Wealth Management Basic Level Conference Call with BSDL Sales Managers February 2010

Return and Risk Concepts Chapter 1 Return and Risk Concepts

Steps to Calculate RoI Compute total returns Periodic income and appreciation RoI= Total return/Original investment RoI % per annum = RoI x 100 x1/n n is the holding period of the investment

Compounded Annual Growth Rate (CAGR) CAGR = {(V1/V0)^365/n}-1 CAGR is the annualized rate at which investment grew over a period of time Considers time value of money and re-investment of income

Impact of Taxation Income earned on an investment is liable to tax Tax depends upon the type of income Effective return is calculated net of taxes Rate of return x (1- applicable tax rate)

Types of Risk Purchasing power risk Credit risk Liquidity risk Market risk Reinvestment Risk

Asset Allocation and Diversification Chapter 2 Asset Allocation and Diversification

Broad Asset Classes Assets are broadly categorized based on the nature of return Equity is for growth Debt generates income Cash is for parking funds Other asset classes include Commodities Real estate Gold Asset classes have sub-categories Opportunity to reduce risks

Asset Categorization- Equity Market capitalisation-based categorisation Liquidity, return and risk are impacted by size Large cap, mid cap and micro cap Sector-based categorisation Sector-indices and thematic classification Style-based categorisation Growth, value, momentum

Asset Categorization - Debt Tenor-based categorisation Long tenor bonds have a higher interest rate risk Credit risk-based categorisation Government securities are credit risk free High Yield and Junk Bonds Issuer-based categorisation Municipalities, Corporates, Government, Government institutions

Impact of Correlation Correlation between assets in a portfolio determines risk Negative correlation (-1): takes portfolio risk to zero Positive correlation (+1): risk increases linearly Risk can be reduced up to a certain point using asset classes with correlation less than 1 Asset Class B Asset Class A

Approaches to Asset Allocation Asset class selection for a portfolio impacts its risk and return Selection driven by expected future performance Re-balanced in the light of actual performance Approaches to asset allocation Strategic asset allocation Dynamic asset allocation Tactical asset allocation