Investment Planning

“In the business world, the rear view mirror is always clearer than the windshield.” – Warren Buffett.

The problem with the financial planning is that it is based on the observation of a rear view mirror. While this is a valid way of predicting future, your planning should not be based solely on past data. Of course, nobody can plan thoroughly for the future, but we will discuss a few important guidelines, that your investment plan should have.

 We invest to safeguard ourselves for a rainy day. If you’ve started investing or want to start, then you could use our steps to plan  your investments. Creating a viable investment plan requires a little more than simply establishing a savings account and buying a few random shares of stocks. In order to structure a plan that is right, it is important to understand what you want to accomplish with the investments, define how to reach those goals and evaluate different types of investment options to decide which ones will aid in the achievement of those goals. The good news is that it is never too late to create and implement a personal investment plan and begin creating a nest egg for the future.

Managing your investments becomes easy when you make it a habit to save, even if it’s very little money. You need to keep a meticulous account of personal income versus expenditure on a monthly basis before you start investing.

We will help you understand

• The importance of investment planning in the financial planning process.

• The types of investment products and their risk return characteristics.

• How to evaluate investment choices in the light of the client’s financial needs.

• Understand what client portfolios- how they are created, monitored and rebalanced based on needs.

• How to recommend an investment portfolio.

Purpose of Investments

• Investment is nothing but using money to make more money.

• It involves sacrifice of something now for the prospects of getting something in future.

• To part with money, investors need compensation for:

 – Time period for which the money Is parted with.

– The expected rate of price rise- Inflation

– The uncertainty of payments in future.

• Investment planning is an important part of overall financial planning.

 The Financial Planning process involves 6 steps

• Establishing and defining the client- Planner relationship.

• Gathering the data and goals of the client

• Analysis and evaluation of clients financial status

 • Developing plan and making recommendations

.• Implementation

• Monitoring the financial recommendations

 Investment Portfolio:

• A portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investors goal(s).

• Items that are considered a part of your portfolio can include any asset you own–from real items such as art and real estate, to equities, fixed-income instruments, and cash and equivalents.

• The Following are the various types of portfolio strategies: – Aggressive Investment Strategy: Search for maximum returns from an investment. Suitable for risk takers and for a longer time horizon. Higher investment in Equities. – Conservative Investment Strategy: Safety of investment is a high priority. Suitable for those who have a low risk appetite and a shorter time horizon. High investments in cash and cash equivalents, and high quality fixed income yielding assets.

• Moderately Aggressive investment strategies: These are suitable for people who have a large an average appetite for risk and a longer time horizon. The objective is to balance the amount of risk and return contained within the fund. The portfolio would consist of approximately 50-55% equities, 35-40% bonds, 5-10% cash and equivalents.

• You can further break down the above asset classes into subclasses, which also have different risks and potential returns. More advanced investors might also have some of the alternative assets such as options and futures in the mix. As you can see, the number of possible asset allocations is practically unlimited.

Why is important to maintain a portfolio?

• Diversification which works on the principle of “Not putting all your eggs in one basket”.

• Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security.

• When your stocks go down, you may still have the stability of the bonds in your portfolio.

• If you spread your investments across various types of assets and markets, youll reduce the risk of catastrophic financial losses.

Investment Vehicles:

  1. Mutual Funds
  2. Unit-linked insurance plans (ULIPs)/ Insurance
  3. National Savings Scheme (NSC)
  4. Public Provident Fund (PPF)
  5. Kisan Vikas Patra (KVP).
  6.  Post office Monthly Income Scheme (POMIS)
  7. Post office Time Deposits ( POTD)
  8. Senior Citizens Savings Schemes:
  9.  Government Securities (G-Secs)/ Treasury Bills (TBs).
  10.  Zero Coupon Bonds
  11. Floating Rate Bonds
  12. Corporate Bonds
  13. Bank Deposits
  14. Bank Savings Accounts
  15. Company Fixed Deposits /Non-Banking Finance Companies (NBFCs) Deposits
  16.  Equity Shares
  17.  American Depository Receipt
  18. Closed End Investment Fund
  19. Futures and Options (Derivatives)
  20. Real Estate
  21. Other Investments • Bullion & Precious Metals, coin, gold, silver or platinum.

 Investment Strategies:  • Active Investment • Passive Investment

 Asset Allocation

• Apportioning of investment funds among a broad array of asset classes such as stocks and bonds. Its objective is to determine an asset mix which is most likely to meet the investment goals of a client with the acceptable risk appetite of the client.

 • The asset allocation process may comprise following steps: – Analysis of the client’s investment objective & risk tolerance – Analysis of expected returns from various asset classes and risk-return trade-off – Determination of the asset classes to be included in the portfolio – Determination of proportionate weighting of each asset class

• Asset categories typically include: equity, fixed income securities, money market instruments, real estate, precious metals and other assets

 Portfolio Rebalancing

• Portfolio rebalancing involves periodically readjusting the portfolio (mix of assets) to match the original allocation of different assets or asset classes following a significant change in one or more.

• More simply stated, it is returning your portfolio to the proper mix of stocks, bonds and cash when they no longer conform to your original or target plan.  

Say you have determined that given your risk tolerance, time horizon and financial goals that your portfolio should look like this: Stocks 60% Rs60,000 Bonds 35% Rs35,000 Cash 5% Rs5,000 Total 100% Rs100,000 A couple of your stocks have done well in the market and your portfolio looks like this: Stocks 66% Rs 80,000 Bonds 29% Rs 35,000 Cash 4% Rs 5,000 Total 100% Rs120,000Your portfolio is up by Rs20, 000This is where the conservative investor will step in and bring the portfolio back to the original allocation. This can be done in a number of ways.  

How to bring the portfolio back to the original allocations?

• First, you could sell off some of the stock that had the recent run up and invest the profits in bonds and cash until the original percentages are achieved.

• Another alternative would be to look at your other stock holdings and sell any underperformers to generate the cash to invest in the other two asset classes.

• The third alternative would be to invest new money into your portfolio in the bonds and cash portion to bring those percentages up to proper levels.

• As a rule of thumb, when your assets drift 5% or more away from your allocation, you should re-balance. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes.

What happens if you do nothing?

• If you are risk adverse, a portfolio that becomes more heavily weighted in volatile stocks will keep you up at night.

• Consider what happened to many investors during the tech stock boom of the late 1990s. Not only did they let the technology stocks grow out of any reasonable allocation, many also sold off other stock to buy more technology companies.

• When the market crashed, the investors who had let technology balloon to a hugely disproportionate percentage of their portfolio had nothing to fall back on.

• Portfolio rebalancing is an important part of sticking to your game plan. You should look at your portfolio at least quarterly in terms of rebalancing and more frequently if you have had a significant gain or loss in any asset class.

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