Session 2 Preparation Print

FINERVA Cognizant Technology Solutions 28 SEPT 2007

Three Power Steps to

Financial Success

SAVE INVEST PROTECT

COGNIZANT TECHNOLOGY SOLUTIONS | 28-SEPTEMBER 2007


Success is Achieving Set Goals

Set Goals Save Invest Protect

Achieve Goals

Fundamentals of Financial Planning – 1 Fundamentals of Financial Planning – 2 Income Tax Management The Way Forward


We are Here

Fundamentals of Financial Planning – 1 Fundamentals of Financial Planning – 2Income Tax ManagementThe Way Forward


Take 2 minutes. Close your eyes

Write what you see.imagine a wealthy

person.


A person's wealth is defined by how long a period of time he/she

can sustain their lifestyle if they stop

working.


The longer you can go on living your life without

working another day, the richer you actually are.


Your wealth is therefore defined by three things

Your monthly expenses,

Your liquid assets and

Your passive income.


Value of Long-Term Investing Programs

Many people don’t start investing because they only have a small amount to invest

but....Small amounts invested regularly become

large amounts over time.


The Mantra TIME

Start early

Use the power of

compounding


What is growth / return?

Time Value for Money

Relative Growth

Nominal Interest Rate Vs Effective Interest Rate


Asset Allocation

Investment Horizon

Market Expectations


What is Risk?

Actual Returns Vs

Expected returns


Factors Affecting the Choice of Investments

Safety and risk.– Safety means minimal risk of loss.

– Speculative investments are high risk, and made to make a large profit in a short time.

Risk is uncertainty about an outcome.– Inflation risk.– Interest rate risk.

– Business risk.

– Market risk.


Comparing Investment Avenues

The Comparison of Investment Avenues


Investment Pyramid

CommoditiesPenny Stocks

Options

Blue Chip Stocks

GovernmentSecurities

Corporatebonds

Gold, Silver

MoneyMarket

Savings Accounts Cash

Rentalproperty

High QualityStocks

Mutual funds

High risk

Lowrisk


Factors That Reduce Investment Risk

Develop and implement a personal investment plan.

Establish realistic goals.

Evaluate risk and potential return.

Evaluate your investment program periodically

But most importantly…DIVERSIFY!!!!


Diversification

Diversification is the process of spreading you assets

among several types of investments to reduce risk.

“Don’t put all your eggs in one basket.”

For diversification to work, assets must have negative or

very low correlations amongst each other


Perfect Positive Correlation

Time

ReturnA

B

Mean

0


Perfect Negative Correlation

Time

ReturnA

B

Mean

0


Zero Correlation

Time

ReturnA

B

Mean

0


What does diversification buy?

It buys variance reduction. When the correlation between assets is not 1,

then as long as some of both assets is held in the portfolio, diversification reduces variance for any level of expected return.

The preceding graphs shows that this is not true for perfectly correlated assets.


What happens when the number of assets in the portfolio, n, becomes large?

deviationstandardPortfolio

Nonsystematic risk

Systematic/Market risk

Number ofsecurities

5 10


The bottom line

Practitioners have shown that putting 30 securities to your portfolio guarantees sufficient diversification

When diversification is possible, all you care about is non-diversifiable risk, also termed systematic risk.

Mutual Funds provide an easy and inexpensive way to diversify


Monitoring Your Investment

Monitor the value of your investments.Keep accurate and current records.Be aware of tax considerations, including tax

deferred and tax exempt investments.Keep track of capital gains and losses, interest

income, rental income, and dividends.

– Cash dividends must be reported as income.

– Dividends in the form of additional shares are generally not taxable.


Investment Strategies

Long-term techniques.– Buy and hold.

– Rupee cost average.

Short-term techniques.– Liquid Mutual Funds

– Day Trading

– Trading in Index and Commodity Futures


Common Sense Investing** Tennessee Securities Division

Don’t believe claims that you can make big profits with risking the loss of some or all of your money

Invest only in what you understand Ask for a prospectus and read it before investing Recognise the difference between Savings and Investing Calculate what you investment will cost Investigate sellers and products Balance emotion with caution For Some – Experience is the best teacher Be alert for potential problems Just say no if you are not interested All things don’t come to those who wait Pride goes before a fall – accept you made a mistake / something is wrong One wrong turn doesn’t deserve another.


Sources of Investment Information

The internet and online computer services.

– Use a search engine such as Yahoo or Alta Vista to find information.

– View sites such as finance.yahoo.com, quicken.com, and personalwealth.com.

Newspapers and news programs. Business periodicals and government publications. Corporate Reports. Statistical Averages. Investor Services and newsletters.


If spending money brings you enjoyment, you will never be

rich.

However if making money brings you enjoyment, then

your wealth isguaranteed.


Take Away

Wealth DefinedInvestment avenues –CharacteristicsInvestment Risks – Managing themInvestment StrategiesCommon Sense Investing

Session 2 Preparation Print

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