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TABLE OF CONTENTS
1. Introduction.2 Scope...3
Research Methodology.4
2. Review of Literature......................................................................5
Types of Risk..5
Factors Affecting Risk Profile...
Risk Profiling...!
3. Ris !rofi"e Se#$entation."#
Reco$$ended Asset Allocation"4
%. Ana"&sis of 'uestionnaire Res(onse."5
Risk Profile seg$entation %y analysis &aria%les."5
). !ortfo"io Construction2"
Modern Portfolio Theory.2" 'n&est$ent Risk Pyra$id23
Portfolio (onstr)ction..2
(o$parison of 'nde* F)nds...34
*. Findin#s and Li$itations of Stud&..35
+. Anne,ure3!
+)estionnaire3!
-. Bi"io#ra(/&..44
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INTRO0CTION
Foot,ear is the prod)ct to protect h)$an feet fro$ effects of all %iological da$ages.
Foot,ear ind)stry is age old traditional ind)stry in 'ndia and it has %een changed
str)ct)rally into different seg$ents like cas)al-,ears dress-,ears and sports,ear. /e,
seg$ent is e$erging for $edical p)rposes as $edical-,ear like dia%etic foot,ear. Many
co$panies )se to concentrate different seg$ent like $en0s-,ear ,o$en0s-,ear and
children0s-,ear separately. Foot,ear ind)stry has %een gi&ing considera%le a$o)nt of
e$ploy$ent to the nation especially ,eaker sections and $inority sections of society in
'ndia. Pop)lation gro,th e*ports do$estic $arkets are the factors of e*pansion of
foot,ear ind)stry and creation of e$ploy$ent opport)nities in this sector. This case
st)dy re&eals the prod)ction capacities str)ct)re of ind)stry e*ports gro,th glo%al
i$ports per capita cons)$ption and esti$ates of f)t)re re1)ire$ents of h)$an
reso)rces in foot,ear ind)stry in 'ndia.
CONCENTRATION OF FOOTEAR IN0STR IN IN0IA4The $aor prod)ction of
foot,ear $an)fact)ring concentrated in these centers.
Ta$il /ad) - (hennai A$%)r Ranipet aniya$%adi Trichy indig)l
Maharashtra M)$%ai
6est 7engal 8olkata
9ttar Pradesh - 8anp)r Agra : /oida
P)na% ;alandhar )rgaon Panchk)la and 8arnal
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elhi and S)rro)ndings
5ICRO6 S5ALL 7 5E0I5 ENTER!RISES IN IN0IAN FOOTEAR SECTOR
According to Micro S$all : Medi)$ ?nterprises >o&ern$ent of 'ndia esti$ates that
there are 2#4@3 )nits registered as ,orking enterprises ,ith e$ploy$ent of 4"
people ,ith the net ,orth of Rs. 33. crores in $icro s$all : $edi)$ enterprises in
'ndia. These )nits are ha&ing Rs.3." crores in Plant and Machinery in&est$ent and
Rs.23244 crores in fi*ed assets and >ross o)tp)t of Rs.@##!. crores. All these
)nits are $an)fact)ring all kinds of foot,ear like leather non-leather and other types of
foot,ear. These )nits had the ".3" percentage in the total 'ndian )nits of "5@34
B"##CD in $icro s$all : $edi)$ enterprises in 'ndia. E"
!RO0CTION CA!ACITIES OF IN0IAN LEAT8ER IN0STR4As per (o)ncil for
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5ass 5aret Target price of Rs."!5-## is do$inated %y 7ata and
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="I There is no relationship %et,een in&estorHs portfolio and risk-tolerance.
Researc/ 5et/odo"o#&
The report has %een co$piled on the %asis of secondary data so)rces fro$ %ooks and
literat)re. internet ,e%sites like /S? 7S? and in&estopedia.co$ etc. for risk profile
seg$entation etc.
Risk Profiler in&est$ent portfolios $anage$ent $odern portfolio theory etc. ha&e %een
collected fro$ the infor$ation like ?7S(J >oogle Scholar a&aila%le on the internet
&alidated fro$ &ario)s recogniKed ,e%sites like /S? S?7' 7S? 'n&estopedia.
Technical %ooks ha&e %een st)died along ,ith $any research papers on the s)%ect
fro$ ?7S(J and >oogle Scholar.
Steps follo,ed for the research ,ork on the proect ,ork are as follo,sI
"D Re&ie, of earlier research papers on risk profiling and seg$enting the c)sto$ers
%ased on risk profile.
2D esign of 1)estionnaire for assessing the risk profile of the indi&id)als.
3D esign 1)estionnaire to capt)re the in&est$ent details for indi&id)al in percentage
ter$s Bas people are not co$forta%le sharing the a%sol)te in&est$ent n)$%ers.
4D (o$pare the c)rrent asset allocation ,ith the reco$$ended asset allocation for the
in&estors.
5D Reco$$end portfolio co$%inations of &ario)s asset for the )ser %ased on $)t)al
f)nds inde* f)nds de%t f)nds and retire$ent f)nds.
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f)t)res that are iss)ed ,ithin a partic)lar co)ntry. This type of risk is $ost often seen in
e$erging $arkets or co)ntries that ha&e a se&ere deficit.
Forei#n:E,c/an#e Ris- 6hen in&esting in foreign co)ntries yo) $)st consider the
fact that c)rrency e*change rates can change the price of the asset as ,ell. Foreign-e*change risk applies to all financial instr)$ents that are in a c)rrency other than yo)r
do$estic c)rrency.
Interest Rate Ris : 'nterest rate risk is the possi%ility that a fi*ed-rate de%t instr)$ent
,ill decline in &al)e as a res)lt of a rise in interest rates. 6hene&er in&estors %)y
sec)rities that offer a fi*ed rate of ret)rn they are e*posing the$sel&es to interest rate
risk. This is tr)e for %onds and also for preferred stocks.
Ta,ai"it& Ris : This applies to $)nicipal %ond offerings and refers to the risk that a
sec)rity that ,as iss)ed ,ith ta*-e*e$pt stat)s co)ld potentially lose that stat)s prior to
$at)rity. Since $)nicipal %onds carry a lo,er interest rate than f)lly ta*a%le %onds the
%ond holders ,o)ld end )p ,ith a lo,er after-ta* yield than originally planned.
Ca"" Ris : (all risk is specific to %ond iss)es and refers to the possi%ility that a de%t
sec)rity ,ill %e called prior to $at)rity. (all risk )s)ally goes hand in hand ,ith
rein&est$ent risk disc)ssed %elo, %eca)se the %ondholder $)st find an in&est$ent
that pro&ides the sa$e le&el of inco$e for e1)al risk. (all risk is $ost pre&alent ,hen
interest rates are falling as co$panies trying to sa&e $oney ,ill )s)ally redee$ %ond
iss)es ,ith higher co)pons and replace the$ on the %ond $arket ,ith iss)es ,ith lo,er
interest rates. 'n a declining interest rate en&iron$ent the in&estor is )s)ally forced to
take on $ore risk in order to replace the sa$e inco$e strea$.
Inf"ationar& Ris :Also kno,n as p)rchasing po,er risk inflationary risk is the chance
that the &al)e of an asset or inco$e ,ill %e eroded as inflation shrinks the &al)e of a
co)ntryHs c)rrency. P)t another ,ay it is the risk that f)t)re inflation ,ill ca)se the
p)rchasing po,er of cash flo, fro$ an in&est$ent to decline. The %est ,ay to fight this
type of risk is thro)gh apprecia%le in&est$ents s)ch as stocks or con&erti%le %onds
,hich ha&e a gro,th co$ponent that stays ahead of inflation o&er the long ter$.
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Li=uidit& Ris :
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BdD 'ndi&id)als e$ployed in professional occ)pations are $ore risk tolerant than those
e$ployed in non-professional occ)pations.
BeD Self-e$ployed indi&id)als are $ore risk tolerant than those e$ployed %y others.
BfD =igh inco$e earners are $ore risk tolerant than lo,er inco$e earners.
BgD 6hites are $ore risk tolerant than non-6hites.
BhD 'ndi&id)als ,ith higher attained ed)cational le&els are $ore risk tolerant than those
,ith lo,er le&els of attained ed)cation.
Source: Investor Risk Tolerance: Testing the efficacy of demographics as differentiating
and classifying factors. By john e. Grable
Ris !rofi"in#
Risk profiling is a process for finding the opti$al le&el of in&est$ent risk for yo)r client
considering the risk re1)ired risk capacity and risk tolerance ,here
N Risk re1)ired is the risk associated ,ith the ret)rn re1)ired to achie&e the client0s
goals fro$ the financial reso)rces a&aila%le
N Risk capacity is the le&el of financial risk the client can afford to take and
N Risk tolerance is the le&el of risk the client is co$forta%le ,ith.
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Risk re1)ired and risk capacities are financial characteristics calc)lated )sing financial
planning soft,are. Risk tolerance is a psychological characteristic ,hich is %est
deter$ined %y ,ay of a psycho$etric test.
Risk profiling re1)ires each of these characteristics to %e separately assessed so that
they can %e co$pared to one another. Risk capacity and risk tolerance %oth act
separately as constraints on ,hat yo)r client $ight other,ise do to achie&e their goals
Brisk re1)iredD. 't is )n)s)al for a client to %e a%le to achie&e their goals fro$ the
reso)rces a&aila%le ,ithin %oth their risk capacity and risk tolerance.
6here a $is$atch %et,een risk re1)ired risk capacity and risk tolerance has %een
fo)nd the ad&isor0s role is to g)ide the client thro)gh the trade-off decisions that are
re1)ired to reach an opti$al sol)tion.
The final step in the risk profiling process is to ens)re that the client has realistic risk
and ret)rn e*pectations so that the ad&isor can %e gi&en the clients properly infor$ed
consent to i$ple$ent the in&est$ent strategy.
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9nlike risk re1)ired and risk capacity ,hich are financial para$eters risk tolerance is a
psychological para$eter. Risk tolerance is ho, an indi&id)al feels a%o)t taking risk.
6here does the person strike the e$otional %alance %et,een seeking a fa&ora%le
o)tco$e &ers)s risking an )nfa&ora%le o)tco$eO
Risk tolerance is a psychological trait - a relati&ely end)ring ,ay one indi&id)al differs
fro$ another.
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Most conser&ati&e in&estors ,ant their portfolios to pro&ide the$ ,ith an inflation-
ad)sted inco$e strea$ to pay their li&ing e*penses. TheyHre either c)rrently depending
on their in&est$ents to gi&e the$ a retire$ent paycheck or are e*pecting this to
happen soon. So$e are on tight %)dgets and are %arely $aking a li&ing as it is so they
are &ery afraid of losing ,hat little $oney they ha&e left. They do not ha&e ti$e to
reco)p any losses.
The $aority of their $oney sho)ld %e held in cash and high-1)ality short- and
inter$ediate-ter$ $at)rity %onds. ery risky asset classes are typically a&oided
altogether.
So the in&est$ents $ost desired %y (onser&ati&e in&estors are the ones that lose the
$ost &al)e fro$ inflation Be.g. fi*ed ann)itiesD. 'n this case the potential for the large
loss of no$inal R)pees Bho, $any r)pees one has relati&e to ho, $any they started
,ithD is lo, %)t the loss of real r)pees Bthe inflation-ad)sted ,orth of those r)peesD is
g)aranteed. This is ca)sed %y the loss of p)rchasing po,er d)e to the prices of
e&erything in their fa$ily %)dget going )p.
(ash Bsa&ings acco)nts $oney $arket f)nds and FsD $ost al,ays lose real &al)e
o&er ti$e %eca)se of the co$%ined effect of ta*es and inflation. There isnHt $)ch one
can do if this happens e*cept to ha&e e*pos)re %eforehand to asset classes that
%enefit ,hen inflation increases Breal estate and tangi%le G co$$odity-%ased $)t)al
f)nds like the precio)s $etals and energy sectorsD. The catch is $ost of these are the
sa$e asset classes that are )s)ally $ini$iKed %eca)se theyHre Ltoo riskyL or donHt
pro&ide a reasona%le inco$e yield.
5oderate"& Conservative4'f a ,orried in&estor can tolerate a little $ore risk than the
(onser&ati&e in&estor %)t still is ad&erse to large short-ter$ do,nside fl)ct)ations and
,ants a little $ore ret)rn ,ith a little less inco$e then this is the category for the$.
The typical in&estor in this category is either retired or getting their paycheck fro$
portfolio inco$e soon to %e retired. These folks ,ant to %e protected so$e,hat fro$
large do,nside $arket fl)ct)ations and are ,illing to not f)lly-participate ,hen $arkets
rally )p,ards to get it.
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'nfor$ed in&estors realiKe that if their life e*pectancy is $ore than a decade then
ha&ing e*pos)re to in&est$ents that increase in &al)e is needed to pro&ide ade1)ate
inco$e in the later years. These folks ,ant to %e protected so$e,hat fro$ large
do,nside $arket fl)ct)ations and are ,illing to not f)lly participate ,hen $arkets rally
)p,ards to get it.
This is achie&ed %y ha&ing a significant e*pos)re to fi*ed inco$e sec)rities se&eral
different types of stocks real estate and tangi%le co$$odities that so$e,hat track
inflation. (ore e1)ity asset classes are )sed %)t &ery risky asset classes are still held
to a $ini$)$.
5oderate4The $aority of in&estors are in this $iddle-of-the-road category. The $ost-
co$$on is the desire to in&est long-ter$ for retire$ent or child ed)cation or drea$
ho)se. The c)rrent need for portfolio-generated inco$e is )s)ally se&eral years
a,ay.These in&estors ,ant good ret)rns and kno, theyHre taking so$e risk to get
the$. They sho)ld e*pect ret)rns si$ilar to a %asket of si$ilarly ,eighted $arket
indices. Their portfolio sho)ld go )p less than the $arkets as a ,hole %)t sho)ld also
go do,n less ,hen $arkets go do,n.
A Moderate portfolio ,ill hold a %alanced $i* of $ost all-$aor &ia%le asset classes Bfor
$a*i$)$ di&ersificationD ,hich ,ill incl)de conser&ati&ely-$anaged %ond f)nds as ,ell
as high-risk stock f)nds. This category typically )ses the largest n)$%er of asset
classes to %oth red)ce risk and increase profits. 7oth safe and risky asset classes are
)tiliKed prag$atically. 7alance %et,een profits and loss red)ction is the goal.
They kno, they ,ill lose $oney if the $arkets go do,n %)t also e*pect to %e along for
the ride if they go )p.
Moderate in&est$ent portfolios are )s)ally co$pared to the S:P 5## to see ho, ,ell
theyHre doing. 6hen the S:P 5## is going )p it sho)ld %e )p a little $ore than aModerate in&est$ent portfolio Bif itHs &ery ,ell $anagedD. 6hen the S:P 5## is do,n
the Moderate portfolio sho)ld %e do,n less.
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5oderate"& A##ressive4 'f an in&estor ,ants to o)tperfor$ a %asket of si$ilarly
,eighted indices ,hen the $arkets are )p and doesnHt $ind too $)ch %eing do,n a
little $ore than the $arkets ,hen they are do,n then this is the category for the$.
They are taking on $ore do,nside risk than the $arkets %)t e*pect to %e s)%stantiallyahead of the ga$e ,hen $arkets go )p. Fi*ed inco$e positions are $ini$iKed and
risky asset classes are f)lly )tiliKed. Most of the %ond and international stock $)t)al
f)nds in this portfolio are aggressi&ely-$anaged.
These in&estors ,ant to take the risks of ,inning the ga$e %y playing hard offense %)t
still donHt ,ant to lose too $)ch in a short period of ti$e. Most Moderately Aggressi&e
in&estors ,ant to acc)$)late a significant a$o)nt of ,ealth in the f)t)re are ,illing to
,ait a significant a$o)nt of ti$e for the re,ards Band to reco)p short-ter$ lossesD and
ha&e earned-inco$e to contri%)te to the portfolio o&er ti$e.
They kno, they ,ill lose a high percentage of their $oney if the $arkets go do,n B$ore
than the S:P 5##D %)t also e*pect to profit greatly if they go )p. More e$phasis is p)t
on $aking $oney than pre&enting the loss of $oney.
A##ressive4These in&estors ,ant to s)%stantially o)tperfor$ the $arkets and Bsho)ldD
kno, they are e*posed to $)ch $ore risk than the $arkets. They co)ld easily lose )p
to 4#C of their portfolio &al)e in a fe, $onths and it $ay take years if e&er to reco)pthese losses.
These in&estors typically hold $ostly gro,th s$all-cap and sector $)t)al f)nds Bor
stocks or ?TFsD. Any fi*ed-inco$e $)t)al f)nds in the portfolio are a s$all percentage
of the portfolio and also are of the riskier types that are aggressi&ely-$anaged.
The p)rpose of any cash held is to handle any )ne*pected ,ithdra,als and to take
ad&antage of percei&ed %)ying opport)nities.
Aggressi&e in&estors are typically yo)nger BThe 'n&inci%leD and intend to contri%)te
relati&ely large a$o)nts into the portfolio periodically o&er ti$e &ia contri%)tions co$ing
fro$ earned-inco$e.
Most aggressi&e in&estors either ,ant to acc)$)late s)%stantial ,ealth in the f)t)re
are in a h)rry ha&e eno)gh inco$e fro$ other so)rces to f)nd their li&ing e*penses
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andGor ha&e plenty of ti$e to ,ork and reco)p losses. So$e )st $ay ha&e not yet
personally e*perienced significant losses in the $arkets so their %ra&ery )s)ally ends
)p %eing their o,n do,nfall.
They sho)ld kno, they ,o)ld lose a &ery high percentage of their $oney if the $arketsgo do,n %)t also e*pect to profit greatly if they go )p. Most all e$phasis is p)t on
$aking $oney and little other than the di&ersification %enefits of )sing $)t)al f)nds
,ith asset allocation is )sed in pre&enting the loss of $oney.
Reco$$ended Asset A""ocation
Score (lient Risk Profile Reco$$ended Asset Allocation
?1)ity C e%t C
2""-25# ery Aggressi&e 'n&estor !#-"## #-2#
"@@-2"# Aggressi&e 'n&estor @#-!# 2#-4#
"@5-"2" Moderate 'n&estor 4#-@# 4#-@#
@-"2# (onser&ati&e 'n&estor 2#-4# @#-!#
5-34 (a)tio)s 'n&estor #-2# !#-"##
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ANALSIS OF 'ESTIONNAIRE RES!ONSETota" Res(ondents4 12@
".Seg$entation of respondents %ased on risk profile
AnalysisI !#C of respondents are Moderate risk takers.
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2.Risk Seg$entation %y Marital Stat)s.
AnalysisI Married people are lo, risk takers co$pared to single people.
3.Risk Seg$entation %y >ender
Analysis I Fe$ales are less risk taking co$pared to $ales. Fe$ales are $ore inclinedto Moderate risky in&est$ent.
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4. Risk Seg$entation %y ho)se o,nership at place of ,ork.
There is not any difference %et,een risk profile and ho)se o,nership.
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Maority of in&estors are sa&ing for retire$ent follo,ed %y child ed)cation and
then rea$ ho)se.
Sa&ing for Retire$ent and children ed)cation sho,s the lack of social sec)rity in'ndia and people tend to plan for the$ in ad&ance.
Another $aor in&estor seg$ent is sa&ing )st for ta* sa&ing ,itho)t any specific
goal in $ind.
BEST IN
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More than 5#C of 'n&estor considers property as the %est for$ of in&est$ent.
Invest$ent of Sa"ar&
E=uit& Invest$ent & Ris se#$ent
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Retire$ent Fund Invest$ent & Ris Se#$ent
0et fund invest$ent & Ris Se#$ent
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Invest$ent Ti$efra$ewor
5O0ERN !ORTFOLIO T8EOR
Modern Portfolio Theory atte$pts to $a*i$iKe e*pected portfolio ret)rn for a gi&en
a$o)nt of portfolio risk Bor e1)i&alently to $ini$iKe risk for a gi&en le&el of e*pected
ret)rnD %y caref)lly choosing the proportions of &ario)s asset classes in the portfolio.
MPT ga&e rise to the idea of an efficient frontier ,here the frontier represents the
opti$al riskGret)rn relationship. For retail in&est$ent ad&ising this $eant that ad&isors
needed to %e a%le to B"D offer portfolios that ,ere on or close to the efficient frontier and
B2D deter$ine ,here on the efficient frontier a partic)lar in&estorHs portfolio sho)ld
appropriately %e positioned.
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Efficient Frontier The le&el of risk associated ,ith that ret)rn is kno,n as the risk
re1)iredQ. 'n ter$s of the efficient frontier portfolio selection %ased on risk re1)ired can
%e en&isaged as follo,s -
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Identif&in# and Reso"vin# 5is$atc/es
Mis$atches are co$$on. Anecdotally in a%o)t @#C of cases there is no in&est$ent
strategy that ,ill achie&e the client0s goals B,ith the desired risk capacityD ,here the risk
is consistent ,ith risk tolerance - an )ndershoot. 'n a f)rther 3#C of casesrisk re1)ired
risk capacity and risk tolerance are $ore or less in line.
'n the re$aining "#C of cases the risk re1)ired to achie&e the client0s goals B,ith the
desired risk capacityD is less than risk tolerance - an o&ershoot.
9ndershoots are co$$on %eca)se ,e tend to %e o&erly opti$istic a%o)t o)r f)t)res.
F)rther ,e are inclined to o&er,eight the present as against the f)t)re and to
)nderesti$ate the $onies that ,ill %e re1)ired to f)nd retire$ent. 'n si$ple ter$s gi&en
the reso)rces ,e ha&e a&aila%le ,e ha&e o&erly a$%itio)s goals.
'n %oth )ndershoot and o&ershoot sit)ations trade-off decisions ,ill %e re1)ired.
=o,e&er an )ndershoot is the $ore diffic)lt of the t,o %eca)se here the trade-off
decisions ,ill re1)ire the client to gi&e so$ething )p.
nders/oot 5is$atc/ for Ris To"erance
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IN
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Base of t/e !&ra$id The fo)ndation of the pyra$id represents the strongest portion
,hich s)pports e&erything a%o&e it. This area sho)ld consist of in&est$ents that are lo,
in risk and ha&e foreseea%le ret)rns. 't is the largest area and co$prises the %)lk of
yo)r assets.
5idd"e !ortion This area sho)ld %e $ade )p of $edi)$-risk in&est$ents that offer a
sta%le ret)rn ,hile still allo,ing for capital appreciation. Altho)gh $ore risky than the
assets creating the %ase these in&est$ents sho)ld still %e relati&ely safe.
Su$$it Reser&ed specifically for high-risk in&est$ents this is the s$allest area of
the pyra$id BportfolioD and sho)ld consist of $oney yo) can lose ,itho)t any serio)s
reperc)ssions. F)rther$ore $oney in the s)$$it sho)ld %e fairly disposa%le so that
yo) donHt ha&e to sell pre$at)rely in instances ,here there are capital losses.
5easurin# ris and returns in t/e custo$er (ortfo"io
A ,idely )sed approach to portfolio $anage$ent is the capital asset pricing $odel
B(APMD ,hich ,as de&eloped fro$ ,ork in the "@#s and "#s %y Sharpe
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consisting of the $arket risk pre$i)$ B$eas)red as the e*cess of e1)ity $arket o&er
gilt $arket ret)rnsD $)ltiplied %y the specific risk of that indi&id)al in&est$ent. For
e*a$ple if an in&estor can get a 5 per cent ret)rn %y in&esting in a 2#-year gilt and an
e*tra "# per cent %y in&esting in a stock $arket inde* f)nd the in&estor ,ill re1)ire a 2#
per cent ret)rn to in&est in a co$pany ,hich is 5# per cent $ore risky than the $arket
a&erage B5 percent B"# percent ".5DD.
ACC AN0 CSTO5ER RIS? :Since shareholder &al)e is only created ,here the
ret)rn on in&est$ent e*ceeds the ,eighted a&erage cost of capital B6A((D the forecast
free cash flo,s no, ha&e to %e ad)sted %y the 6A((. 6A(( is the tr)e cost of capital
of the %)siness. 't is calc)lated as the cost of de%t $)ltiplied %y the proportion of de%t
f)nding pl)s the cost of e1)ity $)ltiplied %y the proportion of e1)ity f)nding. The cost of
de%t is the co$pany0s c)rrent after-ta* %orro,ing rate the cost of e1)ity is )s)ally
calc)lated as the a$o)nt %y ,hich the ret)rn on e1)ities e*ceeds the ret)rn on long-
dated go&ern$ent sec)rities. This represents the additional co$pensation that stock
$arket in&estors de$and for in&esting their $oney in risky co$panies rather than in
safe gilts. The 6A(( is the real cost to co$panies of %orro,ing $oney fro$ the
financial $arkets if it then in&ests that $oney in de&eloping c)sto$er relationships the
ret)rns fro$ those c)sto$ers $)st %e greater than the cost of capital if shareholder
&al)e is to %e created. 6hen calc)lating the &al)e of a relationship ,ith a specific
c)sto$er seg$ent $any organiKations apply a corporate disco)nt rate to f)t)re cash
flo,s to deter$ine their net present &al)e. 9sing the act)al cost of capital Bthe 6A((D
to disco)nt f)t)re cash flo,s fro$ each seg$ent ,ill ho,e&er gi&e a tr)er pict)re of
the total &al)e of the c)sto$er portfolio than )sing a notional disco)nt rate.
The analogy %et,een the c)sto$er portfolio and the share portfolio can %e e*tended
still f)rther. So$e shares s)ch as those in technology or %iotechnology co$panies
are $ore risky than others. 'n the sa$e ,ay so$e c)sto$ers are $ore risky thanothers. Risk is defined as )nanticipated &olatility in ret)rns2! so the riskiness of a
seg$ent co)ld incl)de the risks of s)dden s,ings in %)ying patterns or a$o)nts
defection Bloss to a co$petitorD or e&en defa)lt. This co)ld lead a co$pany to o&er&al)e
certain c)sto$er seg$ents and perhaps to in&est disproportionate ti$e and reso)rces
in the$ ,hile other less capital intensi&e or less risky seg$ents are neglected. All other
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things %eing e1)al if t,o seg$ents ha&e the sa$e le&el of e*pected f)t)re ret)rns %)t
one is $ore risky the riskier seg$ent ,ill %e less &al)a%le to the co$pany. Therefore a
disco)nt rate higher than the 6A(( sho)ld %e )sed to reflect the higher risk attri%)ta%le
to that c)sto$er seg$ent. =o, $)ch higher the disco)nt rate sho)ld %e ,ill depend on
ho, risky that seg$ent is. So $anagers need to %e a%le to assess the risk of a
c)sto$er.
8O ELL 0OES !ORTFOLIO T8EOR FIT T8E CSTO5ER !ORTFOLIO
The )se of the risk-,eighting techni1)e can %e &ie,ed as a depart)re fro$ classic
portfolio theory in ,hich the specific risk of the indi&id)al asset is di&ersified a,ay. The
)stification for this approach is that the analogy %et,een the c)sto$er portfolio and the
$arket portfolio is i$perfect. For e*a$ple the ,eighting and therefore the i$pact of a
$aor seg$ent $ay %e s)%stantial $oreo&er di&ersification $ay not red)ce risk in the
c)sto$er portfolio since the co&ariance of ret)rns fro$ certain seg$ents $ight %e
positi&e not negati&e. This $ight co$e a%o)t ,hen t,o different seg$ents are in fact
related s)ch as certain $o%ile phone acco)nt c)sto$ers and a yo)nger pay-as-yo)-go
seg$ent. 'f the for$er seg$ent contains a high proportion of parents of the pay-as-yo)-
go seg$ent s,itching %eha&io)rs in %oth seg$ents $ight co-&ary.
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risk and ret)rn of the entire c)sto$er relationship. This in t)rn $ay s)ggest ne,
c)sto$er relationship $anage$ent strategies
!ortfo"io Construction
Portfolio (onstr)ction is all a%o)t in&esting in a range of f)nds that ,ork together to
create an in&est$ent sol)tion for in&estors. 7)ilding a portfolio in&ol&es )nderstanding
the ,ay &ario)s types of in&est$ents ,ork and co$%ining the$ to address yo)r
personal in&est$ent o%ecti&es and factors s)ch as attit)de to risk the in&est$ent and
the e*pected life of the in&est$ent.
There are t,o types of approaches for portfolio constr)ction.
"D Botto$:u( investin# :7otto$-)p in&esting often )sed %y indi&id)al pri&ate
in&estors typically starts %y choosing a $anager or f)nd they like only s)%se1)ently if
e&er considering ho, to constr)ct the portfolio as a ,hole. This ad hoc approach takes
no acco)nt of the in&estor0s o%ecti&e or risk profile. 'n addition st)dies of in&estor
%eha&io)r sho, that indi&id)al in&estors often chase top-perfor$ing in&est$ents or
f)nds %y ,hich ti$e the perfor$ance has already %een deli&ered ,hich leads $any to
lose $oney %y %)ying at the top and selling
at a loss.
2D To(:down Investin# :7y co$parison professional in&estors %egin %y e*ploring
in&est$ent risk and ,hat they need the in&est$ent to do for the$. They then ,ork
thro)gh a series of steps creating a fra$e,ork to decide ,hich types of in&est$ents
are needed. Jnly then do they choose indi&id)al f)nds or other in&est$ents. Planning a
portfolio %ased on risk tolerance and in&est$ent o%ecti&es gi&es yo) a %etter chance of
$eeting yo)r goals ,ithin a le&el of risk yo) are co$forta%le ,ith.
At a &ery general and si$plified le&el the top-do,n approach generally goes thro)gh
fo)r %road stagesI
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aD ecide ho, to allocate yo)r $oney %et,een the different types of in&est$ents
Basset allocationD.
%D (hoose ,here to in&est ,ithin each in&est$ent type.
cD ecide on the %alance %et,een acti&ely $anaged and inde* passi&e f)nds.
dD ?&al)ate indi&id)al f)nds and f)nd $anagers.
Sta#e 1 4 Asset A""ocation :The $ost i$portant decision ,hen constr)cting a portfolio
is asset allocation. This $eans $aking s)re yo)r portfolio has the right $i* of assets to
s)it yo)r indi&id)al circ)$stances in&est$ent ai$s and attit)de to risk.
Asset :An ite$ of &al)e incl)ding %onds stocks and other sec)rities cash or physical
ite$s s)ch as in&entory a ho)se or a car.
0iversificationcan red)ce risk. 'n order to red)ce yo)r risk yo) need to di&ersify that
is spread yo)r portfolio across a %road $i* of assets. 'n&est$ent $arkets $o&e in
different cycles reflecting the )nderlying strength of the econo$y ind)stry trends and
in&estor senti$ent. 'ndi&id)al assets also $o&e differently according to e*ternal factors.
So for e*a$ple d)ring hard econo$ic ti$es $any people ,ill stop %)ying l)*)ry ite$s
and co$panies that $ake the$ $ight e*perience a fall in sales %)t $akers of essential
ite$s like food $ay not. i&ersifying yo)r portfolio can help s$ooth o)t $arket )ps
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and do,nsI so ret)rns fro$ %etter perfor$ing assets help to offset those that aren0t
perfor$ing so ,ell.
Ba"ancin# ris and return : The concept of riskGret)rn s)ggests that lo, le&els of
in&est$ent risk ,ill res)lt in potentially lo,er ret)rns ,hile high le&els of risk ,ill
generate potentially higher ret)rns. Jf co)rse there are no g)arantees. 6hile increased
risk offers the possi%ility of higher ret)rns it also can lead to %igger losses. o)r ad&iser
can help yo) constr)ct a portfolio ,ith the potential to gi&e yo) the %est possi%le ret)rns
for a gi&en le&el of risk.
Avoid dan#erous fads : 9sing an asset allocation strategy helps free yo) fro$ the risk
of follo,ing te$porary in&est$ent fashions. ?&en professional in&estors so$eti$es get
their ti$ing ,rong follo,ing the herd into a te$porarily pop)lar asset or $arket that has
reached its top and $ay fall dra$atically. =a&ing a for$al strategy can help %y ens)ring
that yo)r portfolio stays %alanced.
Se"ect uncorre"ated assets : For effecti&e asset allocation professional in&estors often
seek to co$%ine assets that tend to do ,ell at different ti$es. A si$ple e&eryday
e*a$ple $ight %e ho, s)nscreen ,ill so$eti$es get disco)nted d)ring a cold s)$$er
,hile coats and ackets $ight %e $arked )p. At a si$ple le&el these t,o ite$s co)ld %e
said to %e )ncorrelated.
T/e $a;or asset c"asses
'n&est$ents are di&ided into different asset classes s)ch as e1)ities %onds
property and cash. These pro&ide the %asic %)ilding %locks of an in&est$ent
portfolio.
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The ta%le highlights the characteristics of the different asset classes and o)tlines ,ho
they $ay potentially %e s)ita%le for.
Asset C"ass ?e& C/aracteristics !otentia""& suita"e for
?1)ities Potential for capital gro,th and $ayoffer inco$e thro)gh the pay$ent ofdi&idends. o) can choose to in&estin 'ndia and o&erseas co$panies.
Medi)$-to-long-ter$in&estors Bfi&e years pl)sD.
7onds (an pro&ide a steady and relia%leinco$e strea$ ,ith potential forcapital gro,th and )s)ally offers ahigher interest rate or yield thancash. 'ncl)des 'ndian go&ern$ent%onds BgiltsD o&erseas go&ern$ent%onds and co$pany loans
Bcorporate %ondsD.
Short $edi)$ or long-ter$ in&estors.
Property Pro&ides the %enefits ofdi&ersification thro)gh access toproperties in retail office ind)strialto)ris$ and infrastr)ct)re sectors.o) canin&est in %oth 'ndia and internationalproperty.
Medi)$-to-long-ter$in&estors Bfi&e years pl)sD.
(ash May %e s)ita%le for short-ter$ needss)ch as an i$pending do,n pay$enton a ne, ho$e. 9s)ally incl)deshigher interest paying sec)rities as,ell as %ank and %)ilding societyacco)nts or ter$ deposits Ba cashdeposit at afinancial instit)tion that has a fi*edter$D.
Short-ter$ in&estors B)p to threeyearsD
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Sta#e 24 Su:asset a""ocation
Jnce o&erall asset allocation is decided The in&est$ent s)%-asset allocation needs to
decided that is ho, to di&ide yo)r $oney %et,een the s)%-assets or different kinds
of asset ,ithin each asset class.
Su:asset c"ass t&(es
?ach asset class co$prises of a %road &ariety of s)%-asset classes. For e*a$ple a
s)%-asset class ,ithin e1)ities $ight incl)deI large co$panies s$aller co$panies
gro,th f)nds inco$e f)nds and glo%al e1)ities.
"D Fund Dor (oo"ed fund :An in&est$ent &ehicle in ,hich in&estors co$%ine their
$oney in a pool ,hich then in&ests in a range of sec)rities. ?ach in&estor shares
proportionally in the f)nd0s in&est$ent ret)rns.
2D Asset c"asses : A category of assets in ,hich yo) can in&est s)ch as e1)ities
%onds property or cash. 'n&est$ents ,ithin an asset class ha&e si$ilar characteristics.
3D Securities : Freely trada%le assets that are 1)oted on an e*change incl)ding shares
%onds and deri&ati&es.
4D E=uit&>s/are :A share is a stake in the o,nership of a co$pany. Also kno,n as a
stock.
5D Bonds : A loan certificate iss)ed %y a go&ern$ent p)%lic co$pany or other %ody.
The iss)er agrees to repay the original a$o)nt %orro,ed after an agreed ti$e B,hen
the %ond $at)resD. 7onds )s)ally repay a fi*ed interest rate Bkno,n as the co)ponD
o&er a specified ti$e.
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@D Invest$ent 9rade onds : A %ond gi&en a relati&ely high rating %y the credit
agencies Bfro$ a $ini$)$ grade 777 )p to AAA as rated %y Standard : Poor0sD. 't
typically ai$s to offer higher e*pected ret)rns than go&ern$ent %onds as a re,ard for
taking on credit risk.
D 8i#/ &ie"d onds or ;un onds : 7onds rated 77 or lo,er on Standard : Poor0s
credit rating scale. These %onds tend to pay higher yields to offset their greater risk of
defa)lt Bthat is the %ond not %eing repaidD than ,ith in&est$ent-grade %onds.
Sta#e 34 Ba"ance active"& $ana#ed and !assive funds
!assive funds : Inde, Fundsdon0t try to pick indi&id)al sec)rities. 'nstead they
ai$ to reflect the perfor$ance of the $arket. They ,ork %y atte$pting to closely
track an inde* s)ch as the 7S? 'nde* f)nd /ifty 'nde* f)nds. 'nde* f)nds %)y
and hold rather than trade fre1)ently and re1)ire no analysts to research
co$panies they are $)ch cheaper to operate. 6hen yo) o,n all the stocks
that $ake )p a $arket yo)0ll earn )st a&erageQ ret)rns of all the stocks in that
$arket.
Active fundse$ploy $anagers to research and pick e1)ities or %onds in an
atte$pt to %eat the rele&ant inde* or $arket a&erage tho)gh in practice it is
diffic)lt to do o&er the long-ter$. Acti&e f)nds ha&e not deli&ered i$pressi&e
perfor$ance in long r)n. =igher e*penses associated ,ith acti&e $anage$ent
and the inherent diffic)lty of picking ,inning stocks consistently o&er long periods
of ti$e $eans that $ost f)nds that ai$ to %eat the $arket act)ally end )p %ehind
in the long r)n.
Advanta#es of Inde, funds over 5utua" funds
". 5arets Are Efficient. The inde*er %asically %elie&es that the $arket as a ,hole is &ery
good at 1)ickly pricing all the a&aila%le infor$ation a%o)t a stock or a $arket into the
$arket price Bi.e. efficient $arket hypothesisD. 't is therefore al$ost i$possi%le for a
gi&en $oney $anager to o)tg)ess the $arket consistently o&er a long period of ti$e.
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2. It Is
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Co$(arison of Inde, Funds
't0s possi%le to select a range of )ncorrelated acti&e and inde* f)nds in an effort to
red)ce o&erall portfolio &olatility.
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Source: erformance of !T"s and Inde# "unds: a comparative analysis on $S!%ebsite. &http:''%%%.nseindia.com'research'content'R()*(+ar,-).pdf/
.
FIN0IN9S
Actua" Asset A""ocation
9RO!IN9 0et E=uit& Tota"5atc/in# as (erreco$$endation
aggressi&e in&estor2@-4#C 2@-4#C 3
2@-4#C 4#-55C 2 Tota" ) @
conser&ati&e in&estor
2@-4#C U"# C ""
2@-4#C "# to 25 C 5
2@-4#C "# to 25 C 2
Tota" 1- +
$oderate in&estor
2@-4#C U"# C 2#
4#-55C U"# C 22
2@-4#C "# to 25 C "2
4#-55C "# to 25 C 2
2@-4#C 2@-4#C "2
4#-55C 4#-55C 4
Total + 1*Tota" Resu"t 12@
The analysis of the response data sho,s that 'ndian in&estors are $ore conser&ati&e
than s)ggested %y their risk profile. The in&estors are ,ary of in&esting in e1)ity and try
to a&oid it d)e to spec)lations. Jnly 23 o)t of "2# respondents are $atching e1)ity
allocation as per their risk profile.
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The $ain reasons for non-$atching of less e1)ity allocation are as follo,s
"D
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Low ris e=uit& invest$ents avai"a"e for Indian investors.
"D Inde, 5utua" funds As sho,n in the ta%le %elo, the (A>R of 'nde* $)t)al
f)nds is good. 5 year (A>R for 'nde* $)t)al f)nd is appro*i$ately C for /ifty
5# ,hen the $arkets ha&e crashed aro)nd "2C in last " year.
Fund Na$e Fund 8ouse Inde, Launc/ 0ateReturns
1 &r
D
2 &r
D
3 &r
D
)&r
D
Principal'nde* F)nd Principal M)t)al F)nd /ifty 5# Mar 2### -"3.3 "".4 !.3
9T' /ifty'nde* F)nd 9T' AM( Pri&ate
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'7' /ifty'nde* F)nd
'7' AssetManage$ent
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A!!EN0IG A
'uestionnaire
Ris !rofi"er
/a$e VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
"D o)r c)rrent age isI
Mark only one o&al.
)nder 3#
3# - 4#
4" - 5#
5" - @#
a%o&e @#
2D =o, $)ch do yo) depend on yo)r total inco$e for $eeting yo)r e*pensesO
Mark only one o&al.
U 25C
%et,een 25C 5#C
%et,een 5#C 5C
a%o&e 5C
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3D o) pro&ide financially s)pport toI
Mark only one o&al.
only yo)rself andGor ,orking spo)se
yo)rself and non-,orking spo)se
yo)rself non-,orking spo)se and " dependent
yo)rself ,orking spo)se children and parents
yo)rself non-,orking spo)se children and parents
yo)rself ,orking spo)se and children
4D o) are
(heck all that apply.
o,ner of yo)r drea$ ho)se
li&ing ,ith parents in inherited ho)se
o,n a ho)se for ,hich yo) pay ho$e loan
presently sa&ing to %)y a ho)se
>i&en o,n ho)se on rent
staying in rented ho)se
5D.o)r o%G%)siness in co$ing f)t)reI
Mark only one o&al.
$ay decrease s)%stantially
$ay decrease $oderately
,ill re$ain al$ost the sa$e
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,ill gro, $oderately
,ill gro, s)%stantially
@D. escri%e yo)r kno,ledge and e*perience a%o)t in&est$entsI
Mark only one o&al.
fa$iliar and e*perienced
not too fa$iliar %)t e*perienced
fa$iliar %)t not e*perienced
not fa$iliar and not e*perienced
D =o, $any years yo) think yo) can sa&e %efore yo)r financial goals ariseO
Mark only one o&al.
U 5 years
5 - "# years
W "# years
already eno)gh G $et
!D After yo) $ake an in&est$ent yo) typically feelI
Mark only one o&al.
preser&ing ,ealth
generating reg)lar inco$e to $eet c)rrent re1)ire$ents
%alance c)rrent inco$e and long ter$ gro,th
long ter$ gro,th
D 6hen yo) think of the ,ord LriskL ,hich of the follo,ing ,ord co$es to $ind firstO X
Mark only one o&al.
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thrill
opport)nity
)ncertainty
loss
"#D. 'f o&er a three-$onth period an in&est$ent yo) o,ned lost 2#C and the o&erall
stock $arket lost 2#C ,hat ,o)ld yo) %e $ost likely to doO
Mark only one o&al.
%)y $ore of the in&est$ent
do nothing ,ith the in&est$ent
,ait for the stock to regain the loss then sell it
sell and go %ack to fi*ed deposit
""D. yo) are in a ga$e sho, ,ith follo,ing options to choose. The option appealing to
yo) is
Mark only one o&al.
"#C chance of ,inning 25 ti$es of ann)al inco$e
25C chance of ,inning "5 ti$es of ann)al inco$e
5#C chance of ,inning 5 ti$es of ann)al inco$e
cash ,orth one ti$e of yo)r ann)al inco$e
"2D. Please esti$ate ho, long yo) ,ill lea&e yo)r in&est$ent in place )ntil yo) e*pect
to ,ithdra, itO
Mark only one o&al.
less than " year
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fro$ " to 3 year
fro$ 3 to 5 year
$ore than 5 year
"3D. =o, do yo) feel ,hen yo)r financial decision goes ,rongO
' still re$ain confident to o&erco$e o%stacle
' generally donHt take risk %eca)se of ,hich ' s)ffer financial loss
' &ie, it as personal fail)re
' feel g)ilty
"4D. =o, $)ch is yo)r e*isting in&est$ents ,orth as a $)ltiple of yo)r c)rrent ann)al
inco$eO
3 years and a%o&e
%et,een 2-3 years
%et,een "-2 years
%et,een @ $onths-" year
U @ $onths
"5D. The ideal range of end &al)e of in&est$ent of Rs. "#####G- for yo) ,o)ld %e
Mark only one o&al.
%est case 25####G- ,orse case @####G-
%est case 2#####G- ,orse case !####G-
%est case "@####G- ,orse case "#####G-
%est case "5####G- ,orse case ""####G-
"@D. 6hen it co$es to in&esting are yo) $ost co$forta%le ,ith in&est$ents thatI
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Mark only one o&al.
are sta%le and protect against loss e&en if it $eans lo, ret)rns
ha&e little risk of short-ter$ and offer so$e opport)nity for long-ter$ gro,th
ha&e $oderate risk of short-ter$ loss %)t offer $oderate Jpport)nity for long-
ter$ gro,th
ha&e higher risk of short-ter$ loss %)t offer &ery high opport)nity for long-ter$
gro,th
Invest$ent !ortfo"io
"D Marital Stat)s
Mark only one o&al.
Single
Married
2D /)$%er of 8ids
Mark only one o&al.
/GA
#
9pto 2
A%o&e 2
3D Are yo) li&ing ,ith dependent parentsO
Mark only one o&al.
es - 7oth parents
es - Single parent
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/one
4D o yo) o,n a ho)se at place yo) ,orkO
Mark only one o&al.
es
/o
5D 6hat C of yo)r inco$e yo) in&estO
Mark only one o&al.
U"#C
""-25C
2@-4#C
4#-55C
A%o&e 55C
@D 6hat is the $ain $oti&e of yo)r sa&ingO
Mark only one o&al.
(hild ed)cation
rea$ ho)se
Retire$ent planning
JtherI
Rate t/e fo""owin# =uestions 1 as "east i$(ortant and ) as $ost i$(ortant.
D ' prefer $y $oney to %e safe fro$ risk.
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Mark only one o&al.
" 2 3 4 5
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2@-4#C
4#-55C
A%o&e 55C
""D 6hat is the share of yo)r in&est$ent in Fi*ed eposits G 7ondsO
Mark only one o&al.
U"# C
"# to 25 C
2@-4#C
4#-55C
A%o&e 55C
"2D 6hat is the share of yo)r in&est$ent in Retire$ent F)ndsO
Mark only one o&al.
U"# C
"# to 25 C
2@-4#C
4#-55C
A%o&e 55C
"3D 6hich is %est in&est$ent according to yo)O
Mark only one o&al.
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Property
M)t)al F)nds
Retire$ent f)nds like PPF
?1)ity G Stocks
7onds G 7ank eposits
"4D 6hat C of yo)r in&est$ent can %e li1)idated in " $onthO
Mark only one o&al.
U"# C
"# to 25 C
2@-4#C
4#-55C
A%o&e 55C
"5D 6hat is yo)r in&est$ent ti$e fra$eO
Mark only one o&al.
U " year
"-3 years
4- years
!-"5 years
A%o&e "5 years
51
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Bi"io#ra(/&
". The Risk of TradingI Mastering the Most '$portant ?le$ent in Financial
Spec)lation - Michel To$a
2. 'n&est$entsI Analysis and Manage$ent - 7y (harle P. ;ones.
3. 'n&esting in Frontier MarketsI Jpport)nity Risk and Role in an 'n&est$ent
Portfolio >a&in >raha$
4. Modern Portfolio Theory and 'n&est$ent Analysis th ?dition ?d,in ;. ?lton.
5. 7S? and /S? ,e%sites for research reports on portfolio and risk.
@. '&estopedia.co$
. Moneycontrol.co$ and rele&ant ,e%sites for 'n&est$ent and risks.
!. Research articles on >oogle Scholar ?7S(J etc.
. ASS?SS'/> F'/A/('A< R'S8 TJ
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"4.'/?STJRSH R'S8 TJ