CFP- Level-1-IP and Asset Management (Global) Chapter 1-6

Investment Planning & Asset Management CFP Level 1 | Module 2 | Global India’s 1st & Largest CFP Education Provider Authorised by FPSB USA

FPSB® Investment Specialist Module: Investment Planning and Asset Management Chapter-1 Friday, 15 July 2022 Investment Planning & Asset Management

Asset Classes and Securities • Various Asset Classes are: Equity Debt Cash Precious Metals Real Estate Friday, 15 July 2022 Investment Planning & Asset Management

Asset classes and basic features • Equity as an asset class represents a growth-oriented asset. • The major source of income to the investor is growth in value of the investment over time. • Debt as an asset class represents an income-oriented asset. • The major source of return from a debt instrument is regular income. • Cash and its equivalents are for parking funds for a short period of time and earning a nominal return. • However, as investment options have extended beyond capital market products, these basic categories have also expanded to include commodities, real estate and currency. • The risk and return features of each asset class are distinctive. Therefore, the performance for each asset class may vary from time to time. For example, commodities as an asset class perform well during inflationary times. • Equity gives good return over long run Friday, 15 July 2022 Investment Planning & Asset Management

Equity/ Common stocks • Equity shares are the shares that the companies issue to the public for long term financing. • Legally the equity shares are not redeemable in nature and that is why they are referred to as long term source of finance for a company. • The investors of the equity shares have the right to vote, share the profits and claim the assets of the company. • The value of equity shares is expressed in the various term like par value or face value, book value, issue price, market price, intrinsic value and so on. Friday, 15 July 2022 Investment Planning & Asset Management

Equity/Common Stocks Rights • Ownership of common stock confers ownership in the company. In addition to holding equity, common stockholders (normally) have certain legal rights, including dividends, voting, and preemptive rights (i.e., the right to purchase new stock issue before others). • Dividends consist of a portion of the company’s profits that are distributed to shareholders. Shareholders have the right to receive declared dividends in proportion to the number of shares of stock they own. Friday, 15 July 2022

Brief Overview to Financial Markets • Capital Markets Market for financial assets which have long term or indefinite maturity IDBI,ICICI,LIC etc. are lenders in the capital market Business units and Corporate houses are the borrowers in capital market Capital markets include Equity market and bond market SEBI overseas the functioning of Capital market SEBI protects the interest of investors Friday, 15 July 2022 Investment Planning & Asset Management

Functions and Role of the capital market • Mobilization of savings • Capital formation • Provision of Investment avenue • Speed up Economic Growth and Development • Proper regulation of funds • Service Provisions • Continuous availability of Funds Friday, 15 July 2022 Investment Planning & Asset Management

Primary Market • Market to raise money from public • Also known as New Issue Market (NIM) • Securities are sold for the first time to Public • Issued by company directly to investors • Money used by company for new projects of expansion of existing projects • Facilitates capital formation in the economy Friday, 15 July 2022 Investment Planning & Asset Management

Methods of issuing securities in the Primary Market • IPO (Initial Public Offering) • Rights issue (existing shareholders) • Preferential Issue Friday, 15 July 2022 Investment Planning & Asset Management

Secondary Market • Trading of securities issued through IPO • Is vital to an efficient and modern capital market • Securities change hands at this market • Securities are bought and sold at “market value” • The market functions as barometer of public opinion about the company and its prospects • Two components: Equity market and Debt market Friday, 15 July 2022 Investment Planning & Asset Management

Order Types and Conditions • (i) Time Conditions • (a) DAY: All orders entered into the system are currently considered as Day orders only. • (b) IOC: An Immediate or Cancel (IOC) order allows the user to buy or sell a security as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately. Friday, 15 July 2022 Investment Planning & Asset Management

Order Types and Conditions • (ii) Quantity Conditions • DQ: An order with a Disclosed Quantity (DQ) allows the user to disclose only a portion of the order quantity to the market. For e.g. if the order quantity is 9,000 and the disclosed quantity is 3,000, then only 3,000 is released to the market. After this quantity is fully matched, a subsequent quantity of 3,000 is disclosed. Thus, totally three disclosures with the same order number are shown one after the other in the market. Friday, 15 July 2022 Investment Planning & Asset Management

Order Types and Conditions • Price Conditions • (a) Market: Market orders are orders for which price is specified as 'MKT' at the time the order is entered. For such orders, the system determines the price. ( • b) Stop-Loss: This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a threshold price called trigger price. • Example: If for stop loss buy order, the trigger is Rs.93.00, the limit price is Rs.95.00 and the market (last traded) price is Rs.90.00, then this order is released into the system once the market price reaches or exceeds Rs.93.00. • This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of Rs.95.00. All stop loss orders are kept in a separate book (stop loss book) in the system until they are triggered. • (c) Trigger Price: Price at which an order gets triggered from the stop loss book. (Stop loss Trigger price) • (d) Limit Price: Price of the orders after triggering from stop loss book. (Stop loss Limit price) Friday, 15 July 2022 Investment Planning & Asset Management

Short Sale • An investor who owns shares of any company is said to be “long” on the share. Most investors hold long positions as the intention is to create wealth over long period of time to meet some financial goals. • However, sometimes an investor may believe a stock will fall in value rather than increase. When this is the case, the investor may sell the stock short. • When a stock is sold short, an investor borrows share, sells the shares at the current market price, and hopes to purchase the shares at a lower price in the future (to replace the borrowed shares) - just the opposite of a long position. Friday, 15 July 2022 Investment Planning & Asset Management

Short Sale • Selling short must be done through a margin account, and requires more market wisdom than simply buying a stock in a long position. Not all shares of companies are available to sell short, and the potential losses can be significant. Given that there is no theoretical limit to how high a stock’s price can go, there is theoretically no limit to how much an investor can lose by short selling a stock and being wrong in the decision • Example: Share of ABC Ltd.is currently trading at R300 and an investor believes that price will fall. He calls his broker and instructs them to “sell short” 100 shares of the company. The broker does so, and the investor receives Rs.30,000 not counting trading costs (100 shares x Rs.300). Friday, 15 July 2022 Investment Planning & Asset Management

Short Sale • Few days later the share price declines to Rs.200 per share, and the investor buys 100 shares (to replace the shares originally borrowed from the broker), which costs Rs.20,000 (100 shares x Rs.200).The difference of Rs.10,000 is the profit. • Instead of declining, the share price rises to Rs.400. The investor originally received Rs.30, 000 by selling short. This investor must now purchase the share (to replace to the broker) at Rs.400 per share, or a total of Rs.40, 000—a loss of Rs.10, 000. As you can see, this can be a very risky strategy. Friday, 15 July 2022 Investment Planning & Asset Management

Types of Return from Common Stock • Common stock offers two types of return: capital appreciation (growth) and dividends (income). • Holding Period Return = (������������������������������������ ������������������������������ −������������������������������������������������������ ������������������������������) +������������������������������������������������������ ������������������������������������������������������ ������������������������������ • Example: A Bought share of XY on 3rd Jan 2019 at Rs.142.19 • Sold 3 May 2019 at Rs.211.75 • Rs.0.73 dividend paid 14 Feb 2019 • HPR = 211.75 −142.19 +0.73 = 49.43% ������������������������������������ 142.19 Friday, 15 July 2022 Investment Planning & Asset Management

Let us practice one more question • X purchased 200 shares of ITC Limited 2 years back in Rs.31000 • He got dividend of Rs.3 per share every year • He sold the shares 2 days back and got Rs.195 per share. • Calculate holding period return. • Holding Period Return = (������������������������������������ ������������������������������ −������������������������������������������������������ ������������������������������) +������������������������������������������������������ ������������������������������������������������������ ������������������������������ Friday, 15 July 2022 Investment Planning & Asset Management

Let us practice one more question Holding Period Return = (������������������������������������ ������������������������������ −������������������������������������������������������ ������������������������������) +������������������������������������������������������ ������������������������������������������������������ ������������������������������ HPR = (195 −155) +6 = 29.67% ������������������������������������ 155 Or HPR = (195 ∗200−31000) +1200 = 29.67% ������������������������������������ 31000 Friday, 15 July 2022 Investment Planning & Asset Management

Expected Return Calculate the expected return from the given data:- POSSIBLE RETURNS (Xi ) PROBABILITY p (Xi) 30 0.10 40 0.30 50 0.40 60 0.10 70 0.10 POSSIBLE RETURNS (Xi ) PROBABILITY p (Xi) Xi *p(Xi) 30 0.10 3 40 0.30 12 50 0.40 20 60 0.10 6 70 0.10 7 = Σ Xi *p(Xi) = 48 Friday, 15 July 2022 Investment Planning & Asset Management

Let us practice one more question • You are thinking of some shares of ABC Ltd . The rate of return expectations are as follows:- Possible Returns Probability 0.05 0.20 0.10 0.40 0.08 0.10 0.11 0.30 Friday, 15 July 2022 Investment Planning & Asset Management

Let us practice one more question • Compute the expected Return E (R ) on the investments . • Answer: - Expected Return E(R) = (0.20) (0.05) + (0.4)(0.1)+ ( 0.10) (0.08) + (0.3)(0.11) • E(R) = 0.091 = 9.1% Friday, 15 July 2022 Investment Planning & Asset Management

Types of Return from Common Stock • Some companies do not pay dividends, choosing to reinvest all net profits back into the company to fund more growth. • Similarly, some companies, especially those that are mature, do not provide much growth, but do pay regular dividends Friday, 15 July 2022 Investment Planning & Asset Management

Types of Return from Common Stock Dividends • Surplus profits that a company does not want to reinvest into its own growth typically are paid to shareholders as cash dividends. • Dividends are normally paid in cash (and, therefore, the term dividends implies cash dividends). • Sometimes, however, a company may declare bonus shares and shareholders get additional shares Friday, 15 July 2022 Investment Planning & Asset Management

Dividend Payout Ratio • The dividend payout ratio is the amount of dividends paid to stockholders relative to the amount of the company’s net income. • Dividend payout ratio= Dividends/Net Income • For example, a company that has net income of Rs.100,000 and pays Rs.10,000 dividends to shareholders, has a 10% dividend payout ratio: • ������������������������������������������������ ������������������������������������ ������������������������������ = 10,000 = 10% 100,000 Friday, 15 July 2022 Investment Planning & Asset Management

More about Equity Dividends Dividend Dates • Dividends can provide a big part of a stock’s value and return. As such, it is important to know the four key dates related to dividend payments. • Declaration date – when the board of directors declares a dividend • Distribution date – when the dividend is paid • Record date – when the corporation closes its books and identifies shareholders of record (i.e., those who own shares of the stock and will receive the dividend) • Cum- Div/Ex-dividend date – a few days prior to(Cum Div) or after, the record date (Ex-Div) . Investors who purchase shares on or after the ex-dividend date do not receive the scheduled dividend. Friday, 15 July 2022 Investment Planning & Asset Management

More about Stocks Stock Splits • When a company wants to increase its number of shareholders, but its stock price has grown too high to be appealing, its board of directors may authorize a stock split. • A stock split (which must be approved by shareholders) reduces the price of each share of stock, thereby making it easier and more appealing for investors to buy shares. But because the split increases the number of shares outstanding, it does not change the total value nor does it impact the ownership interest of current shareholders. Friday, 15 July 2022 Investment Planning & Asset Management

Stock Splits Stock Splits • Example of a 1 for 2 stock split Before Split 1:2 After Split Result 1000 shares of =1000*2 2000 Increase in number of shares Rs.100 each = 100/2 Rs.50 each Price decreases = Rs.1,00,000 = Rs.1,00,000 Total Value remains same Friday, 15 July 2022 Investment Planning & Asset Management

Reverse Stock Splits Reverse Stock Splits • A reverse stock split is a type of corporate action which consolidates the number of existing shares of stock into fewer, proportionally more valuable, shares. The process involves a company reducing the total number of its outstanding shares in the open market, and often signals a company in distress. • A reverse stock split divides the existing total quantity of shares by a number such as five or ten, which would then be called a 1-for-5 or 1-for- 10 reverse split, respectively. A reverse stock split is also known as a stock consolidation, stock merge or share rollback and is the opposite exercise of stock split, where a share is divided (split) into multiple parts. Friday, 15 July 2022 Investment Planning & Asset Management

Example of Reverse Stock Split • A share price of XY Ltd is Rs.20 per share. • It will split share in the proportion of 5:1 • 5 shares will be consolidated into 1 and one share will now cost Rs.100 • Number of outstanding shares will decrease in the books of company Friday, 15 July 2022 Investment Planning & Asset Management

Goal Specific Asset Allocation • When a need can be expressed in terms of the sum of money required and the time frame in which it would be needed, we call it a financial goal. • When a financial goal is set, its monetary value and the future date on which the money will be required is first defined. • This goal definition indicates the amount of investment value that needs to be generated on a future date. • It is normal to include assumptions for expected inflation rate while defining a future goal. Then the return that the portfolio should generate to achieve the targeted sum can be ascertained, after understanding how much the investor can save for the goal. Friday, 15 July 2022 Investment Planning & Asset Management

Goal Specific Asset Allocation • Short Term Goals (0 to 2 years) Investment in Fixed Income/Debt • Medium Term Goals (2 to 5 years) Mixture of Equity and Debt • Long Term Goals (More than 5 years) All in Equity Friday, 15 July 2022 Investment Planning & Asset Management

Asset Allocation Changes when Approaching Goals • Change in goals can alter the asset allocation. For example, when one nears a goal, it is better to move to safer assets like debt. • Time-horizon investing is all about planning. You need to think about your goals. Once you have done that, investment selection is based on the amount of time you have until the goal must be funded. • As the funding date approaches, assets are shifted to move conservative investments to reduce the risk of market-related losses derailing your strategy. However, associated fees need to be considered when choosing the mix of investments. • The term to the goal changes every day and a long term financial goal becomes a short term goal as the time to the goal comes closer. Investments made for the goal have to be monitored and switched from growth assets to liquid assets so that the funds can be accessed when required. Friday, 15 July 2022 Investment Planning & Asset Management

Let us understand with example • Raman is investing for education of his daughter • Money is required after 15 years • Present cost of education is Rs.30,00,000 • Inflation is 6% p.a. • Amount required after 15 years will be Rs. 72 Lakhs (appr) • Money will be invested per month for 13 years in Equity MF • Last two years accumulated money will be shifted to Debt (Safe) Friday, 15 July 2022 Investment Planning & Asset Management

Selection of Asset Mix According to Client’s Goals • Asset classes differ in their risk-return features. • Equity is a growth-oriented, long-term investment. The major source of return from equity is capital appreciation over time. • Debt is an income-oriented investment, which provides regular income to the investor. The scope for capital appreciation is limited in debt. • Equity offers higher long-term returns as compared to debt, but in the short term its returns tend to be volatile. • Cash and its equivalents are used to invest short-term surpluses and offer capital protection, but a low level of return. Friday, 15 July 2022 Investment Planning & Asset Management

Equity Valuation Methods • Dividend Yield = Dividend per share / Market Price per share • In the absence of any capital gains, the dividend yield is the return on investment for a stock. • Lower the dividend yield, greater the growth potential & Vice Versa. • AB Ltd has declared a dividend of Rs.10 per share • Raman purchased 100 shares at face value of Rs.100 • Saman purchased 100 shares by paying Rs.120 per share • Current Price of share is Rs.130 • Dividend yield for Raman= 10/100*100= 10% • Dividend yield for Saman= 10/120*100= 8.33% Friday, 15 July 2022 Investment Planning & Asset Management

Earning per share • Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. Friday, 15 July 2022 Investment Planning & Asset Management

Numerical to understand EPS • ABC Ltd has After tax income income of Rs.15,00,000 • Dividend for Preference shareholders= Rs.3,00,000 • Number of outstanding Equity shares= 100000 • EPS= 1500000-300000/100000 • = Rs.12 • EPS= Rs.12 Friday, 15 July 2022 Investment Planning & Asset Management

Evaluating Share Investment • You can make more informed decisions on which shares to buy or sell by looking at some financial ratios. • It is also possible to download the stock quotes from the websites of some investment magazines as well. In addition to these details, newspapers give details such as P/E, 52-week high/low, dividend yield etc. • The 52-week high and low show the highest and lowest price at which the particular share traded during the year. Similarly, the Day’s high and low show the highest and lowest price at which the share traded during the day. Friday, 15 July 2022 Investment Planning & Asset Management

Price Earning Ratio • The price earnings (P/E) ratio is calculated by dividing the market price of an ordinary share by the earnings per share. • This ratio is most often used as a relative measure, with investment decisions being made according to the level of a company‘s P/E ratio relative to that of other companies in the same sector or market. Friday, 15 July 2022 Investment Planning & Asset Management

Price earning ratio • It is a valuation ratio of a company's current share and its per share earnings It is a valuation ratio of a company's current share price and its per share earnings. It is also known as \"price multiple\" or \"earnings multiple\". EPS may be calculated based on: • Historic data (generally from the last four quarters) i.e. Trailing P/E or • Expected data (generally estimates of earnings expected in the next four quarters) i.e. • Projected or Forward P/E. • Higher the P/E, greater the growth potential & Vice Versa Friday, 15 July 2022 Investment Planning & Asset Management

Few P/E Ratios Sr Company Last Price Change % Chg EPS * P/E 1.44 43,572.50 1 Piramal Enter 2,614.35 15.35 0.06 7,230.00 0.01 4,650.00 2 Vintage Coffee 72.30 1.85 0.01 0.01 4,130.00 46.50 -0.60 0.01 0.01 3,190.00 3 Medi-Caps 41.30 -0.30 0.03 0.01 2,070.47 31.90 0.00 1.46 1.79 2,039.44 4 Deep Energy 3,706.15 76.35 53.96 0.09 Res 183.55 -6.50 0.09 1,950.00 0.02 1,948.75 5 ETT 0.04 1,925.00 6 V-Mart Retail 0.05 7 Brightcom Group 8 The Indian Wood 39.00 1.60 0.64 9 L&T Finance 77.95 10 FMraidxaiym, 1u5s JIunltyer2n0a22 96.25 -0.30 0.04 -2.15 Investment Plannin0g.2&5Asset Management

How to take decision of buying costly stocks • If these stocks are so expensive, is it worth buying them? Yes and No. • Yes, because they represent high quality companies. • No, because they may yield minimal returns if bought at current price levels. Friday, 15 July 2022 Investment Planning & Asset Management

Market P/E Ratios - Undervalued or Overvalued Markets • The P-E multiple tells us how many times the earnings per share we are paying for purchasing the shares at the present market price. So, for calculating P-E multiples, we need to know two things—the present market price of the shares and the earnings per share, or EPS. • Getting the present market price quoted at the stock exchanges is easy, but calculating EPS requires some exercise. • For calculating EPS, you first need to know the net earnings of the company. Analysts generally take the net earnings from the most recent four quarters, or 12 months, to calculate what is known as trailing EPS. Friday, 15 July 2022 Investment Planning & Asset Management

Undervalued and Overvalued shares • Some shares with higher P-E multiples may still be undervalued and some at even low levels may be overvalued. • It all depends upon the company you are looking at. The companies with higher P/E multiples may be considered undervalued if the growth in the company is higher than the P/E multiples. • As a thumb rule, you need to compare the P-E multiple of the company with that of peer group companies in the same sector or industry. But, this may also not give you the true picture if the sector, as a whole, as been overpriced by the market Friday, 15 July 2022 Investment Planning & Asset Management

Security Valuation- Dividend Discount Model (DDM) (Valuation of a share) • Valuation of shares is not as straight forward as the valuation of interest-bearing securities for three reasons: 1) Expected dividends not known. 2) Shares have no maturity date. 3) Required rate of return is not easy to find • Note that the purpose of the following consideration of valuation is not to arrive at a figure, for example, a market price. • The purpose is to gain an understanding of what determines the value of a share so that an investor can concentrate on the relevant determinants of value and find out the intrinsic worth of a share. Friday, 15 July 2022 Investment Planning & Asset Management

Estimating present value of a share (Dividend Discount Model) • The value of a share to its owner is the cash flow that it generates. This normally takes the form of cash dividends. • Being received over time, these cash dividends can be evaluated using discounted cash flow (DCF) procedures. • The stream of cash dividends into perpetuity will have a present value, which is found by discounting the dividends at an appropriate discount rate. This process can be represented in the following equation: Friday, 15 July 2022 Investment Planning & Asset Management

Intrinsic Value/Present Value of a share P0 is the present value of the share/Intrinsic Value D1, D2, D3 ... are the share’s expected future dividends i is the discount rate, assumed constant in each future period, derived from a number of factors such as interest rates and inflation. It can be taken to represent the return on investment required by investors Friday, 15 July 2022 Investment Planning & Asset Management

Example of computing PV • PQ has given Rs.3 per share as current year’s dividend • Dividend is expected to grow @ 5% p.a. • Sonam has invested Rs.100000 in the stock and paid Rs.50 per share and wishes to hold it for 3 years • After 3 years, she expects to sell it at Rs.80 per share • Compute the PV/Intrinsic Value of share if she expects to get a return of 12% p.a. Friday, 15 July 2022 Investment Planning & Asset Management