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Loveleen Bansal MBA-FA(2014-16)

I joined International College of Financial Planning in 2014. I wanted to do something different in finance as I had keen interest in financial markets. I wanted to learn how the financial market works and Masters in Financial Analysis is a perfect fit for that. I was lucky enough to gain required knowledge through different case studies, projects and much more at ICoFP.

The faculties were very supportive and they guided me in the best possible way. I specifically want to mention my mentors Mr. Ashok Jain sir and Mr. Jatin who helped me a lot. They guided me at every point and always motivated me to handle different projects through trading live capital markets, primary and secondary research tools.

Ashok Jain sir helped me a lot in building the desired knowledge. After the completion of my program, I started trading as I wanted to expand my base and I am grateful that I could do well in trading. After trading for four months, I got placed in Moody’s Analytics knowledge services as Private equity Senior Analyst from my own college. I worked in Moody’s for about an year and a half. After I quit from Moody’s Analytics, I joined my father’s branded garments business and started to trade again side by side. Having gained knowledge in financial analysis and having to know the fundamentals of analyzing financial reports helped me take crucial decisions in my father’s garments business. Hence, I was able to expand my business. I want further broaden my horizons to become an entrepreneur. Moreover, I have been able to meet the criteria and hence received an opportunity to pursue masters abroad from three different reputed institutions, choosing one of which I am yet to decide on.

FUTURE PROSPECTS OF FINANCIAL PLANNING

Financial planning is the six step process which helps you in achieving your financial goals in life in a systematic and planned way.

It involves the following:

1. Make a household budget.
2. Monitor your expenses wisely
3. Maintain a personal account statement
4. Dealing with surplus cash judiciously
5. Create your own investment Portfolio
6. Plan for Retirement
7. Debt Management
8. Insurance coverage
9. Estate Planning
10.Tax Planning

Make a Household Budget :

Making a monthly budget is very important to bifurcate fixed and variable expenses and also to see whether some expenses can be curtailed.

After making budget and calculating surplus amount, investment of that surplus is important before you start spending money.

Systematic saving on a regular basis makes you rich. You may achieve your financial goals in a timely manner. If you are able to invest 10% of your income every month, it can help you to achieve various financial goals in your life. You may invest this amount in a liquid fund. The liquid fund is a type of debt mutual fund which invests money in fixed-income generating instruments like FDs, commercial paper, certificate of deposit etc. and Equity through Mutual Fund schemes depending on time horizon of goals.

Monitor your expenses wisely

If you are living month on month basis depending on your salary to pay for various expenses and find yourself in a situation that you are postponing some expenses for next salary, it means you are living way beyond your means. Maybe there are a lot of unplanned expenses. See that you are following your budget to pay for various fixed expenses and investing money for various goals in future.

Maintain personal account statement

Having a personal account statement helps to know what are your investments and what are your loans. It’s a powerful tool to take your finances to the next level. Before starting to create account statement, pull together your bank statements and other proofs of the liabilities. Then list down your assets like the bank balance, all investments, home value, and value of other assets. Take a sum of all the assets to arrive at the total value of your assets. Afterwards, list down your liabilities such as car loan, home loan, credit card balances and remaining balances in other loans. The sum of all the liabilities will show the value of the money you owe.

When you subtract the value of liabilities from assets, you get your Net Worth. Ideally, it needs to be positive which means money you own is greater than the money you owe.

Dealing with surplus cash judiciously

How you deal with the surplus cash will take care of your future Net Worth. When you don’t have a plan, you are likely going to indulge in overspending. This money could have been used to make you financially self-sufficient. In the backdrop of inflation, everything is going to be costlier with each passing year. If you don’t invest, your money won’t grow to bridge the inflationary gap. You might have to work beyond your 60s to pay your bills. Investing the surplus money will help in leading a luxurious life.

You should start with specification of financial goals like buying a car, buying a house, vacation planning or planning for retirement. Categorise those goals into short-term and long-term. Goals that can be achieved within 1 to 3 years are essentially short-term. Goals that need a horizon of 3-5 years are called medium-term goals. Goals that require more than 5 years to achieve are long-term goals. Then identify your risk appetite i.e. the degree to which you are comfortable with a fall in the value of your investments. In young age you need to have a high Risk appetite as it is the time to accumulate wealth and as you grow in age, your exposure to equity should reduce and debt should increase.

Mutual funds have a very simple option to invest your money systematically. You can start Systematic Investment Plan (SIP) at a nominal sum of Rs 500. Under SIP, a fixed amount gets deducted from your savings account and is invested in mutual fund scheme of your choice.

Create your personal investment Portfolio

Constructing your first investment portfolio is an achievement in itself. It is your first step towards wealth accumulation.

Building a portfolio involves distributing your investment amongst asset classes like Equity, Debt, Gold, Real Estate and cash. It is known as asset allocation. Although equity is the best tax-efficient and inflation beating investment , but putting all your money in equity is not a prudent move. You need to diversify the amount that are to be allocated in each asset class as per your investment goals. It is always wiser to be a long-term investor in order to accumulate greater corpus.

Once you have constructed a portfolio, you need to rebalance it periodically to keep the portfolio risk within expected limits. This is relevant from standpoint of market fluctuations. At the very outset, you may decide the time intervals after which you will be rebalancing. You can do it once in every six months or a year.

Plan for Retirement

Planning for retirement has become all the more important today. Due to nuclear family system, increased life expectancy, increase in healthcare costs, one needs to accumulate sufficient amount of corpus for retirement

It is never too early to plan to start planning for retirement. The earlier you start, the richer you retire. It happens due to the “magic of compounding”. In this way, you can even retire early and lead a stress-free life. While planning for retirement, you need to clarify a few points like deciding an age at which you want to retire. Along with that estimate how much money you will need every month to meet your post-retirement expenses.

Suppose that you plan to retire at 60 years and your monthly estimated expenditure after retirement is Rs 50000. , then assuming a rate of return of 12%, you need to contribute a SIP of Rs 6500 every month for 30 years to accumulate a corpus of Rs 2 crore. This amount will be sufficient to have a comfortable retired life.

Debt Management

Management of Debt is very important. Timely payment of Home loan, Car loan, Education loan or personal loan EMIs and to keep provision from your monthly income for the same is not an easy task or you may end up borrowing fresh loans to pay off older loans. If it gets out of control, then you may fall in a vicious debt trap. Your critical life goals may get side-lined and even your retirement may get delayed. However, management of your debt payment may keep you away from such troubles. In case you have a lot of debt to shoulder, start paying off the most expensive one. In fact, the credit card has been regarded as the most expensive form of debt. As soon as your salary gets credited each month, pay off your credit card balances in full. Don’t fall for the lure of paying off the minimum balance. Even before you know, the interest will spiral up to eat out all your savings. Make it a point to use the credit card only in case of emergency. Always keep debt as the last resort. As far as possible, make down payments for your purchases.

8. Insurance coverage

One needs to buy a Term Insurance policy to take care of loved ones in case of any mis-happening. Health Insurance policy is required to meet the rising health care costs. Purchase of property insurance is also must.
Just like investing is essential for wealth accumulation, insurance is essential for wealth preservation. However, investing and insurance are two separate things which most individuals don’t understand. They buy a ULIP and feel themselves at ease. But, this is the biggest mistake which they make. They end up paying more and remain inadequately insured. Instead of this, a term insurance plan will be a wiser proposition to buy. Term insurance plan provides you higher risk coverage at a reasonable price.

Estate Planning

Estate Planning meaning transfer of estate includes all the assets like house, car, gold, financial investments or any money lying in savings account. It’s everyone’s responsibility to write a WILL and decide about allocation of assets to different heirs.

You can start by preparing an inventory of assets that you own. Create a list of beneficiaries & proportion of assets that you want to allocate to each one of them. Make a WILL, get it registered. It will ensure that the beneficiaries do not have to face challenges in order to get the ownership of assets. A Solicitor can help you write the will properly.

Planning your Taxes

In tax planning, you analyse your finances from a tax efficiency point of view so as to plan these in the most optimized manner. You attempt to take advantage of the various tax exemptions, deductions, and benefits so as to reduce your tax liability at the end of the financial year. Even though tax planning is very much legitimate in nature, you need to ensure that you don’t indulge in tax evasion or tax avoidance.

From a tax planning standpoint, you can make use of a number of tax saving options. Like the deductions available from Sections 80C through to 80U that are given in the Income Tax Act. The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme (ELSS). It has the shortest lock-in period as compared to all the other tax-saving options available under Section 80C. In this, you can invest Rs.1, 50,000 and get deduction. Additionally, the ELSS is a diversified equity fund helps you to achieve your financial goals via investment in the equity market.

Career Opportunities In Financial Planning

Financial Planning is one of the fastest-growing professions across the world and with a huge demand-supply gap in India; the youngsters planning a career in Financial Planning have a bright future and can take advantage of many opportunities coming across in the financial services sector.

Financial Planners and their Role

Financial planners are the professionals who help individuals to plan the investment of money which is not only tricky but also challenging and difficult task.

Every individual wants to invest the funds for future to fulfil financial goals and other social commitments be it higher education of children, marriage of children, retirement, purchase of house , medical and health purpose or any other goal Financial planners offer their advice to the persons on their investment and saving options to achieve their social, personal, professional goals and commitments arising in future. Most people need guidance on where to invest, how to save taxes, the best insurance scheme (life as well as medical), which avenue to invest in, which stock to hold and which to sell, how to plan future career of their college going children and their own retirement. For all such services; planners come into picture for rendering expert advice and consultancy to their clients on utilizing the hard earned money and its better use for achieving financial goals.

Financial Planners performed following functions:

They identify various financial and personal goals of their clients and the time period of investments so that they can plan their investment accordingly.
Financial planners assess and evaluate the risk taking capability and financial strength of their clients for better utilization of funds.
They study the market potential, investment avenues, instruments of investment, financial products available and educate, suggest and advice to the clients.
They assess the risk-return attributes of various investment options with the help of analytical techniques and accordingly match the risk taking capability of clients.
Tax planning is an area where financial planners are really helpful because they upgrade themselves with the latest taxation changes by the government and thus they suggest their clients to invest the amount of money in tax-saving instruments for better return and assured appreciation.
They are also responsible for helping their clients about the comparative return-risk profile of the invested funds in different instruments.
They keep their clients abreast with the updates on financial products having different characteristics to suit their individual requirements.
Financial planners also help their clients by advising them about the right time to invest and proper timing to shift their invested money from poor performers to better performing funds.
They help the clients by investing their money and do accurate documentation with thereby saving their time.
They also manage the wealth of their clients, retail and HNI.
Retirement and insurance planning is an important financial goal. They advise their clients on various pension schemes and insurance products with risk-return profiling.
In addition to the above duties the financial planners frequently make their clients aware about the recent policy changes and economic environment which may affect the investment made by them and accordingly advise, revise or modify their investment strategies.

Organisations giving employment opportunities in Financial Planning

There is vast scope of employment for the people doing courses on Financial Planning/Wealth Management.

Initially financial planner can start his career with a Financial Planning/Wealth management firm, Distribution house or Asset Management Company. They can also start their career in Insurance Company or a Bank offering Wealth Management Services.

New opportunities lie in the field of financial planning of real estate and trusts which is still untapped with lot of potential. In private companies there is always a huge demand for financial planners. Experienced Financial Planners can find satisfying careers in investment banking, financial consulting, and financial analysis and insurance companies.

Knowledge Process Outsourcing (KPO) firms provide employment to financial planners as Data Analyst, Market Researcher, Client Development Analyst, Derivatives Analyst, Equity Analyst, Research Associate etc. Similarly financial planners are much sought after in the brokerage houses for positions such as research analysts, business analysts, research associates and technical analysts etc.

Banks require qualified and experienced financial planners for managing their investment advisory vertical. Relationship Managers in Banks help HNI Clients to manage their portfolio.

Starting your own financial planning firm after few years of experience will help even to tap the market in your home town. A desired qualification with a set of skills is necessary conditions for becoming a successful financial planner. Good inter personal skills; knowledge of financial markets, financial products, and their risk return attributes is important requisite. Financial planning is a fee based service and the fees should be a reasonable amount depending on limited advice or comprehensive advice.

Journalism is an area where financial planners can take advantage of their expertise provided they possess writing, analytical and presentation skills with a passion for writing and spreading financial knowledge to the public with convincing ability. Through print media, they can spread awareness on various products suitable to different category of clients.

Increasing financial literacy is important as many in India do not have knowledge of basic financial terms thereby influencing their investment decision making.

Financial planners can associate with financial services industry to spread financial literacy thus enabling millions to take right decisions. Also there is enough potential in teaching, training and research in the area of Financial Planning. Even financial planning and consultancy can be done on internet using networking sites following professional and ethical code of conduct.

Skill Set Required for Financial Planning

Apart from possessing professional qualification and desired certificate/degree/diploma, the various skills and proficiency required to be a financial planner include; interpersonal skills, convincing capability, patience, strong Commitment to ethics and client, effective communication, positive attitude, strong analytical ability, problem solving skills, updated information about economic environment and legislations related to tax, business or profession, initiative, creativity, relationship management, soft skills on computers, logical mind-set, knowledge of local language for establishing better connectivity with the clients and time management skills.

Madhu Sinha,

Campus Director, ICoFP Mumbai

AIF Market in India

Introduction:
In India, alternative investment funds (AIFs) are defined in Regulation 2(1) (b) of Securities and Exchange
Board of India (Alternative Investment Funds) Regulations, 2012. It refers to any privately pooled investment
fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a
Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming
under the jurisdiction of any regulatory agency in India.

Categories of Alternative Investment Funds (AIFs) :
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 Alternative
Investment Funds shall seek registration in one of the three categories
Category I: Mainly invests in start- ups, SME’s or any other sector which Govt. considers economically and
socially viable.
Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which
no specific incentives or concessions are given by the government or any other Regulator
Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make
short term returns or such other funds which are open ended and for which no specific incentives or concessions
are given by the government or any other Regulator.

Process and Documentation required for Listing and Trading Alternative Investment Fund

Size of AIF market:
Alternative investment funds (AIFs) have grown substantially – by 96% in the last financial year. The
commitments raised (roughly equivalent to AUM in MF parlance) increased from Rs.84,304 crore to Rs.1.65
lakh crore, shows the latest data by SEBI.
Investors continue to lap up category II funds such as private equity and debt funds, investing Rs.54,064 crore
in the category. These funds offer exposure to assets in which traditional mutual funds schemes do not invest.
Category III AIFs, which are essentially hedge funds, have also recorded an exponential increase, growing by
161% in the last one year. These funds deploy a variety of strategies like long and short strategy, IPO focussed
investments, running a concentrated portfolio to generate performance.

Category I funds meanwhile grew at a modest pace collecting Rs. 7,435 crore. The category consists of infrastructure funds, social venture funds, angel funds or VC funds.

Tax implication:
In India, the Category I and Category II AIFs registered with the SEBI have been accorded a pass through
status, with a requirement to subject any income credited or paid by the AIFs to a withholding tax of 10% for
resident investors and as per the “rates in force” for non-resident investors.
The Category III AIF has still not been accorded a pass through status, which means that income from such
funds will be taxed at the investment fund level and the tax obligation will not pass through to the unit- holders.
In cases where the income of the fund is characterized as income under the head “Profits or gains from business
or profession”, the investment fund would be taxed in respect to such income at the maximum marginal rate of
tax.

Ayush S.Mazumdar,

MBA-FA (2018-20)

Portfolio Management

What Is Portfolio Management?

There is an aspiration common to all investors – you want to grow your wealth exponentially. But the returns you see depend on several factors such as the assets you choose to invest in, the overall market sentiments and most importantly the allocation decisions you make. To give you an example in the securities market there are people who earn good returns on their investments even on days when the market crashes while some see their investments being corroded on good days. This is where it becomes important to build a portfolio that spreads out the wealth into different avenues and helps you in averting unnecessary risks.

Building a good portfolio is a combination of art & science. It is science because lot of data analysis needs to be conducted in order to create an optimal portfolio out of a pool of selected investable asset classes. It is an art because portfolio management is done for people who are unlikely to act rationally in different scenarios. Investors are humans and tend to exhibit lot of behavioural biases. Managing those diverse emotions & biases and helping investors to achieve near optimal investment solution for themselves is certainly an art. Under professional portfolio management, investments are made with respect to the objectives, goals are set both short and long term, assets are allocated based on evaluation of risk appetite, return objectives and investment constraints. Portfolio Managers take into account investor’s long term interests when building appropriate portfolio for their clients. They help investors choose the right investment avenues in terms of equities, mutual funds, bonds etc. and create a portfolio that grows with time, beats inflation and is reasonably protected against all the risks associated with investments.

In this detailed guide we shall look at various aspects of portfolio management including the roles and responsibilities of Portfolio Managers.

Importance of Portfolio Management

Now that you have got a brief idea about Portfolio Management you’d surely be interested in knowing the importance of portfolio management. Here’s why this is important –

The most important foundation of Portfolio Management lies in the concept of diversification. Diversification derives its importance from the adage “Don’t keep all your eggs in one basket”. Diversification reduces the risk of overall portfolio depletion in case of a specific event that impacts any given asset or asset class.
In the world of investment, one size doesn’t fit all and investment strategies have to be formulated based on the investor’s goals, time frame, risk appetite and expected capital market outlook. Portfolio Management lets the manager choose the investment strategy for the clients’ that is best suited to achieve their investment goals.
Risk management is one of the focus areas for any Portfolio Manager. One of the primary objectives of Portfolio Management is to evaluate the portfolio for current risk exposure and take necessary steps in adverse market conditions to shield investments from such risks through hedging.
Portfolio Management takes into account the ever-changing taxation laws and suggests a tax efficient investment strategy that reduces the tax burden on the investors and generates the best post-tax return given the investment goals & constraints.
“There are no free lunches in this world”. Similarly, there is no excess return that comes without incremental risk. Return expectation on different portfolios is usually based on the level of inherent risks –
1. High Risk – High Return Investments
2. Moderate Risk – Moderate Return Investments
3. Low Risk – Low Return Investments

Different kinds of Investment Portfolios:

Different investors have different levels of risk appetite and also have different goals to be achieved through their investments. Based on these risks and return objectives, Portfolio Managers may adopt one of these investment strategies –

Aggressive Portfolio – As the name suggests this is for investors who are looking to take high amounts of risk with the goal of earning exponential returns on their investments. From the Portfolio Manager’s point of view Aggressive Portfolio Management is all about choosing avenues that are expected to offer high returns to the investors above the broad index levels. But higher returns come with potential likelihood of higher losses. Most of the investment goes into alpha generation strategies including stocks, commodities, derivatives and other avenues that promise lucrative returns.
Defensive Portfolio – This is the antithesis of an Aggressive Portfolio. This is the more popular of the two and finds large number of takers. In a Defensive Portfolio the goal is to avoid losses even if that comes at the cost of dismal return to the portfolio. Investors who opt for this strategy are risk averse and conservative. This kind of investment is spread around T-Bills, money market securities and short-term government bonds. These safer avenues of investments yield low but steady returns.

Regular-Income generating Portfolio – There are investors who look for regular income from their investments. For instance, a retired person may want monthly pay-outs to fund his or her current lifestyle. Income Portfolio is targeted towards such investors. The area of focus for this investment strategy is to choose investment avenues with low volatility and regular income. This is done through a large allocation towards fixed income instruments like corporate bonds and a relatively small allocation to stable companies’ stocks that offer high dividend yields.

Roles and Responsibilities of a Portfolio Manager

Portfolio Managers help their clients make the right investment moves and help them achieve their investment goals and increase their wealth. But a Portfolio Manager wears multiple hats and their roles and responsibilities extend way beyond this primary objective. Here are the important roles and responsibilities of a Portfolio Manager –

Portfolio Managers chalk out tailored investment strategies for their clients. These are based on the age of the client, income levels and surplus capital at hand and finally align them with the long term investment goals.
Quick and informed decision making is one of the most important traits of a Portfolio Managers. They should be able to offer actionable advice to their clients.
There are different avenues of investment in the market such as equities, commodities, mutual funds, bonds to name a few. Portfolio Managers need to educate their clients on these options explaining clearly risks and opportunities in each of these to help them take informed decisions.
Portfolio Management incorporates risk management. A good manager would always inform his/her clients about the immediate and long-term risks associated with all their investments.
Ethics is one of the main pillars of Portfolio Management. A Portfolio Managers needs to be unbiased while offering investment suggestions to their clients. There should be nothing that conflicts with their primary duty towards their clients and their objective of providing the best investment solution with client’s long-term benefit in mind.
A portfolio manager should be accessible to the clients. While no client should expect a 24/7 Portfolio Manager, it is important to return a call or reply to an email within reasonable time. They should periodically enquire about any changes in clients’ circumstances like investment goals, constraints etc. and make modifications in the portfolio (if required) to incorporate the revised investment criterions.

Portfolio Managers and Clientele

Portfolio managers work at different levels with different kinds of clients. A Portfolio Manager who runs his/her own firm may choose to work with only one category of investor and specialize in their investments on work with different types of investors. Bigger firms often work with different types of investors. They can be broadly divided into three categories –

Individual Investors – They are mostly retail clients or high net worth individuals (better known as HNIs). Individual investors’ have diverse investment requirements based on factors such as their age, level of wealth vis-à-vis their investment goals, risk tolerance, income volatility or stability etc. Diversity in the behavioural aspects offer significant challenges and learning opportunities for portfolio managers.
Businesses – Businesses/Corporate/Institutional clients look at Portfolio Managers to help them optimize the investment strategy of their treasury management function. More often it is a support or an advisory role that the Portfolio Manager undertakes. For NBFCs, Insurance companies, Banks etc. role of portfolio manager increases significantly in importance due to larger stakes.

Use of Technology in Portfolio Management

Information Technology has made deep inroads into our lives. It has touched upon everything that we do in our lives and Portfolio Management is no different. As the saying goes technology has democratized investments. Whether it is buying or selling securities or investing in mutual funds people are making use of technology in every sphere of investments. Portfolio Managers in the modern world are technology savvy and use technology to the advantage of their clients. Through smart-phones and mobile applications, investors’ can keep a track of their investment portfolio, maintain risk limits and even execute transactions from anywhere anytime.

Let us now look at some of the areas where technology is being used for Portfolio Management and how it is helping the investors –

Analytical Research – In the past Portfolio Managers had to scout for information physically to come up with the most rewarding investment advice for their clients. This wasn’t easy and often the location of the manager, his/her access to information and time required to source this information could make a lot of difference. Now information on global capital markets is available on a millisecond basis and the information is automatically filtered based on the criterions set in the analytical model.
Agility in Investments – The biggest advantage of technology is the fact that it has brought agility in investments. With all the data and information freely available Portfolio Managers can take quick decisions. This allows them to capitalize on the opportunities that the market presents in a matter of seconds rather than hours or days.
Transparency – Go back to a time when there was no Internet and most investors would have to rely on their Portfolio Managers to know the status of their investments and returns. There was virtually no way to get daily update on investments. Technology has made it possible for investors to keep track of their investments. This has made the process more transparent as compared to the past.
Risk Management – Through the use of technology, risks can now be managed in a much more dynamic manner. Auto-execution limits can be set on portfolios which helps in keeping the losses in specified limits.
Robo-advisory – Now advisory systems are also getting automated, which presents both opportunities and challenges for investment advisors and portfolio managers.

Tips to Become a Good Portfolio Manager

Attain the Right Qualification – As a first step you need to attain the right qualification to become a Portfolio Manager. At the graduate level you need to choose a degree in economics, accounting, finance or statistics. This should be followed by a post-graduate degree in either of the streams or you can opt for a Master of Business Administration. MBA program offers you several incentives in this field
Be Tech-Savvy – In the times to come, knowledge of AI, data analytics, Programming etc. will be paramount as technology becomes an integral part of portfolio management. Proficiency in latest technology will be a pre-requisite for these jobs.

Opt for Certification – Portfolio Management market has become competitive and if you want to break into the top levels in this field earning a specialist qualification would be an advantage. You can opt for global certifications such as CFA® Charter (Chartered Financial Analyst – USA). A lot of Indian and global portfolio managers are CFA charter-holders. Equity research analysts, fixed-income research analysts who end up becoming Portfolio managers of different Mutual Funds, PMS firms, Pension Funds etc. work towards earning a CFA charter in order to have global career opportunities.
Start As A Financial Analyst – Portfolio Management is an advanced level in this industry and you need to start your career as a Financial Analyst (Research Analyst). You can either opt for this during your internship program or take it as a full-time job. You will have to learn the tricks of the trade in Portfolio Management and working as an analyst would be the right stepping stone towards that dream.
Always Be Analytical – There are many who end up remaining Financial Analysts and never graduate to becoming a Portfolio Manager due to their lack of enthusiasm in learning more than what is required at their job. Always be analytical in your research, focus on analysing companies not just part of one/two sectors, but in the overall market and continuously work towards sharpening your skills.
Stay Updated – There is no end to updating your skills and knowledge as a Portfolio Manager and you need to attend seminars and conferences where you will be exposed to new knowledge in Portfolio Management and also become aware of the new tools and methods that are used to identify the right investment avenues.

To sum up Portfolio Management plays a very important role in the investment market. Here in this detailed guide we have covered most of the important things you’d like to know about Portfolio Management. If you wish to multiply your investments without having to go through the nitty-gritties of the markets and other concerning factors you need to hire a seasoned Portfolio Manager to look after your wealth. From helping you choose the right investment avenues based on your financial goals to capitalizing on the opportunities and risk management, they are your trusted partners when it comes to investments.

THE TWIN DEFICIT DILEMMA

It’s high time that the global economy addresses the Minotaur in the room, the world’s de facto economic capital, USA. During his electoral campaigning, self reliance was a primary target that Donald Trump focused on and believed in. MAGA was a vote magnet for the many local industries that couldn’t survive global competition. Over two years into his term, we’ve witnessed Trump initiate a trade war and hike rates enough to cause a currency crises in nearly all the EMEs. Massive tax cuts were federally funded to revive the local industries. And while that may seem like a sound internal policy, the republican economists have completely disregarded the Twin Deficits Hypothesis, which even though isn’t true for every other nation, certainly holds for the American economy.

Twin deficit refers to a situation when a nation’s Trade deficit is accompanied by a simultaneous Fiscal deficit. After the Bretton Woods conference of 1945 chose the well-lobbied Global Plan as suggested by Harry Dexter (On behalf of the American Government) over the Global Surplus Recycling Mechanism (GSRM)/Bancor system proposed by Keynes, it was evident that the US couldn’t forsee a future where they’d have a Trade deficit. The GSRM was a mess-proof mechanism that would systematically bring international markets to equilibrium by appreciating the currencies of surplus nations, and depreciating those of the deficit facing nations. But since USA had a huge surpluses after the war, which they didn’t want to let go of, they put forth the Global Plan that would ameliorate deficits via IMF lending, but would do nothing about the surplus nations. This mechanism worked well for them after the implementation of the Marshall’s plan, under which money was lent to Western Europe and Japan (Cornering USSR!) to help them recover the consequences of the war. But for USA it served two purposes, eliminating communism and creating a market for the American economy, thus boosting it’s Trade surpluses. Eventually, in the 60’s, after the American government funded various Asian wars and simultaneously attempted to maintain populism by mass public welfare programs like Great Society by Lyndon Johnson or the New Frontier by JFK, it ran too deep into deficits. And this is where our twin deficit hypothesis comes in. Running fiscal deficits by cutting taxes causes consumption to rise and thus savings to fall. A reduction in savings prompts the government to borrow funds from abroad to finance their fiscal expenditure. Now an influx of investment makes demand for dollar rise, which in turn results in appreciation of the USD. And that makes American commodities relatively expensive to purchase, thus causing a trade deficit. It can be explained mathematically through a simple equation, Y = C + I + G + NX can be written as (Y – C – Tax + Transfer) + (Tax – G – Transfer) = I + NX which signifies

Private Savings + Public Saving = Domestic Investment + Net foreign Investment

Now imagine a decline in Public Savings, due to cutting taxes and causing a fiscal deficit. This can be offset by:

A Rise in Private Savings: As per Ricardian equivalence, tax cuts prompt people to increase savings, because they expect taxes to rise in the This, though economically ideal, is unlikely in the real life context of the non rational people.
A Fall in Domestic Investment: The crowding out It’s never good.
A Fall in the Net foreign Investment: The Twin Deficits dilemma

These deficits in the 60’s required a free monetary policy, one that wasn’t just limited to the Special Drawing Rights over gold reserves, and eventually resulted in the collapse of the Bretton Woods in 1971, so that USA could more freely incur deficits and take advantage of the negative engineering via the unfaltered faith in the Dollar. Twin deficits were also faced during the 80’s tax cuts by Reagan, and in early 2000s under the spending programs of the Bush administration.

The contrary cases of the 90’s and the late 2000’s can be justified by changes in the ‘other’ factors. In Clinton’s 90’s, the fiscal budget was under control while the trade deficit widened due to decrease in private savings, under a phenomenon known as Ricardian equivalence. In the late 2000s, private savings shot up due to the economic crises, thus giving way to a high fiscal deficit with a low trade deficit.

Coming to the current scenario, it is important for the Trump administration to realise that the trade deficit cannot be improved unless they control their fiscal profligacy, for which tax cuts and creating artificial competitiveness are certainly not the way. The situation is even more delicate when you realise that the Federal Reserve has been increasing the Federal Funds Rate, to take up monetary tightening to control the inflation, that was created under the quantitative easing taken up after the Recession of 2008. These rising rates attract foreign capital and appreciate the Dollar which deepens the Trade deficit. Although Trump has been threatening to replace Jerome Powell, by cronies like Herman Cain unless he reduces the rates, the hikes are necessary to counter the impact of over $3 trillion pumped in the economy.

Politicians, in order to elongate their careers take up fiscal profligacy, and America could easily do that due to the it’s Reserve status advantage. But new and better alternatives are constantly coming up. Additionally, the world has started to take notice of the $21 trillion debt the American government owes to the Fed, the Public and other economies, China leading the feat by holding over $1.2 trillion. And the budget must deepen as baby boomers retire. Unless the necessary steps are taken for fiscal consolidation right now, the burden might come crashing down on the shoulders of those who never asked for it.

Riya Kaul,

B.A. Economic Hons.

Shri Ram College of Commerce

IMPACT OF ORGANISATIONAL CULTURE ON THE PROCEDURES AND TECHNIQUES OF ACCOUNTING

Organizational culture represents a company’s common beliefs and concepts that create the social and psychological environment of an organization. It refers to a system of shared meaning held by members that distinguishes the organization from others.

Culture has proven to have an important influence on the transparency of accounting disclosures within organizations all over the world. One influence of culture is resistance to planned change from existing accounting procedures to new accounting procedures.

Accounting procedures are immensely influenced by organizational culture, which includes ethics and value system in the organization. Most of the corporate frauds take place through manipulation of accounting procedure, window dressing of accounts being a common phenomenon.

According to Kotler, organizational culture can create cohesion between the members and the organization as a social control in the company in the face of information systems.

ACCOUNTING INFORMATION SYSTEM

An accounting information system as an organizational component, accumulates, classifies, processes, analyzes and communicates relevant finance-oriented, decision making information to a company’s external parties (Reviews such as current and potential investors, federal and state tax agencies and creditors) and internal parties (principal management)

Organizational cultures and subcultures are important determinants of how people use information and information systems. By grounding information systems in the context of the organization as a larger system, it is possible to realize that numerous factors are important and should be taken into account when ascertaining information requirements and designing and implementing information systems. An important factor in the development and implementation of information systems is identifying, understanding the meaning, norms and power within the organization.

Implementation of information systems in the financial services sector needs strengthening organizational cultural values associated with customer orientation, flexibility, quality, and performance orientation.

Getanjali Bhatia,

B.A(Hons.) Business Economics

Gargi College

WORKSHOP AT MAITREYI COLLEGE

One of the most sought after women’s college under Delhi university, Maitreyi College, invited International College of Financial Planning on 1st of April to conduct a session on the topic “Financial Planning- A Lucrative Career” in their college premises wherein our speaker Mr. Anil Chopra, Group Director- Corporate Affairs at Bajaj Capital Group shared his enriching & valuable industry experience with all the students.

The students were anxiously waiting for this day since they wanted to listen to his valuable industry experience and learn the ropes about the financial field. In an hour long session, the speaker took the students through the fundamentals of financial planning and why it is most important in today’s time to be a financial planner which not only helps you as an individual in planning your own finances but also adds feather in your academic qualification helping you with lucrative job opportunities.

He also fielded many questions from the students at the end of the session clearing all their doubts and queries with respect to finance as a career. Students were left optimistic and well informed after the session got over and they thanked ICOFP for giving them such a leaning opportunity that too with a finance expert. The college Principal and commerce department valued our efforts and wished to call us again in future.

Importance of Financial Planning

Recently, one of my friends forwarded me a story titled “Can you sleep when the wind blows”. It’s a nice story which partly answers the above questions. The story goes like this –

Years ago a farmer owned land along the Atlantic seacoast. He constantly advertised for hired hands, however, most people were reluctant to work on farms along the Atlantic. They dreaded the awful storms that raged across the Atlantic, wreaking havoc on the buildings and crops.

As the farmer interviewed applicants for the job, he received a steady stream of refusals. Finally, a short, thin man, well past middle age, approached the farmer. ‘Are you a good farm hand?’ the farmer asked him.

‘Well, I can sleep when the wind blows,’ answered the little man. Although puzzled by this answer, the farmer, desperate for help decided to hired him.

The little man worked well around the farm, busy from dawn to dusk, and the farmer felt well satisfied with the his work. Then one night the wind howled in loudly from offshore. Jumping out of bed, the farmer grabbed a lantern and rushed next door to the hired hand’s sleeping quarters. He shook the little man and yelled, ‘Get up! A storm is coming! Tie things down before they blow away!’

The little man rolled over in bed and said firmly, ‘No sir, told you, I can sleep when the wind blows.’

Enraged by the response, the farmer was tempted to fire him on the spot. Instead, he hurried outside to prepare for the storm. To his amazement, he discovered that all of the

haystacks had been covered with tarpaulins. The cows were in the barn, the chickens were in the coop and the doors were barred. The shutters were tightly secured. Everything was tied down. Nothing could blow away. The farmer then understood what his hired hand meant, so he returned to his bed to also sleep while the wind blew.

(Source: http://www.agiftofinspiration.com.au/stories/attitude/When%20the%20wind%20blow s.shtml)

All of us face some degree of harsh winds in our lives. It jolts lives of people who are caught unaware & unprepared.

Harsh winds could come in the form of

A close relative’s serious illness or accident which requires urgent arrangement of loads of cash;
Death of an earning member;
Daughter / son’s wedding expenses going way above the savings or budget;
Unplanned pregnancy
Disability (Permanent or for even for couple of months)
Loss of Job
Property damage due to fire or accidents.
Serious damage to any expensive asset/s requiring major repair or replacement.

And hundreds of other things which can go wrong and cause our life and financial health to tremble & be blown away in the wind. But if we are well prepared; then we can also sleep when the wind blows.

We sadly cannot secure ourselves from all the blows that life is going to through

our way. Most of us cannot prepare ourselves for emotional or psychological losses, because it requires lot of emotional strength & stability. But securing ourselves against financial turmoil is not as difficult.

We can, to a great degree, plan and secure ourselves against events that can put a bad strain on our financial health. We can insure ourselves against almost all the risks that we face in our lives. We can plan, save and invest appropriately to provide for all the financial needs that are expected to, or unexpectedly may, arise in our lifetime.

The good news is that options to secure our financial future are available online at a very low cost. If we have the required knowledge, we can bypass all intermediaries’ i.e. brokers / agents & buy these products online directly from the company websites.

Online Term Insurance for 1Crore Rupees is available at meagre cost of 500-1500 rupees per month depending on the age & medical condition. This is cheaper than couple’s movie ticket on any weekend.

Most mutual funds have their own simple online investment vehicles or can be accessed through through MF Utilities platform ( https://www.mfuindia.com/ & https://mfuonline.com/ ) or CAMS online ( http://www.camsonline.com/ ) or Karvy MFs platform ( https://www.karvymfs.com ) with zero additional costs. Now MF investments can be done through any smart phone using different user friendly phone applications.

All insurance products can be bought sitting in the comfort of your

homes using phone or a computer.

But it is imperative that one seeks professional guidance on financial planning and investment planning if he/she does not have the necessary skills to create an optimal portfolio that seeks to achieve all their important financial goals. Services of a financial planner are also required to evaluate the insurance cover that would suffice the need to secure one’s human capital. INR 1 crore might seem like a big amount and a sufficient insurance cover today, but the value of INR 1 crore will have depleted in real terms to around INR 31 lacs in 20 years at 6% inflation. Simply put Rs. 1 Crore after 20 years ≈ Rs. 31 lakhs today.

To chose between different advisers or to evaluate the quality of investment advice being provided, fundamental level education is required. Lot of options are available for one to get training on financial planning and investment planning. Professional courses are available which can help individuals master the art of financial planning and use the knowledge not just for managing their own investments, but for additional income by advising others. Financial planning will always remain a lucrative field if one chooses to make it a career path.

So what we really need is to just fight the lethargy & learn a few things that can help us “Sleep when the wind blows”.

Kushal Bhateja,

Program Head-Financial Analysis

Market Risk Profile of HSBC Holdings Plc

Value at risk (‘VaR’)

It is a technique for estimating potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and calculated for all trading positions regardless of how it is capitalised.

The VaR model formulated by HSBC is predominantly based on historical simulation that incorporates the following features:

Historical market rates and prices, which are calculated with reference to foreign exchange rates, commodity prices, interest rates, equity prices and the associated volatilities;
Potential market movements utilised for VaR, which are calculated with reference to data from the past two years; and
VaR measures, which are calculated to a 99% confidence level and use a one-day holding period.

The models also incorporate the effect of option features on the underlying exposures.

Market Risk

Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices, will reduce the income or the value of the portfolios. In HSBC the exposure to market risk is separated into two portfolios:

Trading portfolios; and
Non-trading portfolios.

Market Risk in 2018

Global markets were characterised by robust economic sentiment at the start of the year. As the year progressed, economic activity diverged across the global economy against a backdrop of continuing trade and geopolitical tensions; concerns around slowing growth in China; and the continuing uncertainty around the shape of the UK’s withdrawal from the EU.

Monetary tightening started across the developed world. The US Federal Reserve raised official interest rates multiple times during the year. Bond yields started to increase but remained low by historical standards. In the eurozone, the European Central Bank ended its bond-buying programme, although softening growth and inflation prospects add to the uncertainty of the timing of the next interest rate hike.

Trading value at risk (‘VaR’) ended the year lower when compared with the previous year. The trading VaR composition remained largely the same, with interest rate trading VaR being the largest individual contributor to overall trading VaR. Non-trading interest rate VaR ended the year lower when compared with the previous year as exposures were managed down.

I. Trading Portfolios

Trading VaR predominantly resides within Global Markets where trading VaR was lower at 31 December 2018 compared with 31 December 2017. The contributions of each asset class were largely range bound during the year.

The decrease in trading VaR from the equity and credit spread trading VaR components was partially offset by an increase in the interest rate and foreign exchange trading VaR components. The effects of portfolio diversification reduced the overall trading VaR.

II. Non-Trading Portfolios

Non-trading VaR of the Group includes contributions from all global businesses. There was no commodity risk in the non-trading portfolios. The non-trading VaR ended the year lower compared with the previous year, due to a reduction in the non-trading interest rate VaR component. This was caused by the reduction of the risk in our investment portfolio, specifically from reduced interest rate risk on US Treasuries and agency mortgage backed securities.

Basel III conditions to calculate VaR

According to the Basel III framework the banks have flexibility in the calculation of their capital requirements, but there are some minimum standards which they have to adhere.

The basis of the calculation is the VaR computed on a daily basis, using a 99^th percentile, one tailed confidence interval.
The 10-day-returns of the portfolio must be used, which can be approximated by using the 1-day-returns and scale them according to a normal distribution by √10 up to ten days.
Furthermore, the length of the sample period underlying the calculation must be at least one year.
Besides that the banks are free to choose between models based on variance-covariance matrices, historical simulations or Monte Carlo simulations.
Moreover, the Basel III market risk framework defines a SVaR, which is calculated on the same basis as the VaR, but in a period of significant stress for the bank’s portfolio.

The length of the period must be twelve months and the choice of the period has to be approved by the supervisor as well as reviewed regularly.

Limitations of VaR

Although a valuable guide to risk, VaR should always be viewed in the context of its limitations:

Use of historical data as a proxy for estimating future events may not encompass all potential events, particularly extreme ones.
The use of a holding period assumes that all positions can be liquidated or the risks offset during that period, which may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully.
The use of a 99% confidence level does not take into account losses that might occur beyond this level of confidence.
VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.
While calculating VaR of a portfolio, it is required to measure or estimate the correlations between the return and volatility of individual assets. With growing number and diversity of positions in the portfolio, the difficulty (and cost) of this task grows exponentially.

Shivam Daga,

MBA-FA (2018-20)

Inverted Yield Curve

Overview: In good economic times, yields on government bonds tend to track an upward curve, since longer term bonds carry a higher risk of inflation. The curve inverts when shorter-term debt—like 3-month Treasury notes—offer a higher interest rate than a longer-term bond such as the 10-year Treasury bond. On 22nd march, 2019 the yield for 10-year Treasuries fell below than the yield for 3-month Treasuries, marking the first appearance of such an inversion since 2007, months before the financial crisis triggered a stock-market rout. If the inversion persists in coming weeks, it could be a bad sign for stocks and negative spread also indicates sign of recession as per the past data. Currently on April 5, 2019 spreads are at 0.07 still in the downtrend from last few years.

Yield curve Vs S&P 500 Vs recession:

Such inversions have occurred seven times since the early 1950s and all but one preceded equity gains.
Specifically, the S&P 500 Index rose a median 19 months before peaking after an inversion, with returns
reaching 21 percent. Even after an inversion, it usually takes about 19 months for a recession to hit the
economy, data compiled by Canaccord showed.

US Unemployment rate:

US National home price index since 1950:

If we see inflation adjusted home price index it is still at peak but below 2007 levels and if we see spread
between mortgage rates and expected increase in home value it simply not indicatiog such disruption like
recession due to home prices, which we have seen in 2007 recession

Yield curve 2018 vs 2019:

Europe current situation:

On march 22nd Germany’s worst manufacturing survey in seven years sent investors rushing to buy bonds. For
the first time in three years yields on German ten-year government debt fell below zero.

Canadian yield curve inversion:

The yield on Canada’s 10-year bond dipped to 1.57 percent Monday, or 10 basis points lower than the rate on
the three-month Treasury bill, compared with a gap of 6 basis points. That inversion hasn’t happened since
2007, at the start of the financial crisis sparked by a U.S. housing crash. The 10-year inflation-linked bond,
meanwhile, offers a negative yield in real terms, after accounting for consumer prices.

Ayush S.Mazumdar,

MBA-FA (2018-20)