As per the study of Brinson, Singer, Beebouwer

Understanding Asset AllocationUnderstanding Asset Allocation

Story of three friends......

•Three friends received Rs 1,00,000.00 in the year 2000.00

•Mr SMART - Invested at the bottom & got out at the top, however he invested only 10%

•Mr Fool – Invested at the top and stayed invested

•Mr Balance – Invested 50% in Equity and 50% in Debt and kept on balancing

Mr. SmartMr. Smart•Invested in SEP 2001 , 10000 Rs in Equity when markets were at 3000

•Dis-invested in Jan 2008 when markets were at 21000

•On the balance 90000 Rs of investments he made 8% compounded annually

His equity money has grown 7 times from 2001 to 2008. He redeemed at 21,000 and reinvested Rs. 70,000/- at 9,000 level

Debt return is calculated till Feb 2010

Mr. FoolMr. Fool

•Mr Fool invested the entire 1,00,000 at 6000 market level and is still invested at index of 16000

His equity money has grown 2.7 times during this period.

Current value is calculated at 16,000 SENSEX level in Feb 2010

Mr. BalanceMr. Balance

• Mr Balance invested 50% at 6000 level and rebalance when market crashed at 3000 level and again rebalanced when market was at 21000 and at 9,000 levels.

Mr. BalanceMr. Balance

Initial investment assumed in Sept 2000. Rebalancing is done at SENSEX level of 3000, 21000, 9000 & 16000 levels; Debt return assumed at 8% p.a.

Summary of End ValueSummary of End Value• Mr Smart : Rs.2,97,563

• Mr. Fool : Rs.2,66,667

• Mr. Balance : Rs.3,71,004

Key LearningKey Learning

• Asset Allocation automates market timing and reduces the risk of market volatility.

• Asset allocation helps you invest scientifically.• In the long run, participation in equity matters

rather than the market timing.

Disclaimer:The above presentation is for private circulation only. This is for information purpose only and is not intended to be and must not be taken as the basis of any investment decision. Nothing in this presentation should be construed as an investment advice ,and/or as an advice to buy or sell or solicitation to buy or sell any mutual fund / schemes. NJ India Invest has taken due care & caution in preparing this presentation and the information has been taken from various sources. However, NJ or any of its employees, Partners, do not take any responsibility or liability, expressed or implied, whatsoever, for any investment decision made or taken on the basis of this presentation. The viewers are strongly advised to seek expert professional help before making any decisions. The presentation contents returns / performance figures which are for illustrative purpose only. There is no guarantee that the projection given would materialize. NJ IndiaInvest or any of its employees or Network Partners cannot be held responsible for any performance or non-performance of the illustrations / projections depicted in this presentation. Risk Factors: Mutual funds and securities are subject to market risks and there can be no assurance and no guarantee that the objectives of Mutual Fund schemes invested in can be achieved. As with any investment in securities, the NAV of the units issued under the Scheme (s) can go up or down, depending up on the factors and forces affecting the capital markets. Past performance of the Sponsor/AMC/ does not indicate or guarantee the future performance of the Scheme(s) of any Mutual Fund. Investors are therefore urged to read the Offer Document (s) carefully, and consult their legal/tax/investment advisor before they invest in the scheme(s). Investors in the scheme(s) are not being offered a guaranteed or assured rate of return or monthly or regular/periodical income distribution, and the actual returns and/or periodical income distribution to an investor will be based on the actual NAV, which may go up or down, depending on the market conditions. Kindly refer to the Offer Document of the respective schemes carefully prior to investing.

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