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Certified Financial Planner Module 4: Investment Planning
Certified Financial Planner Module 4: Investment Planning
Certified Financial Planner Module 4: Investment Planning
Investment Planning
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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.
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Monitoring the
recommendations
Establishing and
Defining the clientPlanner relationship
Gathering Client Data &
Goals
Analysing and
Evaluating Financial
Status
Implementing the
Financial plan
recommendations
Developing and
Presenting Financial
Planning
Recommendations/
Alternatives
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Type of returns
Total return or Holding period return: The period during
which the investment is held by the investor is known as
holding period and the return generated on that
investment is called as holding period return during that
period.
Annualized return (CAGR): It is also known as
compounded annual growth rate. The year-over-year
growth rate of an investment over a specified period of
time. The compound annual growth rate is calculated by
taking the nth root of the total percentage growth rate,
where n is the number of years in the period being
considered.
Measurement of return
Historical return
Expected return
The expected rate of return is the weighed average of all possible returns multiplied
by their respective probabilities.
n
E(R) = Ri Pi
i=1
Where, E(R) = Expected return from the stock
Ri = Return form the stock under state i
Pi = Probability that the state i occurs
n
Portfolio return
The expected return on a portfolio of securities weighted average of expected
return for the individual investment in a portfolio.
Risk Tolerance
How much are
you prepared to
lose over one year
without giving up
on investment?
Age
Younger
investors can
usually afford
to be more
aggressive
Goals
If you are saving
to buy a house or
starting to invest
for retirement,
you will need to
invest in growth
stocks. This
means taking on
more risk
Time horizon
The longer you
can afford to
wait, the less risk
is involved. Do
not invest in
risky assets if
you may need
funds in the short
term.
The element of
return variability
from an asset
which results
from
fluctuations in
the aggregate
market
Non Systematic/
Non Market
Risks
The variability
in a security's
total returns
not related to
overall market
variability
Re-investment
Risks
Interest Rate
Risks
The possibility
of a reduction in
the value of a
security,
especially a
bond, resulting
from a rise in
interest rates.
Such changes
generally affect
security prices
inversely
The risk of
loss in the
value of
cash due to
inflation.
This is also
known as
inflation risk
Re-investment
Risks
Interest Rate
Risks
The possibility
of a reduction
in the value of
a security,
especially a
bond,
resulting from
a rise in
interest rates.
Political
Risks
The risk of
loss when
investing in a
given country
caused by
changes in a
country's
political
structure or
policies
Exchange
Rate
Risks
Managing risk
Avoiding Risks: Simply avoid the risk altogether. Dont invest in the financial
market to avoid financial loss. However, some risks are unavoidable.
Controlling Risks: Put in place some control measures for the risks. For
example, you can install sprinkler systems in your office to control the risk of
loss due to a fire.
Transferring Risks: Shifting the financial responsibility for that risk to the other
party, generally in exchange for a fee. Purchasing Insurance is the most
common method of transferring risk from the individual to the insurance
company
Measurement of risk
2 = Pi Ri E (r) 2
Where,
E(r) = expected return from the stock
Ri = return from stock under state
Pi = probability that the event i occurs
n = number of possible events
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Portfolio risk
Measuring Risks
Coefficient of determination (R2) gives the variation in
one variable explained by another and is an important
statistic in investments.
R2 is calculated by squaring the correlation coefficient (r).
It is a measure of systematic risk;
I - R2 is defined as unsystematic risk. The beta coefficient
reports the volatility of some return relative to the market.
The strength of the relationship is indicated by R2. If R2
equals 0.15, an investor can assume that beta has little
meaning because the variation in the return is caused by
something other than the movement in the market
(unsystematic risk). If R2 equals 0.95, the variation in the
market explains 95 percent of the variation in the return
(systematic risk-where beta is a good measure of risk).
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Managing Risks
Diversification
Diversification
There are three main practices that can help you ensure
the best diversification:
Spread your portfolio among multiple investment
vehicles such as cash, stocks, bonds, mutual funds,
and perhaps even some real estate.
Vary the risk in your securities. You're not restricted to
choosing only blue chip stocks. In fact, it would be wise
to pick investments with varied risk levels; this will
ensure that large losses are offset by other areas.
Vary your securities by industry. This will minimize the
impact of specific risks of certain industries.
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Types of Diversification
Company
Diversification
Geographical
Diversification
Manager
Diversification
Asset
Allocation
Managing Risks
Hedging:
Hedging is a strategy to protect oneself from losing by a
counterbalancing transaction. It can be used to protect
one financially--to buy or sell commodity futures as a
protection against loss due to price fluctuation or to
minimize the risk of a bet.
Hedging against investment risk means strategically using
instruments in the market to offset the risk of any adverse
price movements. In other words, investors hedge one
investment by making another. Technically, to hedge you
would invest in two securities with negative correlations
R
E
T
U
R
N
Low levels of uncertainty (low risk) are associated with low potential returns.
High levels of uncertainty (high risk) are associated with high potential returns.
The risk/return tradeoff is the balance between the desire for the lowest possible
risk and the highest possible return. Other factors you will need to consider for
investments are; how long you want to invest the money for and whether you
need quick access to it at any time during the investment period.
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Compounding
Real Returns
The earnings from an investment above the prevailing
inflation rate is called the real return on that investment.
The real returns are determined with the help of the
following formula:
[{(1 + nominal rate)/ (1+ inflation rate)}-1]*100
Where the nominal rate is the absolute return and the
inflation rate is the rate of inflation for the period.
Measures of Performance
Measures of Performance
Measures of Performance
Investment Portfolio
A portfolio is a combination of different investment assets
mixed and matched for the purpose of achieving an
investor's 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.
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Investment Portfolios
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.
Investment Vehicles
Small Savings
Small savings continue to be a favorite investment
alternative for a large section of investing population
despite the emergence of a number of alternative avenues
such as mutual funds and unit-linked insurance plans
(ULIPs).
Small savings scheme in India generally include National
Savings Scheme (NSC), Public Provident Fund (PPF) and
Kisan Vikas Patra (KVP).
All small savings schemes tend to be characterized as the
same despite the fact that they vary on parameters
including tenure, returns and liquidity. There is much more
to these schemes than just the safety and returns.
Small Savings
Public Provident Fund:
It presently offers a return of 8% per annum and has a
maturity period of 15 years. Contributions can vary from Rs
500 to Rs 70,000 per annum.
Investment under PPF is not very liquid. Withdrawals are
permitted only after the expiry of 5 years from the end of the
financial year of the first deposit. Also only a small portion
can be withdrawn
Investors are entitled to claim tax-benefits under Section 80
C for deposits made up to Rs 70,000 pa in the PPF account
and interest exemptions under Section 10 of the Income Tax
Act.
Suitable investment option for investors who have age on
their side and for whom liquidity is not a concern.
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Small Savings
Small Savings
Kisan Vikas Patra
KVP falls under the category of small saving schemes which
don't offer any benefits under the Income Tax Act. The
scheme runs over a tenure of 8 years and 7 months (which is
a fairly longish horizon) and doubles the amount invested.
This makes the return one of the most attractive one amongst
its peers.
Investors are permitted to liquidate their investments in KVP
any time after 2.5 years from the investment date. However a
loss of interest has to be borne. In terms of tenure for
withdrawal (2.5 years) it scores far better than the NSC and
PPF on this parameter.
Investors whose priority is earning attractive returns while
maintaining a reasonable degree of liquidity should consider
investing in the KVP. Also KVP will hold appeal for investors
in cases where tax benefits are not a priority.
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Small Savings
Small Savings
Post office Time Deposits:
Fixed deposits of varying tenures offered under the domain of
small saving schemes. These deposits are available for
periods ranging from 1 year to 5 years with the interest rates
varying correspondingly. Interest payments are made
annually. POTD have emerged as one of the most favoured
instruments in recent times.
Investors can exercise the exit option within 6 months without
receiving any interest (1-Yr lock-in for exit with interest
receipt). However the penalty clause is applicable depending
on the interest rates offered by the time deposit. A flat penalty
of 2% is deducted from the relevant rate in case of premature
withdrawals.
Interest on POTD is eligible for tax benefits under Section
80L of the Income Tax Act.
POTD fit into most portfolios across investor classes.
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Small Savings
Senior Citizens Savings Schemes:
The scheme has been reserved for citizens above 60 years
of age, albeit citizens above 55 years can invest in the same
subject to certain conditions being fulfilled. SCSS offers a
return of 9% pa, making it a must have proposition for the
target audience. The SCSS in tandem with the POMIS can
prove to be a very lucrative option for senior citizens who
need regular income without taking on any risk.
Securities:
Government Securities (G-Secs):
Government Securities (G-Secs) market comprises almost 95% of
the debt market.
Government Security is a sovereign debt issued by the Reserve
Bank of India (RBI) on behalf of Government of India. These
securities are issued to cover the Central Government's annual
market borrowing programme to fund the fiscal deficit. The term
"Government Security" includes: * Central Government Dated
Securities * State Government Securities * Treasury Bills (TBs).
The market borrowing of the Central Government is raised through
the issue of dated securities and 364 days TBs either by auction or
by floatation of fixed coupon loans. In addition, TBs of 91 days are
issued for managing the temporary cash mismatches of the
Government. These do not form part of the borrowing programme of
the Central Government.
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Corporate Bonds:
Corporate bonds are debt obligations, issued by private and
public corporations.
They are typically issued in multiples of Rs 1,000. Companies
use the funds they raise from selling bonds for a variety of
purposes, from building facilities to purchasing equipment to
expanding the business.
When you buy a bond, you are lending money to the corporation
that issued it.
The corporation promises to return your money, or principal, on
a specified maturity date. Until that time, it also pays you a
stated rate of interest, usually semiannually.
The interest payments you receive from corporate bonds are
taxable. Unlike stocks, bonds do not give you an ownership
interest in the issuing corporation. Benefits of Investing in
Corporate Bonds
Deposits
1. Bank Deposits:
Bank Savings Accounts: The simplest kind of short
term (or cash) investment is a savings account. Returns
are low compared to other investments, but returns are
guaranteed by the supplier - so your investment won't
drop in value in the short term like others might. You can
withdraw part or all of your money whenever you want
(total liquidity).
Bank fixed term investment : You keep a fixed
lumpsum amount of money for a fixed period of time with
the bank for a higher rate of interest. Good for short to
medium term investment. Returns are high but is not very
liquid.
Deposits
2. Company Fixed Deposits:
Fixed deposits in companies that earn a fixed rate of return
over a period of time are called Company Fixed Deposits.
Financial institutions and Non-Banking Finance Companies
(NBFCs) also accept such deposits. Deposits thus mobilised
are governed by the Companies Act under Section 58A. These
deposits are unsecured, i.e., if the company defaults, the
investor cannot sell the company to recover his capital, thus
making them a risky investment option.
NBFCs are small organisations, and have modest fixed and
manpower costs. Therefore, they can pass on the benefits to
the investor in the form of a higher rate of interest.
NBFCs suffer from a credibility crisis. So be absolutely sure to
check the credit rating. AAA rating is the safest.According to
latest RBI guidelines, NBFCs and comapnies cannot offer more
than 14 per cent interest on public deposits.
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Deposits
Investment Objectives:
A Company/NBFC Fixed Deposit provides for faster
appreciation in the principal amount than bank fixed deposits
and post-office schemes. However, the increase in the interest
rate is essentially due to the fact that it entails more risk as
compared to banks and post-office schemes.
Company/NBFC Fixed Deposits are suitable for regular income
with the option to receive monthly, quarterly, half-yearly, and
annual interest income. Moreover, the interest rates offered are
higher than banks.
A Company/NBFC Fixed Deposit provides you with limited
protection against inflation, with comparatively higher returns
than other assured return options.
You can borrow against a Company/NBFC Fixed Deposit from
banks, but it depends on the credit rating of the company you
have invested in. Moreover, some NBFCs also offer a loan
facility on the deposits you maintain with them.
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Deposits
Investment Objectives:
Company Fixed Deposits are unsecured instruments, i.e.,
there are no assets backing them up. Therefore, in case
the company/NBFC goes under, chances are that you
may not get your principal sum back. It depends on the
strength of the company and its ability to pay back your
deposit at the time of its maturity. While investing in an
NBFC, always remember to first check out its credit
rating. Also, beware of NBFCs offering ridiculously high
rates of interest.
Income is not at all secured. Some NBFCs have known to
default on their interest and principal payments. You must
check out the liquidity position and its revenue plan
before investing in an NBFC.
Deposits
Investment Objectives:
If the Company/NBFC goes under, there is no assurance
of your principal amount. Moreover, there is no guarantee
of your receiving the regular-interval income from the
company. Inflation and interest rate movements are one
of the major factors affecting the decision to invest in a
Company/NBFC Fixed Deposit. Also, you must keep the
safety considerations and the company/NBFC's credit
rating and credibility in mind before investing in one.
Company/NBFC Fixed Deposits are rated by credit rating
agencies like CARE, CRISIL and ICRA. A company rated
lower by credit rating agency is likely to offer a higher rate
of interest and vice-versa. An AAA rating signifies highest
safety, and D or FD means the company is in default.
Deposits
ULIPs:
ULIPs:
Mutual Funds
A mutual fund is nothing but money pooled in by a large
group of people that is professionally managed.
A mutual fund manager proceeds to buy a number of
stocks from various markets and industries. Depending on
the amount you invest, you own a part of the overall fund.
The advantages of mutual funds are as follows:
Professional Management & Convenient
Administration. Also well regulated.
Diversification and good return potential.
Low costs and liquidity.
Transparency and flexibility.
Tax Benefits.
Wide choice of schemes.
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Disadvantages
Make tax planning
difficult.
May be somewhat
difficult to track in terms
of what they actually are
investing in.
So called non-substantial
changes in the way the
funds are managed (such
as manager switches)
may not be disclosed to
investors by fund
companies in a timely
manner.
Equity Shares
Common stock- these share in the ownership of the
company. The share holders are entitled to a share in the
profits of the company and voting rights.
Profits are paid in the form of dividends.
History has dictated that common stocks average 11-12%
per year and outperform just about every other type of
security including bonds and preferred shares. Stocks
provide potential for capital appreciation, income, and
protection again moderate inflation.
Risks associated with stocks can vary widely, and usually
depends on the company. Purchasing stock in a well
established and profitable company means there is much
less risk you'll lose your investment whereas by
purchasing a penny stock your risks increase
substantially.
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Equity Shares
Advantages Easy to buy and sell
Very easy to locate reliable information on public
companies.
There a thousands of companies to choose from.
Disadvantages Your original investment is not guaranteed.
Your stock is only as good as the company you invest
in, if you invest in a poor company, you will suffer from
poor stock performance.
Equity Shares
Shares- By investing in shares in a public company listed
on a stock exchange you get the right to share in the
future income and value of that company.
Your return can come in two ways:
Dividends paid out of the profits made by the company.
Capital gains made because you're able at some time
to sell your shares for more than you paid. Gains may
reflect the fact that the company has grown or
improved its performance or that the investment
community see that it has improved future prospects.
Direct Investment
You can invest directly in term deposits, bonds, shares
and property or you can place your money in a
superannuation scheme or managed fund and have full
time specialists look after the investment decisions for
you.
Direct investment in shares in specific companies or
selected rental properties should only be undertaken if
you have detailed knowledge or are prepared to pay for
specialist advice.
If you want to invest directly in shares or property
remember the importance of duration, risk, diversification,
returns and liquidity.
Managed Funds
In a managed fund your money is pooled with other
investors, and a professional fund manager invests it in a
variety of investments
Managed funds come in many forms - different funds
invest in different types of assets for different objectives.
Some funds target all-out growth and invest more in high
risk shares than others - they could rise dramatically or
just as easily drop dramatically.
Other funds look for solid long term growth from a range
of deposits, bonds, and shares - a better place for a lump
sum intended for your retirement. Financial advisors,
banks and insurance companies can all advise you on
managed funds that match your investment needs.
Managed funds usually involve paying management and
administration fees. These can vary a lot, so check to see
what you'd have to pay.
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Advantages are:
funds are easy to buy and sell on financial markets,
furthermore they are regulated by the Securities and
Exchange Commission.
the funds usually invest in hundreds of companies so offer
good diversification in certain areas.
if bought in a tax deferred account closed-end funds are a
great investment for long term capital appreciation.
Weaknesses are:
fixed interest payments are taxed at the same rate as
income.
the price of the closed-end fund is not exclusively linked to
the performance of the securities held by the fund. The funds
share price depends on supply and demand in the open
market.
Convertible Securities
Convertibles, sometimes called CVs, are referring to either
a convertible bond or a preferred stock convertible. A
convertible bond is a bond which can be converted into
the company's common stock.
Convertibles typically offer a lower yield than a regular
bond because there is the option to convert the shares
into stock and collect the capital gain.
But, should the company go bankrupt, convertibles are
ranked the same as regular bonds so you have a better
chance of getting some of your money back.
Convertible Securities
Advantages are:
Your original investment cannot go lower than the market
value of the bond, it doesn't matter what the stock price does
until you convert into stock.
Convertibles can be purchased through tax-deferred
retirement accounts.
CVs gain popularity in times of uncertainty when interest
rates are high and stock prices are low. This is the best time
to buy a convertible.
Disadvantages are:
the return on the bond or preferred stock is usually quite low.
"forced conversion" means that the company can make you
convert your bond into stock at virtually anytime, pay very
close attention to the price at which the bonds are callable.
Futures Contract
Futures are contracts on commodities, currencies, and
stock market indexes that attempt to predict the value of
these securities at some date in the future.
They are a form of very high risk speculation.
A futures contract on a commodity is a commitment to
deliver or receive a specific quantity and quality of a
commodity during a designated month at a price
determined by the futures market.
It is important to know that a very high portion of futures
contracts trades never lead to delivery of the underlying
asset, most contracts are "closed out" before the delivery
date.
Futures Contract
Strengths:
Futures are extremely useful in reducing unwanted
risk.
Futures markets are very active, so liquidating your
contracts is usually easy.
Weaknesses:
Futures are considered to be one of the most risky
investments in the financial markets, this is for
professionals only.
Losing your original investment is very easy in volatile
markets.
The extremely high amount of leverage can create
enormous capital gains and losses, you must be fully
aware of any tax consequences.
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Treasuries
Options
Options
Speculators simply buy an option because they think the
stock will either go up or down over the next little while.
Hedgers use options strategies such as a "covered call"
that allows them to reduce their risk and essentially lock-in
the current market price of a security. Using options (and
futures) is popular with institutional investors because it
allows them to control the amount of risk they are exposed
to.
Advantages- Allows you to drastically increase your
leverage in stock. Options in shares will actually cost you
lesser than purchasing shares. Can be used as a useful
hedging tool.
Disadvantages- Highly complex, requires a close watch,
high risk tolerance and in- depth information of the stock
market. You may lose a lot of money
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Preferred Stock
Represents ownership in a company but usually dont
have voting rights.
Usually get a fixed dividend, throughout and enjoy better
position in case of liquidation of the company.
Preferred stock may also be callable, meaning that the
company has the option to purchase the shares from
shareholders at anytime, and usually for a premium.
The major objective of a preferred stock is to provide a
much higher dividend. These are not as volatile or risky as
common stock.
Advantages- Higher dividend, lesser risk, better benefits in
case of liquidation.
Disadvantages- Higher dividend means higher taxes. Also
the returns offered are the same as corporate bonds,
which are less risky.
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Derivatives
These are financial instruments that derive their value
from the underlying, which can be a commodity, a stock or
stock index or even a complex parameter like the interest
rate.
It has no independent value.
Include forwards, futures or option contract of
predetermined fixed duration, linked for the purpose of
contract fulfillment to the value of specified contracts
underlying.
Derivative markets can be classified into commodity and
financial derivative markets, which each have various subbranches.
Derivatives
Forward contracts
Futures contracts
Operational
mechanism
Contract
specifications
Standardised
Flexibility
Counter-party risk
Exists
Liquidity
Price discovery
Examples
Terminologies
Spot price: The price at which an asset
trades in the cash market.
Futures price: The price at which the futures
contract trades in the futures market.
Contract maturity: The period over which a
contract trades. The maturity is 1, 2, 3 months
in India.
Expiry date: The last trading day of the
contract.
Contract size: The notional value of the
contract worked out as Futures Price
multiplied by the volume of units.
Basis: Spot Price - Futures Price. Basis
should theoretically be negative.
Cost of carry: Though the term originated
from Commodity Futures for financial futures it
reflects the relationship between futures and
spot. It can be summarized in terms of an
interest cost the futures buyer is paying over
the spot price today.
Initial margin: Upfront amount that must be
deposited in the margin account prior to
trading.
Marking-to-market: The process of
Revaluing each investor's positions generally
at the end of each trading day and computing
the profit or loss on the positions accordingly.
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Terminologies
Baskets: Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average or a basket of assets. Equity index
options are a form of basket options.
Swaps: Swaps are private agreements between two parties to exchange cash
flows in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are interest rate
swaps: These entail swapping only the interest related cash flows between the
parties in the same currency. Currency swaps: These entail swapping both
principal and interest between the parties with the cashflows in one direction being
in a different currency than those in the opposite direction.
Swaption: Swaption are options to buy or sell a swap that will become operative
at the expiry of the options. Thus a Swaption is an option on a forward swap.
Rather than have calls and puts, the Swaption market has receiver Swaption and
payer Swaption. A receiver Swaption is an option to receive fixed and pay floating
interest. A payer Swaption is an option to pay fixed and receives floating interest..
Option
Option is a security that represents the right, but not the
obligation, to buy or sell a specified amount of an
underlying security (stock, bond, futures contract, etc.) at
a specified price within a specified time.
Option Holder is the buyer of either a call or put option.
Option Writer is the seller of either a call or put option.
Options unlike futures are also concerned with speed of
the trend and not just the underlying trend. They are more
complex.
Directional strategies can be implemented using Options
Options can be categorized as call and put options. The
option, which gives the buyer a right to buy the underlying
asset, is called Call option and the option, which gives the
buyer a right to sell the underlying asset, is called Put
option.
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Calls: A call represents the right, but not the obligation, to buy an
underlying instrument at a fixed price (E), within a fixed period of time
(T). A simple way to understand options is to observe the cash flows
for the option considered i.e. what is an inflow and what's an outflow.
Now in the following case, a long call option, strike and premium is
what goes out (a cash outflow) and spot price i.e. the price of the
underlying comes in (a cash inflow).
Reward
Unlimited
Breakeven Price
Intrinsic Value
Long Call
Module 4: Investment Planning
Risk
Reward
Breakeven Price
Short Call
Reward
Breakeven Price
Long Put
Risk
Reward
Breakeven Price
Short Call
Options
Options
Options are deferred settlement contracts
Settlement i.e. delivery and payment takes place in the future
Give the buyer the right and no obligation
Give the seller the obligation and no right
To buy or sell (call or put options).
A specific asset (called underlying and outrightly defined).
At a specific price (strike or exercise price).
On/on or before a specific date (European/American options).
Intrinsic value is the value which you can get back if you exercise the
option..
For calls, it is stock price exercise price.
For puts, it is exercise price stock price.
Time Value = The price (premium) of an option less its intrinsic value.
Time value is made up of two components: insurance value and interest
value.
Key Features
Call option Key features: A call option has intrinsic value when its
exercise price is below the underlying security price. In other words, a
call option with intrinsic value gives the holder the right to buy the
underlying security at a price below the current market level.
Call intrinsic value = Underlying security price Exercise price
The higher the price of the underlying security in relation to the
exercise price, the greater the options intrinsic value and therefore
the value of the option.
Put option Key features: A put option will have intrinsic value when
its exercise price is above the current market price of the underlying
security. This gives the holder the right to sell the underlying security
above the current market level.
Put intrinsic value = Exercise price Underlying security price
Intrinsic value is also the amount that an option is in-the-money. An
option with no intrinsic value is out-of-the-money. The intrinsic value
of an option is always a positive figure.
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Market Scenario
Call Option
Put Option
in-the-money
out-of-the-money
out-of-themoney
in-the-money
at-the-money
at-the-money
near-the-money
near-the-money
Real Estate
Real estate investing doesn't just mean purchasing a house, it
can include vacation homes, commercial properties, land
(both developed and undeveloped), condominiums, along with
many other possibilities.
The value of the real estate is arrived at by considering a
number of factors, such as the location, the age and condition
of the home, improvements that have been made, recent
sales in the neighbourhood, if there are any zoning plans and
so on.
Holding real estate involves significant risks- property taxes,
maintenance, repairs among other costs of holding the asset.
These are usually purchased via brokers, who get a
percentage of the amount. It can also be purchased directly.
Other Investments
Other Investments
Investment Strategies
Active Investment:
An investment strategy involving ongoing buying and
selling actions of the investor. Active investors will
purchase investments and continuously monitor their
activity in order to exploit profitable conditions.
Active investing is highly involved.
Passive Investment:
An investment strategy involving limited ongoing
buying and selling actions.
Passive investors will purchase investments with the
intention of long-term appreciation and limited
maintenance.
Also known as a buy-and-hold or couch potato
strategy, passive investing requires good initial
research, patience, and a well diversified portfolio.
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Advantages
Expert analysis seasoned
money managers make informed
decisions based on experience,
judgment, and prevailing market
trends.
Possibility of higher-than-index
returns Managers aim to beat
the performance of the index.
Defensive measures Managers
can make changes if they believe
the market may take a downturn.
Disadvantages
Higher fees and operating
expenses.
Mistakes may happen there
is always the risk that
managers may make unwise
choices on behalf of investors,
which could reduce returns.
Style issues may interfere with
performance at any given
time, a manager's style may be
in or out of favor with the
market, which could reduce
returns.
Tactical Allocation
Tactical allocation among specific types of stocks (such as small
or large, value or growth, foreign or domestic) and bonds (such as
long or short, high-quality or low-quality) can be handled in one of
two ways:
Investors retain the tactical asset allocation decision and actively
manage the exposure to various categories. Most investors fall in
this category whether they manage allocations in a disciplined, predetermined fashion or simply let it fall where it may, as a residual of
other decisions.
The investor ignores tactical allocation by selecting a neutrally
weighted portfolio that reflects the entire available investment
universe. Few investors select this truly passive asset allocation
strategy. Given factors such as homeland bias, investors tend to
over-emphasize areas closer to home, consistently under-weighting
foreign securities.
Only after both the strategic stock/bond allocation and the handling of
the tactical allocation are decided upon, can we begin examining the
merits and pitfalls of passive versus active investment selection
strategies.
Tactical Allocation
With the context of comprehensive planning, understanding the
main drivers of portfolio returns is a major step in properly
implementing an investment strategy.
In order of their influence on results, these drivers are:
Strategic asset allocation investment policy between growth and
fixed-income investments. This allocation should be based on
each clients unique objectives and risk tolerance. The policy
allocation should be the foundation block of any long-term
investment strategy.
Actively managed tactical allocation versus a market neutral,
static allocation. Significant value can be added (or detracted)
by concentrating the portfolio in certain asset categories.
Selection of investments for each asset category may add (or
detract) an additional layer of value.
Asset Allocation
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%
Bonds 35%
Cash 5%
Total 100%
Rs60,000
Rs35,000
Rs5,000
Rs100,000
A couple of your stocks have done well in the market and your
portfolio looks like this:
Stocks 66%
Bonds 29%
Cash 4%
Total 100%
Rs 80,000
Rs 35,000
Rs 5,000
Rs120,000
Thank you!