EXECUTIVE SUMMARY In few year investment advisory services has emerged as a tool for ensuring one’s financial well being. Advisory services has not only contributed to the Individual growth story but have also helped economy to mobilize the savings. As information and awareness is rising more and more people are enjoying the benefits of investment advisory services. The reason for low number of people investing with investment advisory services is low awareness among people about financial services available and their benefits. But once people are aware of investment advisory services, the number may grow. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The analysis and advice presented in this Project Report is based on market research on the saving and investment practices of the investors and preferences of the investors for investment in fixed deposits and other options. This Report will help to know about the investo rs’ Preferences in making investment. Report will help us know how does a investor weigh fixed deposits against other investment options like insurance, mutual funds, NSCs. It will also help us to know that what are the factors which affects the investment decision of investor, whether it is being affected by brand name, security or ratings by CRISIL or ICRA, or type of deposit i.e. company deposits, secured deposit. The first part gives an insight insight about Fixed deposit deposit and other investment options and its various aspects, the Company Profile, Objectives of the study, Research Methodology. One can have a brief knowledge about Investment options and its basics through the Project. The second part of the Project consists of data and its analysis collected through survey done on 343 people. For the collection of Primary data I made a questionnaire and surveyed of 343 people. I also taken interview of many People those who were coming at Banks and their ATMs. This Project covers the topic “ANALYSIS “ ANALYSIS OF INVESTMENT OPTIONS WITH FOCUS ON FIXED DEPOSIT.” DEPOSIT .”
The data collected has been well
organized and presented. I hope the research findings and conclusion will be of use. 1|Page
OBJECTIVE OF THE PROJECT The main objective of undertaking the project with Mahindra Finance was to understand the functioning of the investment division of a NBFC and analyze the various investment options available in the Indian financial market. The main objectives of the project are: Understand the various investment options available in Indian market. Concepts of Mutual Fund and Corporate Fixed Deposits Understanding asset allocation and wealth management Analyzing various Tax Saving options available Understanding the marketing and promotional activities involved in promoting the
various investment products offered by Mahindra Finance. Developing communication skills and presentation skills
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INTRODUCTION TO MUTUAL FUND AND ITS ASPECTS Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. This pool of money is invested in accordance with a stated objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to all investors. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund’s Net Asset value (NAV) is determined each day. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.
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Company Profile Mahindra Finance is a subsidiary of the prestigious Mahindra & Mahindra (M&M) group and is one of the leading non-banking financial companies. It largely focuses on the rural and semi-urban sector providing finance for utility vehicles, tractors and cars. Having been incorporated in January, 1991 as Maxi Motors Financial Services Limited, it changed its name to Mahindra & Mahindra Financial Services Limited (MMFSL) in November, 1992. MMFSL provides financial loans to tractors, utility vehicles, light commercial vehicles, cars, three-wheelers and used vehicles. It also provides financial services which include Mutual Fund distributions and financial advisory services. Goal of MMFSL is to be the preferred provider of retail financing services in the rural and semi-urban areas of India, while our strategy is to provide a range of financial products and services to our customers through our nationwide distribution network. We seek to position ourselves between the organised banking sector and local money lenders, offering our customers competitive, flexible and speedy lending services. Mahindra Finance principally finance UVs used both for commercial and personal purposes, tractors and cars. While we predominantly finance M&M UVs and tractors, we have continued to expand our lending to vehicles not manufactured by Mahindra & Mahindra Ltd..
MMFSL is a company with a strong foundation and a shining legacy, growing every day to create a legacy of our own. Our leading promoter Mahindra & Mahindra holds the majority of our Equity Shares and is also a leading tractor and UV manufacturer with over 60 years’ ex perience in the Indian market. As a supplement to our business, in May 2004, we started an insurance broking business through our wholly owned subsidiary, Mahindra Insurance Brokers Limited. In short, At Mahindra Finance they have a wide range of products and services, with something to suit everyone’s needs. Right from finance for two wheelers, tractors, farm equipment, cars and utility vehicles to commercial vehicles and construction equipment, we also have a group of experts providing investment advice, surveying available market products and choosing the most suitable to our customers’ needs
.
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Investment Options in India The table below compares the investment options under the broad heads viz. return, safety, volatility, liquidity and convenience Investment Option
Convenience
Return
Safety
Volatility
Liquidity
Equity
High
High
Low
High
High
FI Bonds
Moderate
Moderate
High
Moderate
Moderate
CD’s
Moderate
Moderate
Moderate
Moderate
Low
Company FD’s
Moderate
Moderate
Low
Low
Low
Bank Deposits
High
Moderate
High
Low
High
PPF
Moderate
Moderate
High
Low
Moderate
Life Insurance
Moderate
Low
High
Low
Low
Gold
Moderate
Low
High
Moderate
Moderate
Real Estate
Low
High
Moderate
High
Low
Mutual Funds
High
High
High
Moderate
High
Table No.1 Comparison of Various Investment Options
MARKET SURVEY ON PREFERENCE OF MUTUAL FUNDS
The awareness of Mutual Funds as a financial instrument has been comparatively low in India. Though the concept of mutual fund in India dates back to mid 1960s, but only around 2% of India’s population has invested till date in mutual funds (Source: www. Amfiindia.com) . Thus it was very important to know about the investor’s preference towards Mutual Funds. It is always crucial to be aware of the requirements of the potential customers and thus adjusting the schemes accordingly. The questionnaire used for the survey is attached in appendix #. The survey was conducted with a target population of 500 to determine the level of awareness about Mutual Funds. The target population constituted of basically employees of IT Companies, who were in the age group of 25-40years.
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Objective of the Survey:
The prime objective of performing the survey was to understand the customer’s preference and interest in various Financial Instruments, and especially in Mutual Fund.
Though Mutual Funds are a safer option than investing directly in the Equity market, there has been very low awareness of MFs amongst the people and the masses are still not comfortable in investing in this instrument.
MUTUAL FUND INDUSTRY IN INDIA ALL ABOUT MUTUAL FUNDS WHAT IS MUTUAL FUND BY STRUCTURE BY NATURE EQUITY FUND DEBT FUNDS BY INVESTMENT OBJECTIVE OTHER SCHEMES PROS & CONS OF INVESTING IN MUTUAL FUNDS ADVANTAGES OF INVESTING MUTUAL FUNDS DISADVANTAGES OF INVESTING MUTUAL FUNDS MUTUAL FUNDS INDUSTRY IN INDIA MAJOR PLAYERS OF MUTUAL FUNDS IN INDIA HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY CATEGORIES OF MUTUAL FUNDS INVESTMENT STRATEGIES WORKING OF A MUTUAL FUND
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GUIDELINES OF THE SEBI FOR MUTUAL FUND COMPANIES DISTRIBUTION CHANNELS DOES FUND PERFORMANCE AND RANKING PERSIST? PORTFOLIO ANALYSIS TOOLS
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital 7|Page
market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.
ADVANTAGES OF MUTUAL FUND
Portfolio Diversification
Professional management
Reduction / Diversification of Risk
Liquidity
Flexibility & Convenience
Reduction in Transaction cost
Safety of regulated environment
Choice of schemes
Transparency
DISADVANTAGE OF MUTUAL FUND
No control over Cost in the Hands of an Investor
No tailor-made Portfolios
Managing a Portfolio Funds
Difficulty in selecting a Suitable Fund Scheme
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HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the Industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) was Rs67 billion. The private sector entry to the fund family raised the Aim to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs. 1540 billion. The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up 9|Page
its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds)
1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
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CATEGORIES OF MUTUAL FUND:
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Mutual funds can be classified as follow:
Based on their structure:
Open-ended funds: Investors can buy and sell the units from the fund, at any
point of time.
Close-ended funds: These funds raise money from investors only once.
Therefore, after the offer period, fresh investments can not be made into the fund. If the fund is listed on a stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.
Based on their investment objective:
Equity funds:
These funds invest in equities and equity related instruments. With
fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as: i) Index funds - In this case a key stock market index, like BSE Sensex or Nifty is tracked.
Their
portfolio mirrors the benchmark index both in terms of composition and individual
stock weightings. ii) Equity diversified funds- 100% of the capital is invested in equities spreading across
different sectors and stocks. iii|) Dividend yield funds- it is similar to the equity diversified funds except that they
invest in companies offering high dividend yields. 12 | P a g e
iv) Thematic funds- Invest 100% of the assets in sectors which are related through some
theme. e.g. -An infrastructure fund invests in power, construction, cements sectors etc. v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector
fund will invest in banking stocks. vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.
Balanced fund:
Their investment portfolio includes both debt and equity. As a result, on the
risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes:
i) Debt-oriented funds - Investment below 65% in equities. ii) Equity-oriented funds Invest at least 65% in equities, remaining in debt. -
Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs. i) Liquid funds- These funds invest 100% in money market instruments, a large portion
being invested in call money market. ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and T-
bills. iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt
instruments which have variable coupon rate.
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iv)Arbitrage fund- They generate income through arbitrage opportunities due to mis-
pricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities. v) Gilt funds LT- They invest 100% of their portfolio in long-term government securities. vi)Income funds LT- Typically, such funds invest a major portion of the portfolio in long-
term debt papers. vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure
of 10%-30% to equities. viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of
the fund.
INVESTMENT STRATEGIES 1. Systematic Investment Plan: under this a fixed sum is invested each month on a fixed
date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and give
instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. 3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then
he can withdraw a fixed amount each month.
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RISK V/S. RETURN:
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Scope of the study A lot of ups and down has been witnessed by financial industry since January 2008, and collapse of Lehman Brothers only added to worry of financial industry and bail out packaged pleaded by international banks questioned the fundamentals of financial industry. All this events had a direct or indirect effect on trust of investor and its attitude towards financial industry, in specific investment services and banks. Due to which many of companies faced problems in raising capital for further expansion of business and some of them sought the way of fixed deposits seeing and assessing the present situation. The research was carried in Bangalore. I was working on project from Jaynagar office of Mahindra Finance, from where i carried out all the studies and completed my project. The main focus of study has been towards fixed deposit industry and preference of investor for fixed deposits. The study will help to know the preferences of the customers, which company, portfolio, mode of investment, and option for getting return and so on they prefer. This project report may help the company to make further planning and strategy.
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CORPORATE FIXED DEPOSITS Company Fixed Deposit market in India has an interesting phase of evolution. It basically grew out of the need of Corporate Sector for raising short term finance and requirements of small investors to earn superior returns as compared to returns offered by the Banks. The concept of company fixed deposits was started in India in 1964 by Bajaj Capital Ltd. by launching first ever Company Fixed Deposit of Oberoi Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels prompted others private and public sector companies which started accepting deposits from public. Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The number of depositors has increased to around 5 million. The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns, premature encashment, simplicity of transactions, TDS benefits, wide choice, all these features have made company deposits a preferred instrument of investment. Features:
Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands, it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one.
No income tax is deducted at source if the interest income is up to Rs 5000/-in one financial year. One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000/-
Further, advantage of investing in company fixed deposits is that one can analyze the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
It is also important that company fixed deposit should be made for short term, i.e., tenure should be for 1-3 years depending upon the rate of interest. This will help the investor to switch to other company if need be
Recently, nomination facility has been introduced in company fixed deposits. 17 | P a g e
Recruiting students for summer internships:
In addition to dealing with the finance market we were assigned the task to recruit 50 MBA students for pursuing their summer internship at Mahindra Finance. This task provided an opportunity to understand the HR aspects in addition to the finance and marketing part of the training. It helped us analyze the recruitment policies of different institutes as well as to know how one should represent a company. The students thus recruited were assigned projects in either finance or marketing. The recruitment was done mostly for the Bangalore centre of the company. Corporate presentation:
In addition to the survey and the marketing activities conducted by me I was also asked to fix up an appointment with a corporate house and present the investment options Mahindra Finance has to offer with a special focus on the fixed deposits. I fixed up an appointment with sonata software located in RT Nagar and gave the presentation in front of 35 of their employees it was an enriching experience as this boosted up my confidence to a great extent as it helped me market my products in front of the corporate.
Designing & Implementation of a Marketing Campaign for Fixed Deposit Scheme:
Mahindra & Mahindra Financial Services Ltd. re-launched its fixed deposit scheme from 1 st January ’09 after 3 years. The interest rates were revised by the company on 20 th April ’09. The deposit came be made in 2 Schemes: Cumulative and non-Cumulative Scheme.
The salient features of our Fixed Deposit scheme are:-
Cumulative Schemes:-
Minimum Amount
Rs 10,000
Period (Months)
Amount Payable (Rs.)
Interest* p.a.
Effective Yield p.a.**
12
10,900
9.00%
9.00%
18
11,430
9.25%
9.53%
24
11,990
9.50%
9.95%
36
13,310
10.00%
11.03%
Table No.2 Cumulative Scheme of Fixed Deposit
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Non-Cumulative Schemes:Minimum Amount
Rs 25,000
Period (Months)
Interest*# p.a
12
8.75%
24
9.25%
36
9.75%
Table No.3 Non-Cumulative Scheme of Fixed Deposit
* Senior Citizens/ Shareholders/ Employees will get an additional rate of 0.25% per annum.
# Interest payment half yearly on 30 th September and 31st March only through ECS
** Compounded Annually
Since the management had modified the interest rates of the FD schemes, we had to devise a marketing campaign to promote the FD and increase the level of awareness amongst t he potential customers. The task which was more difficult was that these promotional activities should necessarily be cost effective and can be implemented by individuals without any expenses incurred by the company. We also had to give a corporate presentation on the Fixed Deposit schemes in any organization with a minimum employee base of 20 and we also had to make sure that the presentation was attended by at least 20 employees of the company. The promotional activities I performed were:
Displaying Posters : This included displaying posters and banners at the
nearby bakeries and restaurants which included high frequency of people who come in daily to these places
Pamphlets: This included distributing pamphlets to the people in the
nearby area to generate awareness for Mahindra fixed deposits to do this at a large scale I made arrangements to distribute pamphlets through newspaper vendors to cover a large area of population.
Some Innovative marketing: Stamping the tissues used at eateries and
restaurants, Creating awareness at the nearest election campaigns to generate awareness of the product.
Market Survey: This included a survey which tried to capture the interest of the
respondents towards the Fixed Deposit.
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Empanel Fixed Deposit Agents:-
Following the promotional campaign for Mahindra Finance Fixed Deposits we were assigned the task of recruiting agents/advisors for the same. These agents were supposed to empanel with Mahindra Finance and subsequently they would be eligible for the commission as decided by the company. The slab for commission is as follows: Tenure of Fixed Deposit(in months)
Commission (as %age of Amount invested) *
12
0.5
18
0.5
24
0.75
36
1.0 Table No.4 Brokerage of FD agents/Advisors
*An additional 0.25% would be paid if the agent gets a business of Rs 1 crore in a month and an additional 0.5% would be paid if the agent rakes in a business of Rs 5 crore in a month. In addition to being associated with Fixed Deposit an agent can also partner with Mahindra Finance for selling Mutual Funds provided he/she is AMFI certified.
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FINANCIAL PLANNING Wealth Management is the next step in financial planning. It challenges advisers, especially those with high-net-worth clients, to bring together all aspects of a client's financial life into a single plan-from investment advice to estate planning to long-term-care insurance. The components, and the methods of approaching them, vary as widely as the number of practitioners who are moving into this area. We generally plan for everything we do in life, be it career, success, travel, shopping or family. But most of us do not plan for financial security and hence peace of mind. Most of the times, we do not have the time to think about our own financial management. If we do have the time, we may lack the required knowledge, expertise and research capabilities. Hence, we often make decisions but after a while realize its incorrectness. Financial Planning is a critical need and the implementation of a well crafted Financial Plan. It is like a blueprint for the management of all our financial affairs for our entire life. Managing money is getting more complicated hence Planning is as important as earning it nowadays. A Financial Planner has to study and analyze gamut of investment products in the Indian market ranging from Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments. Financial Planner has to guide clients on all financial matters that have or will have an impact on their life today and in future. The primary responsibility of a financial planner is to plan their financial affairs, then execute the plan and finally keep monitoring their assets lifelong for the fulfillment of all their financial objectives. The Creation of a Financial Plan
Having a professionally made financial plan would provide solutions to the following issues and many more;
How to manage changing financial needs & requirements from time to time
How to manage loans and other short & long term liabilities
How to ensure that the budget never goes into a deficit
What are the best strategies for hedging income & managing liabilities
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How to do a comprehensive planning for education funding during the time span of the
child’s career What provisions need to be made for retirement funding so as to have ample cash flow
during retired years and not make any compromises whatsoever
How to be prepared for anything in life so as to have ample financial security
How not to be left grappling for funds when we need them the most
What is a good roadmap for long term wealth creation
Methodology
Mahindra Finance is one of the leading NBFCs in the market and is also corporate brokers to almost all the AMCs in the market. They also have their Fixed Deposits in the market with currently two schemes:
Cumulative and Non-Cumulative
Schemes. The following
methodology was adopted in the process of drawing an investment plan for a customer.
Training has been given to all the financial planners on Fixed Deposits, Mutual Funds and Portfolio Management Services.
Financial planners have to fix up an appointment with the already existing clients of Mahindra Finance who have invested in any mutual fund and meet them either at residence or office based on their convenience.
Financial planners have to identify and analyze the requirements of the clients and make an appropriate portfolio based on their risk appetite and their future financial requirements.
Strategy used in planning and managing the money
Firstly, Financial Planner estimates an amount that is required for keeping as a safety margin. Safety margin constitutes the amount required for protecting client’s family against liabilities and the loss of income in his absence for which he needs an insurance cover. Once this cover is in place, Financial Planner estimates the contingency funds that are needed to manage emergencies. Deducting the amounts needed for the above, all the balance funds find their way into assets capable of delivering highest possible returns. The Financial Planner then estimates 22 | P a g e
the fund requirements for retirement, child’s education, holiday’s and other financial goals. Financial Planner would then prepare an investment plan, do the analysis and create an appropriate portfolio based on the client ’s risk appetite.
Investment plan for a person of age 50 years: A simulation
We were asked to prepare a financial plan of Mr. X (name not to be disclosed) when he is of the age of 50 years. This was basically a simulation exercise before letting us meet the actual clients. Following are the investment plans:
2.1. Investment plan of Mr. X at the age of 50 years:-
Current Status of Mr. X :
Son :
Age 16 years
Currently in Std XI
Plans to do Graduation
Two Daughters:
Age 20 years: nd
Presently in 2
year engineering
Plans to do MBA
Age 23 years :
Pursuing MBA (in final year)
Note: Mr. X plans to get his daughters married at the age of 25
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Assets of Mr. X : PARTICULARS
VALUE (in Rs.)
Stocks
30 lacs
NSC
7 lac (maturing after 2 years)
Insurance
15 lacs (maturing after 2 yrs)
Medical Insurance
3 lacs
2 Houses
1.5 cr
Rent
25000/month
Monthly income
75000/month Table No.5 Assets of Mr. X
Liabilities of Mr. X : PARTICULARS
AMOUNT (present value in Rs.)
TIME
Personal loan
1 lac
1 year
Education loan
3 lacs
3 years
Life Insurance
30000/year
2 years
Expenditure
35000/month
Medical Insurance
10000/year
Son’s Education
4 lacs
Daughter’s Education
8 lacs
Daughter’s Marriage
20 lacs
After 2 years
After 2 years
Table No.6 Liabilities of Mr. X
Now we will look into the requirements of Mr. X in the coming years and will analyze the financial liabilities and how to finance them with the assets available. After two years he has the following liabilities to be taken care off: PARTICULARS
AMOUNT REQUIRED* (in Rs.)
Daughter marriage : 23 years old
23 lacs
Son’s Education(Graduation)
4.6 lacs
Daughter’s Education ( PG )
9.2 lacs
Total
37 lacs
Table No.7 Liabilities of Mr. X at the age of 52
* Note: Considering inflation at 7% on an average 24 | P a g e
The suggestions to finance these liabilities are: PARTICULARS
AMOUNT (in Rs.)
REMARKS
National Saving Certificate
11.5 lacs (@ 8.5% p.a**.)
At maturity
Life Insurance Corporation
15 lacs
At maturity
Stocks converted to Fixed Deposit
8.5 lacs (@ 9.75% p.a**.)
Invested 2 years back
Total
37 lacs
Table No.8 Suggestive Investments to finance Mr.X’s liabilities ** The rates of return are standards practiced in the market.
I suggested him to invest in fixed deposit because looking at the market conditions and the volatility in the equity market it would not be a heady decision to risk neither the daughters’ marriage nor their education. At the age of 55 which is 5 years from now he has following major expenses apart from his daily expenses: PARTICULARS
AMOUNT REQUIRED* (in Rs.)
Son’s PG
28.25 lacs
Daughter’s Marriage (20 years old)
28.25 lacs
Total
56.5lacs
Table No.9 Liabilities of Mr. X at the age of 52
* Note: Considering inflation at 7% on an average This amount of Rs. 57 lacs of liabilities will be financed in the following manner: PARTICULARS
AMOUNT** (in Rs.)
Maturity Amount (In Rs.)
REMARKS
Systematic Investment Plan
20,000 p.m. (@ 15% p.a.)
18 lacs
At the age of 55
Stocks to FD#
11.6 lacs (@ 10% p.a.)
18 lacs
At the age of 55
Stocks to FD#
3.3 lacs (@ 10% p.a.)
5.1 lacs
At the age of 55
Recurring Deposit
9,000 p.m. (@ 5% p.a.)
4.8 lacs
Started at 51 years
Recurring Deposit
10,000 p.m. (@ 5% p.a.)
2.48 lacs
Started at 53 years
Total
48.38 lacs
Required
56 lacs
Deficit
7.62 lacs
Table No.10 Suggestive Investments to finance Mr.X’s liabilities ** The rates of return are standards practiced in the market. # invested in two different Fixed Deposits to diversify risk
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This deficit of Rs. 7.62 lacs was proposed to be financed by an Educational Loan @ 15% for 7 years. This would give him an additional tax benefit under section 80(c) and section 80(g) on the interest payment of the loan. Now we will see his liabilities at the age of 60 years: PARTICULARS
AMOUNT REQUIRED (IN RS.)
Monthly Expenses
50000/Month
Contingency Requirement
1 lac
World Tour
2 lacs
Repayment of Education Loan in 7 yrs
9,500 EMI for 7 years from 57 years of age
Table No.11 Requirements of Mr. X after the age of 60 years
For the repayment of Education Loan Mr. X needs to start investing Rs. 18750 p.m. in a Recurring Deposit which would fetch him a moderate return of 6% p.a. and will amount to Rs. 4.9 lacs after 2 years (from the age of 55yrs to 57yrs). This amount can be utilized to pay back some amount to loan to reduce the EMI amount. At the age of 60, Mr. X has an excess cash amount of Rs. 41 lacs which needs to be invested for suffice his future requirements. This Rs. 41 lac of cash amount has been obtained from the following: + Earning of Rs 18 lacs from a SIP done at the age of 55 years (Rs 20,000 p.m) + Rs 10 lacs in PF account + Rs 16 lacs from FD after tax of 10% on interest. (Rs 6.6 lacs invested for 10 years in a cumulative scheme@ 10% per annum.) - Rs 2 lacs reserved for a tour - Rs 1 lac reserved for contingency = Net Surplus worth Rs. 41 lacs.
These Rs. 41 lacs should be invested in the following way: Invest Rs 41.5 lac in a FD @ 10% p.a. Return of Rs 34,166 p.m. Less: 10% tax (tax on interest income) Total: Rs 30,750
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He also has an additional income from the farm house: Rent: Rs 41,111(Incremented at the market rate of 5% p.a.)
Less: 30% tax
Total : Rs 28,800
So his net earnings is Rs. 59,750 and his requirements are Rs. 59,500(Rs. 50,000 for monthly expenditure + Rs. 9500 for EMI of the education loan)
Meeting up with the actual clients
The final stage of this assignment was to fix up appointments with the clients of Mahindra Finance who have already invested in Mutual Funds through the company. We were asked to arrange meetings with these clients and were asked to push Fixed Deposits to these clients as this was a safer option in terms of assured returns with a reasonably good return of around 8.5% to 10% p.a. In order to advise the clients to invest in Fixed Deposit we needed to analyze the requirements of the clients as well as his risk appetite. I used a questionnaire in order to be aware of the customer’s requirements (Refer to appendix for the questionnaire). The scores of the responses from the investors helped me to decide upon the apt allocation of his/her money in equity and debt market depending upon his/her capacity to take risk and the amount of return he/she is expecting out of the investment made.
LIMITATIONS Mutual Funds & Mahindra Finance are both new entrants to the market Security market’s continuous volatility Economic factors showing it is not a perfect time for investing in security market Awareness of the FD of Mahindra Finance is very low
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CONCLUSION The internship with M&MFSL was a very enriching experience and helped me to understand the various concepts involved in the functioning of the Investment division of a NBFC. During the entire period of our internship we were given weekly assignments which helped us to gain insights about the various aspects in promoting business and advising Mutual Funds and Fixed Deposits. It also helped me gain valuable insights about the financial market. Working with such an esteemed organization also helped me gain confidence and as the company is well established and has a high brand value, it helped me understand how the customer base is made and maintained and also the importance of building long term relationship with the clients as well as promoters.
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BIBLIOGRAPHY
Mallette Paul, Doing the Right Thing: Bank One’s Response to the Mutual Fund Scandal, Colorado State University
Benefits of investing in Mutual Funds, Reliance AMC
Basic of Mutual Fund, Reliance AMC
Mutual Fund industry is going down to 6.26%, Business Line, April 2, 2008
Safe Investment, Outlook Profit, July 2007 edition
Portfolio Management & Mutual Funds, ICFAI Press
Marketing Management, ICFAI Press
Business Research Methods, ICFAI Press
Fact Sheets of different AMCs
WEBSITES: www.amfiindia.com www.moneycontrol.com www.rediffmoney.com www.mahindrafinance.com
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APPENDIX Questionnaire for MUTUAL FUND SURVEY Name:
Age:
Occupation:
Address:
Phone No.:
Mobile No.:
Email-ID:
1.) What are your present investment needs? a. To build a corpus for retirement b. To save for Children’s education & marriage c. To provide for medical emergencies d. To provide for family financial security e. To create wealth f. All of the above 2.) Are you aware of investment options for tax aversion under section 80(c)? a. Mutual Funds b. Fixed Deposit c. Insurance d. PPF e. All of the above 3.) Which is your preferred investment option? a. Mutual Fund b. Fixed Deposit c. Direct Equity d. Life Insurance e. Post Office Deposit 4.) Have you ever invested in Mutual Fund? a. Yes b. No 5.) Do you need help on Tax Effective investment options? a. Yes b. No 30 | P a g e
Questionnaire for FIXED DEPOSIT AWARENESS Name: Address: Contact No.: Email-ID:
1.) Which age group do you belong to? a. 23-35yrs b. 35-50yrs c. above 50 years 2.) Which income bracket do you fall in (per annum)? a. 1-3 lacs b. 3-6 lacs c. More than 6 lacs 3.) Are you interested in Fixed Deposit? a. Yes b. No 4.) What are the investment options you are looking for? a. Mutual Fund b. Fixed Deposit c. Equity d. Insurance e. Post Office Fixed Deposit 5.) What is the expected rate of Interest? a. 7-8% b. 8-9% c. more than 9% 6.) What is the tenure you are looking for the deposit? a. less than 1 year b. 1-2 years c. 2-3years d. more than 3 years 31 | P a g e
Questionnaire for INVESTOR‟s PREFRENCE Part A: (Choose one answer which best describes your nature and preferences)
1. If the performance of an investment you have recently made were below your expectations, how would you feel?
a. Very upset b. Somewhat upset, but hope that it will improve in the future. c. Uneasy but willing to take it in my stride d. Not upset because I know that all investments carry risk. 2. What do you normally associate the word „risk‟ with?
a. Danger b. Uncertainty c. Opportunity d. Thrill 3. If you had to choose between being a salaried employee and running your own business, which one would you prefer?
a. Being a salaried employee b. Doing a salaried job and may be run a part-time business. c. Running a partnership business d. Running my own business. 4. When you invest your money, what thought comes to your mind first?
a. I should not lose my money. b. This should not turn out to be a bad investment. c. This should turn out to be a good investment. d. I know this is a good decision. 5. After you have made an investment, how do you usually feel?
a. Very worried. b. Somewhat worried. c. Somewhat satisfied. d. Very satisfied. 6. If you had the choice between a fixed salary and a partly variable one, depending on your performance and the profits of your company, which one would you prefer?
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a. I would prefer a fixed salary, even if it is small. b. I would prefer most of my salary to be fixed, with only a small variable part. c. I would prefer half my salary to be fixed, and the other half to be variable. d. I would prefer most of my earnings to be performance-linked. 7. If you had to make an investment decision without consulting or discussing it with anybody, how would you feel?
a. Very unsure. b. Not very confident. c. Somewhat confident. d. Very confident. 8. Consider this scenario. You had invested in a company, but its performance was so bad past your investment, that you sold off your investments at a loss. Then you hear that the same company has begun to do well. Would you invest in the company again?
a. Definitely not. b. May be, but am not very sure. c. Perhaps I will. d. Definitely yes. 9. Experts tell you that investments are subject to risk and you have to be prepared for losses as well as gains. What is the level of loss in your investment that you are willing to accept?
a. I would hate to see any kind of loss in my investments. b. I will be willing to take up to a 20% loss. c. I can perhaps bear a loss of up to 40%. d. I am willing to take any kind of loss. 10. If you looked at the portfolio of the investments that you have already made, how would you characterize them?
a. Only assured return investments. b. Limited investment in risky products c. Divided between risky and safe products d. Mostly risky investments.
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11. If your investment adviser told you that you could enjoy better returns if you were willing to take the risk, to what extent would you be willing to expose your investments to risk, to earn a higher return?
a. None at all. b. About 20%. c. About 40% d. More than 50% 12. Interest rates can go up or down. If you had to take a loan and had the choice between a fixed rate and a variable one, which one would you prefer?
a. I will always choose a fixed rate. b. I will choose a combination of 70% fixed and 30% variable. c. I will choose a combination of 30% fixed and 70% variable. d. I will choose 100% variable. CUSTOMER DETAILS Name: Age:
Sex: Male / Female
Address: Tel. Investment Amount: Rs._______________. Investment Horizon (In Yrs.): ______________ Score: Give yourself 10 marks for every (a); 20 marks for (b); 30 marks for (c) and 40 marks for (d). Add up your score. YOUR RISK PROFILE SCORE =
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