The Hindu Business Line : Knowhow to counsel customers on wealth creation

GAMBLING or satta is what happens during sustained rallies, with small investors entering the fray, on decisions "not backed by any understanding of the company". This is one of the first inputs you gather from the Indian Institute of Banking and Finance (www.iibf.org.in). Its book titled Securities Market and Products, published by Taxmann (www.taxmann.com), is part of a series that supplements course material for the IIBF's PGDFA or Post Graduate Diploma in Financial Advising.

As the foreword by the training body's CEO explains, the programme has technical support from the Securities Institute Australia, and is aimed at creating a cadre of financial advisors "to meet the common investors wealth creation and wealth protection needs."

For starters, another concept is immunisation. This is not for disease prevention, but a type of hedging "particularly relevant for debt instruments". Here is an example to make things clear: "If consequent to an increase in interest rate by 1 per cent your debt instrument portfolio is likely to depreciate by Rs 10 lakh, you could immunise yourself by ensuring a liability structure that would lose the same value on the same event." Don't be immune to investment jargon!

If you invest in gold, you should know about `hallmarking' to confirm purity. "A hallmark jewel should have the Bureau of Indian Standards (BIS) logo, purity mark, mark of the assaying and hallmarking centre, jeweller's logo and the year of hallmark engraved on the article or ornament after ensuring its quality."

For those who think gold is a `dead asset', an option to have the cake and eat it too comes in the form of the Gold Deposit Scheme, which was introduced in 1999 "to bring privately held gold in circulation and reduce the country's reliance on import of gold."

There is the facility of availing oneself of loan against the deposit certificate; and this is transferable by endorsement and delivery.

SBI's site www.statebankofindia.com highlights the tax benefits: No income-tax on interest earning, no wealth tax on deposited gold, and exemption from capital gains tax.

For Vijay Mallya, horses may be a passion, but a banker may find his customer too interested in horses, not for racing but as part of his portfolio! "The investment outlay for horses is high, and so is the expense in maintaining them," is a caution to remember, though the animal may return an income to you if it performs well in the races.

Do I see you already galloping... to read the book?

Fount of fund knowledge

ANOTHER title in the same series is Mutual Fund Industry: Products & Services. Mutual fund is `the purest form of financial intermediary', informs the book.

How? Because there is "almost perfect pass through of money between unit holders (savers) and the securities in which the fund invests." In contrast, bank is not a pass through type because "depositors have no specific knowledge of how their funds will be used."

It is not as if the `purest form' ensures absolute safety for money. There is no deposit insurance for MF, and the value of investment may rise or fall depending on the value of securities that the fund has put the money in.

To invest, you have a choice of more than 400 fund schemes offering different options. A common classification of these, according to Association of Mutual Fund in India or AMFI, is growth, income, balanced, liquid and money market, gilt, and equity-linked savings schemes.

Go for SIP, if you're interested; it's the systematic investment plan or "the practice of investing a constant amount every month". Opposite is SWP, where W is for withdrawal. FWP is flexi about amount withdrawn every month, while STP or systematic transfer plan "allows the investor to maintain a target mix of debt and equity."

A chapter explains how you can perform `performance measurement' of MF schemes. HPR or holding period return is "the most straightforward rate of return" and this is a.k.a. total return or point-to-point return. Formula is HPR = (I+(E-B))/B, using Income, Ending price (or NAV at the time of exit) and Beginning price. Other measures are CAGR or compounded annual growth rate, RWR or rupee-weighted return, TWR or time-weighted return, and so on.

You can also learn how to interpret the standard deviation number in relation to MF return; compute beta that relates the return to market index; work out Sharpe ratio that measures `reward to variability'; and measure as Treynor advised, to adjust "excess return for systematic risk".

An important chapter is on unit-holders' protection. "In open-ended schemes unit-holders are always free to `vote with their rupees' by not buying a product if the fees are too high or `vote with their feet' by redeeming the units if they are unhappy."

Vote for the book with your time, if you find that your fund knowledge is weak.

BookValue@TheHindu.co.in

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