Introduction to Mutual funds

Here is a real life case – the name has been changed though.

My presentation for this session can be downloaded from http://www.slideshare.net/sgrajasekharan/wealth-management-session-2

Rashmi had finished her MBA in 2008  – lived in Bangalore with her friends –– was employed in a mid tier IT services firm – had a saving of about 20 K per month. She had come to me for advice regarding investments - this was in Aug 2009. She had looked at options like recurring deposits, fixed deposits, and post office schemes. She knew investment in equity was a high risk / high returns option - was not sure where to start.

Post discussing her needs the following points emerged:

1.       She must not use the Fixed deposit, Recurring deposit or Post office schemes as the returns from these schemes just match the inflation levels in India.

2.       She must not buy specific stocks directly as she is not got enough hands on knowledge in stock markets.

3.       She must look at a time frame of at least 3 years for any investment – in fact the longer the better.

4.       She must start immediately as she had not done anything on these lines since she started earning one year back.

5.       We decided that it was a good time to invest in mutual funds that had equity investments – it would give her

a.       the returns that equity investments gave with a lower risk vis a vis direct equity investment as the MF’s were diversified.

b.      access to professionals who managed the funds at a cost that was miniscule

c.       the flexibility to invest every month through Systematic investment plans if she wanted

d.      there was transparency on the value, as the Net Asset Values of the MF’s were calculated daily for the open ended funds

e.      she had the freedom to exit anytime after paying the exit load

f.        she had many choices as to which MF to invest in.

Deciding on which MF to invest in was the next step – the key factors that we took into consideration was

·         the past performance of the fund, even though we knew that the past performance does not guarantee future performance

·         the ratings for the MF - we got it from http://www.moneycontrol.com/mutualfundindia/ and http://valueresearchonline.com/

·         look at the background of the fund manager and see how successful he has been

·         look at the offer documents of the MF and see the detailed investment objectives

·         look at the size of corpus that the fund is managing –the larger the better

Based on these parameters, Rashmi invested in two equity funds through the SIP route – where the money is transferred every month from her bank account automatically.

Today, in Sept 2010, she is glad that she took these steps as her investment has appreciated by over 30%  in the past 12 months.

 She intends to continue with this SIP for the next two years and as of now she is educating herself on the other investment options available in India.

This case sums up what we discussed in the class -although in a different format - for more information - you can download the ppt -the url is shared early in the blog.

Overview of Financial planning and Wealth management

Hello students - This week onwards, for the next ten weeks, we will explore the various facets of wealth management - remember that Wealth management is for managing your own wealth - aimed at making you financially independent - where one does not need to work to maintain your lifestyle - as we go through the classes every week, my blog also will follow with one update every week.


My plan to cover Wealth management in the next ten sessions is as follows:

Session 1 - Overview of financial planning and Wealth management

Session 2 and 3 - Equity, Debt and Mutual funds

Session 4 -Insurance, Derivatives and Bullion

Session 5 -Real Estate, Private Equity and Venture capital

Session 6 -Macro Economics

Session 7 -Tax planning, Retirement planning and Estate planning

Session 8 - Wealth management industry in India

Session 9 and Session 10 - executive interaction and Wrap up

The first session aims at making you realize that each of us, irrespective of our backgrounds, can become financially independent - all that we need to do is create a personal long term financial cash flow plan and a focus on getting good % returns on our savings.

My presentation and the excel sheet that I use for this session can be downloaded from

http://www.slideshare.net/sgrajasekharan/wealth-management-session-1

http://www.slideshare.net/sgrajasekharan/financial-planning-template

Robert Kiyosaki in his book “Rich dad, Poor Dad” has defined Assets as any item that produces an income and Liabilities as any item that produces an expense. In order to reach financial independence, you need to amass assets and keep liabilities to the minimum possible. For example -a car for personal use and a house where you stay will be classified as a liability as it creates a cash outflow - and the same car used as a taxi or a the same house given for a rental will be classified as an asset as it creates a cash inflow.

You need to invest in more and more assets, which over time will create bigger and bigger cash inflows - and over time, this cash inflow from assets will take care of your living expenses and you will be financially independent.

Each one of us have three areas where we must focus in order to become financially independent:

Salary - our cash Inflow

Expenses - our cash outflow

Savings - the net of cash Inflows minus outflows

As future professionals, most of you will be focused on the salary - being aware of what you make in your job, what your peers are making in their jobs and as most professionals, we believe that for reaching financial independence, you need to get a high salary. That’s not fully true.

Then there are people amongst you, who will go one step further and have a reasonably accurate measure of what the expenses are - hence know what the net savings would be - the belief is that controlling expenses and having a good salary will make you financially independent -that too is not fully true.

Both these are reasonable approaches - but not good enough to ensure financial independence - the only sure shot way to reach financial independence is to focus on the % returns from your savings - focus on investing in areas where you get better % returns. For example a Fixed deposit that gives 8% returns is not good enough as inflation in India is also 8% (also interest in FD is taxed) - so FD is not an investment that will take you to financial independence but most of us do not see FD in this way as it is a safe (and if I may add - lazy) place to park our savings.

So a clear focus on savings and the % return is needed to reach financial independence - We must have our money working hard for us - so that we do not have to work hard and have time to do things that we always wanted to do.

In this session, we have jointly prepared a 50 year (long term) cash flow plan - for a young MBA who will be shortly married - we have made some reasonable assumptions of their income, expenses, life time expenses (things like children’s education, parent’s health, holidays etc), inflation and returns from investments. This data is given in the excel sheet and anyone can customize this sheet and make a personal financial plan.

I urge each one of you to make a personal financial plan - make reasonable assumptions as you see fit - and over the next few years, revise the plan regularly - and you will be on your way to reach financial independence. The earlier we start, the faster we will reach this stage - hence it makes sense to start it now - even though you are not earning as of now.

In the next few sessions, we will address the various options that we have in India for investments. If we can be smart and get about 25-30% returns on our investment (at this stage of life -when you are starting your careers) - you will reach financial independence in about 12 -15 years.

I know many people, who have been able to achieve this. And we will jointly explore the various options available for us as we go through this exciting journey of Wealth management.

I want you to realize that it is not necessary to do extraordinary things to get extraordinary results - you just need to plan well and be focused and consistent over time.

My objectives of blogging and views on Wealth management

The objective of starting this blog is to help my MBA students with additional content to get a better perspective of the subjects discussed. This trimester, I am teaching two courses, Wealth management and Entrepreneurship, in Christ University Institute of Management in Bangalore. Through this blog, I intend to share my views and contents on these two subjects.


Let me start with Wealth management.

I believe wealth management is not just for MBA finance students –every graduate must go through the basics of wealth management. After all each one of us should know how to manage our own wealth. As one progresses in life and career, one will earn and save – with the expectation of India’s economy growing at 8% and above for the coming decade – everyone will do well financially in the years to come - and in that context, everyone needs to have a long term plan for achieving what I call “financial independence” – a stage where one does not need to work to earn a living – a stage when the money saved and invested gives you enough returns to fund your lifestyle. Once you reach this stage of financial independence, you can be free to follow your dreams.

There are many ways of doing this – and wealth management will expose you to the various ways this can be achieved. This course is a journey where you will learn about various asset classes where you can invest -you will learn the role of insurance in wealth management - we will discuss retirement planning and estate planning - plus we will discuss the wealth management industry in India and what is required to succeed if you want to make this your career. Through this course, you will also realise that the earlier you start in this journey, the better it will be for you. As you learn to manage your own wealth – you would be better equipped to manage other’s wealth too. Then you are truly a wealth manager.

Warren Buffet had once said “Wall street is the only place that people ride to in a Rolls Royce to get advice from those who take a subway”. It is similar here in India – many young wealth managers in India do not practice wealth management in their personal lives - and that is what we need to change.

Looking around, I do not see much activity in this space addressed at the common man –there are courses for specialists – but for a common man there is not much training available – there is one company called Finshiksha (http://finshiksha.com/) that is starting to do some good work in creating awareness for wealth management for the common man in India.

My course is intended to help you become financially independent early in life – I will help you to make a long term (30 year) financial plan for yourself - I believe that if you can manage your own wealth, then you will be truly qualified to become a professional wealth manager – if that’s what you want to do in life.