Statement of Investment objectives and Policy guidelines
This portfolio belongs to DPS who is working for a large multinational corporation and will have a stable
monthly salary for next 30 years. The Statement of Investment Objective and Policy Guideline was
developed to help him understand and fulfill his long term financial objectives and to ensure that his
current savings are able to support his current and long term obligations.
Current/Short term Obligations:
1. He needs to repay his education loan starting March 2009
2. He needs to buy a house in near future
3. Short term money could be effectively invested and can also be used to provide liquidity to the
Long term obligations:
1. Money for Child education – Time horizon 18 years
2. Retirement planning – Time horizon 30 years
Considering the fact that India is an emerging market and is in high growth phase the expected long
term return from the portfolio should be 15% on a 5 year basis (expected average inflation is 7%).
1. Primary objective: Capital appreciation
2. Secondary objective: None
3. Tenure : Long term i.e. greater than 20 years
4. Review period: Once in a year
5. Risk Profile of investor: Moderate( Refer Appendix 2)
6. Investing Style: Growth
Monthly Salary will be used to cover all the monthly expenses and liabilities such as loan repayment and
the investment portfolio is supposed to take care of the long term obligations. All major investments in
the portfolio will be made from the monthly savings.
Asset allocation strategy
Possible asset classes with which Investor will be comfortable
1. Real estate, both for capital appreciation and for rental income
2. Gold via ETF or Gold funds
3. Mutual funds(Domestic and International) – Investing in Stocks will require time commitment which I
don’t have so I will depends on mutual funds
4. Fixed deposit in banks
The general policy shall be to diversify investment to provide a balance that will enhance the total
return while avoiding undue risk concentration in any single asset class or investment category (Risk free
rate 6.5%). Based on Holden spreadsheet model and based on personal preference I came up with
following Asset allocation chart
Asset Return Allocation %
Government of India Bond 8% 5
Gold 24% 10
Large Cap 25% 35
Small Cap 16% 5
Mid Cap 22% 25
Fixed deposits 10% 10
Total expected Portfolio return is 21% with a standard deviation of 7% (Refer Appendix 4)
Few general guidelines
1. The use of mutual funds is highly encouraged
2. Short term funds(390 days) shall be issues of high quality and marketability
3. In order to enhance portfolio result use of hedge fund and real estate is recommended but this
needs to be done with lot of caution and preferably with the help of investment manager
4. There will be one big investment in real estate in form of personal house but beyond that there will
be no direct real estate investment for next 10 years. If the real estate mutual fund industry matures
in the coming years then it could be considered as an investment asset.
There are many benefits of investing in Real estate and some of the most common ones are capital
gains, tax benefit and rental income. Real estate has low correlation with other assets so it helps in
diversification of the portfolio. In India there are very few real estate funds and as of now they are all
only available to high net worth investors or institutional investors. My personal knowledge of real
estate is not very good so I would not directly invest in companies having substantial investment in Real
estate or companies which get huge amount of their income from real estate rents.
Indians have emotional bonding with gold and the gold jewellery is bought and passed over to next
generations as a tradition. Gold investment should therefore be done as Gold ETFs or Gold bars so that it
remains in tradable form. In India most of the houses have bank lockers so if we buy Gold bars we can
store them safely at no extra cost. It is also advisable to buy golf from trusted jeweler so that it can be
easily sold and the price offered is better compared to banks. My personal choice would still be GOLD
ETFs because they are easy to buy and sell and I will try to minimize the cost by investing in ETF with
lowest cost. In times of downturn people tend to buy more gold so it acts as a natural Hedge against
downturn in economy.
There are several tax advantages of holding ETF over holding Gold. ETFs enjoy long term capital gain tax
exemption if they are sold after one year vis-à-vis 3 years in case of holding Gold. Since all the GOLD
ETFs are tracking gold price their performance is more or equal so the differentiating factor would be
low cost( no entry and exit load) and low turnover.
Among the list of Gold ETFs present on NSE the only ones with no entry and exit loads are listed below
1. Benchmark Gold ETF(GOLDBEES)
2. Reliance Gold ETF
3. Quantum Gold ETF (Exit load of 0.5%)
Comparing the above three funds(www.nseindia.com) we find that Quantum Gold ETF has lower
turnover (i.e. traded quantity) so I will invest in Quantum Gold ETF and compare it on an yearly basis
with Benchmark Gold ETF.
Cash or Fixed deposit in banks
1. Short term interest rates - 390 days – 10.5%
2. Long term interest rates – greater than 5 years – 9.5%
Fixed deposits in Banks are a good way to park short term money and the money invested will be used
to change the asset allocation percentages on a yearly basis. They are also good for long term
investment as the capital gains are tax exempt.
Selecting a mutual fund family and mutual fund manager is difficult because of the number of funds in
the market and because of non availability of mutual fund historic NAV data. There is also no authentic
source of data to evaluate the performance of fund managers. There are a couple of data sources which
we looked through to compare performance of various mutual funds such as http://www.equity
master.com, www.personalfn.com, www.icicidirect.com, http://www.valueresearchonline.com but
most of the information found were through investment blogs which provide no authentication about
As a starting point to choose funds we will use the guide of top 50 mutual funds provided by
ICICIDIRECT.com. This guide rates the fund and makes it easy for the investor to choose top performing
finds which match his investment style (refer appendix 2). International mutual funds are available in
India only to institutional investors and high net worth individuals so I will wait for another year before
investing internationally using mutual funds. Each fund has a defined benchmark which will be used to
measure its performance and we just need to ensure that over all return is 15 % on a 5 year basis
Based of the data provided on report (Value 50 by ICICIdirect.com) and based on the risk profile of the
investor we choose following mutual funds. The three mutual funds in combination represent about the
same portfolio percentage as mentioned in our asset allocation and there is a clear focus (greater
percentage allocation) towards growth stocks. The review of investment manager’s profile based on
information present on various blogs and based on their interview in investment journals has also
played a role in selecting the investment funds.
1. HDFC Equity managed by Prashant Jain for last 5 years – 4 star rating
2. Tata pure equity managed by M Venugopal for last 3 years – 4 star rating
3. Reliance Growth managed by Ashwani Kumar for last 4 years – 4 star rating
For all the above funds the Sharpe ratio and the standard deviation data was taken from
http://www.valueresearchonline.com/ . There are other funds with similar quantitative statistics but
these funds and the corresponding fund manager fare well on the qualitative aspects such as the kind of
data they look for when they interview a company for e.g. a fund manager can be interested in
quantitative data or on other qualitative aspects as how happy as the employees, how clean is the
working environment, are the employees and managers revealing similar information, is the attrition
rate of the company less than industry standard etc.
In order to manage risk and avoid unexpected expenses we need to buy some insurance policies.
Various Insurance policies which can be considered have been discussed in details in appendix 7. The
insurances which need to be bought are
1. Life Insurance for INR 5 million (Refer to appendix 6 for calculation details)
2. Health Insurance – To be taken care by employer
3. Property Insurance and Insurance on home loan
Portfolio will be reviewed on a yearly basis or at a time when there is a major change in the financial
status of the portfolio owner. The portfolio will be balanced on a yearly basis and the each asset will not
be changed by more than 10% on a yearly basis. The future prospect of the assets under management
should be reviewed before making any changes to the portfolio. It should be kept in mind that the
change in asset allocation will result in some transaction cost so the gains from the transaction should
be able to offset it. Not more than 10% change should be done to any portfolio asset on a yearly basis.
Tax implications should also be considered (refer appendix 5).
The investment exercise done above made be go through a process which I would have never gone
through otherwise. I had an investment portfolio which I liquidated to pay for my MBA but the only
factor which I considered while building it was the returns offered by a particular instrument. I had
started investment in 2001 and I liquidated my investment in 2007, the good part about this investment
period was that the market went up exponentially during this period and most of the market
instruments were giving high returns(if chosen carefully). I had a personal fund manager who would
used to suggest funds to me based on his company research but the fact which I missed is the he was
being paid by commission build in the entry load of the fund.
I had no idea about real diversification and investing in different equity diversified mutual funds was my
strategy to ensure that I keep getting high returns on my investments. I had never considered the cost of
entering and exiting the mutual fund and I had also bought some Unit linked Insurance plans which
charged me 10% entry load. I was invested heavily in the stocks of the company I was working for and
never considered the fact that if the industry went down both my investments and my job would be in
danger and I would have no option to fall back on.
I had an opportunity to get a house loan for 7% fixed interest rate but I preferred to keep my money in
funds so that I can pay for my MBA. I never thought about the tax benefits I could enjoy and the fact
that I could get a loan easily if I mortgage my house. While building my investment portfolio I have a
write down all my future expenses and also see the tax implications of investing in a particular option. It
is during this exercise I realized that buying a house is the only way to save tax if my salary is above INR
5,00,000. Most of the mistakes mentioned above became evident when I started doing the return
calculations for my investments and realized that a entry load of 2.25% makes a huge difference in the
The exercise of writing a investment policy was similar to writing a why MBA essay for my admission as I
have to really think that is maximum returns from an investment the only factor which I care about. I
realized that I am a moderate investor but before this I was sure that I was an aggressive investor which
was just based on the fact that I have no liabilities for next 20 years and I can play with my money the
way I want. The risk factor is something which I gave importance to for the first time but I am still not
sure whether this is due to methodically building my portfolio or due to the fear of economic recession
which we are experiencing.
Another useful exercise was to decide whether to invest directly in stocks or to use mutual funds as an
investment instruments. At the beginning of the assignment I was convinced that by investing directly in
stocks I would be saving all the fees which mutual fund manager would charge me but it took me some
time to realize that I have very limited knowledge about the various industries and moreover keeping a
track record of all the company new is a time consuming activity. So I decided to make a bargain where I
would pay the investment feed to mutual fund manager and he would take the hassle of investing in
various companies but the only thing which I was supposed to take care was that I need to decide the
sector or type of companies I want to invest in and to ensure that the mutual fund I choose has a low
turnover and costs me min in terms of fees.
I also realized some limitations like investing in Real estate mutual funds or investing in international
funds was not possible for small investor like me and there are no good fund focused only of growth or
value investing so the maximum which a investor can do is allocate greater percentage to his style of
investing. Another limitation is that there is no single website which can provide information about the
mutual fund managers past performance and also mutual fund’s past performance. If we need to track
mutual funds we need to download and maintain the data on a quarterly basis as the websites like
yahoo finance are not tracking data for large number of mutual funds available in the market. I also
could not go much into quantitative details as my current income is uncertain but I think this gave me an
opportunity to concentrate on qualitative side of portfolio building which I am sure I have completely
missed in my last portfolio building exercise.
After completing the assignment I feel that there is a lot which I still need to learn especially if I need to
master quantitative techniques to better manager my portfolio and the resources are really scarce but
the bright side is that most of the people in India are speculators and they think they are investors so
there is a lot of opportunity to establish myself as an fund manager.
Appendix 1: NSE vs BSE
There are two main stock exchange in India National Stock exchange (NSE) and Bombay stock exchange
(BSE). There is a lot of discussion in India about comparing the two stock exchanges and ranking them.
Some factors which I think are important in deciding which stock exchange to trade on are:
1. NSE has greater Bid-Ask spread as compared to BSE
2. There have been a number of scams in BSE and NSE was formed to provide more transparency
3. BSE is mainly dominated by some rich communities of India and all the related scams are a result of
4. NSE trade volume has been constantly increasing in the recent years
Considering the above factors and also keeping in mind that my primary aim is to do long term
investment I would choose to trade on NSE.
Appendix 2: Risk Profile
Some facts about the client which will help in determining clients risk profile
1. Major investments are long term and a shortfall of 10% is acceptable
2. The investor is ready to accept fluctuations in the value of portfolio in order to get high returns
3. The investor is Individualists kind1 which means that he is both careful and confident. He reads all
the research reports and also investigates for investment alternatives on his own.
4. The investor’s only source of income is his monthly salary.
5. Questionnaire at http://www.mutualfundadvisorindia.in/ revealed that investors profile is
6. Another factor which is worth considering that I want to spend only 1 hour per week looking at my
investments and tracking my stocks on daily basis is not something which I would like to do.
On basis of the above facts we can conclude that investment style is moderate and he is a growth
Source: Thomas E. Bailward, David L. Biehl, and Ronald W Kaiser,Personal money management, 5 Edition
Appendix 3: Sample report by ICICIdirect.com
Appendix 4: Portfolio efficient frontier
Eff. Trade-Off Line & Eff. Frontier Curve
0% 5% 10% 15% 20% 25%
Standard Deviation (s)
Appendix 5: Tax Implications
Some important Income tax related facts:
1. A short term or long term capital loss can be carried forward for a period of eight years
2. Long term capital gain can be offset against long term capital loss and same for short term gain
3. Capital gain savings bond can be used to save tax on capital gain through property sale
4. Fixed deposits of min 5 years are eligible for tax exemptions
5. Tax exemption of charities are available under section 80G
6. Consider tax benefits on principal and interest of home loans under Section 24(b)
7. Dividends on Equity Mutual funds are tax exempt. A mutual fund must have at least 65% of its net
assets in equities/stocks to qualify as an equity-oriented mutual fund.
8. Dividends on Debt funds are taxed at 14.2%
Appendix 6: Insurance amount
1. Number of dependent is one
2. Dependents current age is 26 and she will live for another 35 years
3. After some mishap family members tend to become more risk averse so investment is generally
done is with minimum risk.
Returns from Safe
No of Dependents 1
Age they live 35
Yearly expense INR 360,000
Loan Amount 1,100,000
Amount set aside
emergency INR 100,000
NPV of Expense 3,660,575
Total NPV 4,860,575
Appendix 7: Insurance
Type of Insurances and other factors to be considered
1. Insurance against House Loan
a. Mortgage Insurance loan is an option which can be considers as it covers the risk of life and
also disability. Companies like HDFC and ICICI offer good packages.
2. Life Insurance
a. Amount paid at the time of death should be exempt as per section 10(10D), of the Income
Tax Act 1961.
b. The premium paid should get tax benefits under section 80 c
c. To calculate the amount on which insurance needs to be taken we will calculate the Human
life value. According to this method we need to calculate NPV for all are expected future
expenses of Spouse and other dependents. Factors life Inflation and return of safe deposits
are also considered. Total HLV calculated is approximately 50,00,000 INR (Refer appendix
one).The Insurance will change when there is a change in number of dependents.
3. Medical Insurance
a. This is paid by the employers.
b. Ensure that the insurance company has collaborations with all major hospitals
c. Ensure that Insurance company gets good discount on regular checkups
4. Loss of Job Insurance
a. There is no Insurance for this in India so a better option would be to Invest in Real estate
and ensure a constant monthly income as a rent.
5. Disability Insurance
a. Unlike the developed countries there is no such Insurance in India. The max one can do is
take a disability rider with the critical illness plan
6. Property Insurance
a. Considering the fact the digitalization is making the house items more expensive one should
get a insurance which is available at a very reasonable price
b. People in India have a tendency to keep gold jewelries at home so this is another important
reason to take property Insurance
Insurance policies such as Health Insurance, and Disability insurance get very expensive as people get
older so in long term we should get rid of there insurances and try to generate a constant income with
the existing investment portfolio.
Appendix 8: Short term and long term financial obligations
Inflation in higher
Expected Rate of
per annum 480000
education expense 1500000
1. Loan repayment of 4 lac INR per annum starting June 2009 for next 3 years
2. Amount needed for child education after 18 years(in NPV terms): INR 8,20,000
3. Amount needed for retirement after 30 years(in NPV terms): INR,5,00,000