Term Report(2)

8/3/2019 Term Report(2)

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INVESTMENT PORTFOLIO

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Financial Assets

PKR 20,000,000


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LETTER OF TRANSMITTAL

Date: December 6, 2011

To:

From:

Subject: PortfolioInvestment

Dear Maam,

We are pleased to present our term project on Portfolio Investment. This project strengthened

our understanding of the investment diversification.

Our project has been very productive, specially receiving first-hand knowledge & informationfrom various avenues for investment, considering the risk and investing thereof, which opened

new ways of learning for us & helped us in understanding & practical implementation of the

concepts we learnt in the course of Financial Institutions.

We would like to thank all the Sources who have cooperated with us and provided us with all the

information that we required to complete this report. And we express sincere gratitude to our

parents for their continuous support throughout the preparation of this report.We acknowledge

your help and support for this report and we look forward to discussing this report with you and

having your feedback.

This report is as per your instructions & contains all the relevant information. We would dearly

& sincerely like to thank you for the belief you showed in our capabilities and the support you

gave us throughout the semester & in assigning us the report which truly helped in our learning

process & also gave us first-hand experience regarding investment opportunities for portfolio

investment in Pakistan.


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Executive SummaryThe purpose of our project is to create a portfolio that includes multiple investments in order to

reduce risk. In the more general sense, it is aimed at splitting our investment in different assets

in orderto diversify the risk associated with each investment i.e.Not putting all our eggs in one

basket.

For our project, we were given Rs.20 million to make our investment for one year i.e. fromSeptember 2011 to September 2012, and determine the return thereof. We decided to invest this

amount in different financial products.

Firstly, we opened a Savings account in Habib Bank Limited Garden Brach for our transactions.

This is the account where we would also keep our decided liquidity of Rs. 1.5 million.

Among the financial products, we invested Rs. 1.5 million in RIF, Rs. 1.5 million in DSC, Rs. 1

million in BME cash fund, Rs. 6 millions in Alfalah Stock Funds, Rs. 1.25 million in NIT Income

Funds, Rs. 3 million in HMB- Izaafa Certficate, Rs. 1.25 million in HBL advantage account and

Rs.3 million in PIEF. The remaining Rs. 1.5 million has been kept aside for maintaining

liquidity.

The cost and profit analysis of all investments indicate that we get an average rate of return of

15% in one year. From this project, we concluded that risk is diversified and a reasonably

greater rate of average return is obtained by making investment in variety of assets. The reason

behind it is that if we diversify our portfolio, our investment performance fluctuates less because

losses from some investments are offset by gains in others. Therefore, we have less risk than if

we put all our money in one type of investment, such as stocks and bonds.


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Contents

Our Portfolio ................................................................................................................................... 5

Investment # 1 - Regular Income certificates ................................................................................. 6

Calculation of Profit .................................................................................................................... 6

Investment # 2 - Defense Saving Certificates: ................................................................................ 7

Calculation of Profit .................................................................................................................... 7

Investment # 3 - BMA Empress Cash Fund: .................................................................................. 8

Calculation of Profits: ................................................................................................................. 8

Investment # 4 - Al-Falah Stock Fund ............................................................................................ 9

Calculation of Profits: ................................................................................................................. 9

Investment # 5 - NIT Income Fund: ........................................................................................... 10

Calculation of Profits: ............................................................................................................... 10

Investment # 6: Habib Metropolitan Bank - HMB Izafa Certificate ........................................ 11


Investment # 7: Habib Bank Limited - hbl advantage account............................................... 12


Investment # 8 - Pakistan Income Enhancement Fund: .......................................................... 14


Factors affecting Investment Decisions ........................................................................................ 15Rate of Return ........................................................................................................................... 15

Riskiness ................................................................................................................................... 16

Opportunity Cost ....................................................................................................................... 17

Inflation rate .............................................................................................................................. 17

Bibliography ................................................................................................................................. 18


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OUR PORTFOLIO:

We are given Rs. 20,000,000 which we first kept in Savings account in Habib Bank Limited

Garden Brach for our transactions. This is the account where we would also keep our decided

liquidity of Rs. 1.5 million. Our Portfolio has 8 different products consisting of government

bonds, mutual funds and banks. All these products have varying degree of risk and returnassociated.

1. Regular Income certificates2. Defense Saving Certificates3. BMA Empress Cash Fund4. Al-falah Stock Fund5. NIT Income Fund6. Habib Metropolitan Bank - HMB Izafa Certificate7. Habib Bank Limited - HBL Advantage Account8. Pakistan Income Enhancement Fund


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INVESTMENT #1-REGULAR INCOME CERTIFICATES

In order to facilitate the monthly requirements of the general public, and was launched on

2nd February, 1993. Profit is paid on monthly basis reckoned from the date of issue of

certificates.

Reasons for investing in Regular Income Certificates:

High rate of return as compared to Other certificates like Special SavingCertificates

Exemption of Zakat on these certificates as compared to Defense SavingCertificates and Special Saving Certificates

Regular inflow of profit on monthly basis.Denominations:Rs.50,000, Rs.100,000, Rs.500,000, Rs.1,000,000, Rs.5,000,000 &

Rs.10,000,000/=.

Rate of Return:12.60% p.a.

Amount investing: 1.5 million (we have bought two certificates worth Rs.1, 000,000 and

one worth Rs.500, 000, in order to invest a total amount of Rs.1.5 million). We do not intend toredeem our certificates before their maturity since it leads to a reduction in the face value of the

certificates as a penalty.

Risk: Lowest possible risk as it is a government security

Maturity: 5 years

Procedure: These certificates can be purchased from any National Savings Centre(NSCs) or from Pakistan Post Office (PPO) by filling in a prescribed form called SC-1, which is

available at the above mentioned offices free of cost. A copy of the Computerized National

Identity Card (CNIC) or in case of a foreign national, a copy of the Passport may be attachedwith the application form (SC-I). These certificates are purchased by depositing cash at the

issuing office or by presenting a cheque. The certificates are immediately issued on receipt of

cash. However, in case of deposit through cheque the certificates are issued from the date ofrealization of the cheque after receipt of the clearance advice.

CALCULATION OF PROFIT

Total value of certificates Rs.1,500,000

Rate of return per annum 12.60%

Total return Rs.189,000

Tax (10%) Rs.18,900

Return after Tax Rs. 170,100


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INVESTMENT #2-DEFENSE SAVING CERTIFICATES:

The Government of Pakistan introduced Defense Savings Certificate scheme in the year1966. The scheme has specifically been designed to meet the future requirements of the

depositors. This is 10 years' maturity scheme with built in feature of automatic reinvestment after

the maturity. We are investing in these certificates because they have a higher rate of return ascompared to other certificates like Special Saving Certificates and also offer a variety of maturitytime periods, i.e.: 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 years. In this scheme the profit is paid on

maturity or encashment for completed years.

Denominations: Rs.500, Rs.1000, Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000,

Rs.500,000 and Rs.1,000,000/=.

Rate of Return:12.68% p.a.

Risk: Lowest possible risk as it is a government security

Amount investing:1.5 million (we have bought one DSC worth Rs.1,000,000 and

another DSC worth Rs.500,000)

Maturity:1 year

Procedure:The way of purchasing Defense Saving Certificates is almost similar to that

of Regular Income Certificates. These certificates can be purchased from any National SavingsCentre (NSC), Pakistan Post Offices (PPO), Authorized branches of Scheduled Banks and State

Bank of Pakistan (SBP) by filling in a prescribed form calledSC-1, which is available at all theabove mentioned offices of issue free of cost. A copy of the Computerized National Identity

Card (CNIC) or in case of a foreign national, a copy of the Passport is required to be attachedwith the application form.These certificates can be purchased by depositing cash at the issuingoffice or by presenting a cheque. The certificates are issued on receipt of cash. However, in case

of deposit through cheque the certificates shall be issued from the date of realization of the

cheque after receipt of the clearance advice.

CALCULATION OF PROFIT

Total value of certificates: Rs.1,500,000

Rate of return per annum: 12.68%

Total return before tax: Rs.190,200

Less tax (10%): Rs.19,020

Less Zakat (2.5%): Rs.4,755Return after Tax and Zakat Rs. 166,425


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INVESTMENT #3-BMAEMPRESS CASH FUND:

BMA Empress Cash Fund is one of the most professionally managed cash funds in

Pakistan. It is considered as a very safe investment as it mostly contains government

securities, AA+ rated securities and AA securities.

Return:11.18%

Risk: Low

Amount investing: 1 million

CALCULATION OF PROFITS:

1,000,000*11.18% 111,800

Less: 1.5% management fee (1677)

Return after fee deduction 110,123


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INVESTMENT #4-AL-FALAH STOCKFUND

The Al-Falah Stock Fund offers one of the highest rates in the market. The managementfee however is a bit higher than others. CPT is collected on the fund in case of redemption on a

premature basis. The tax on redemption within six months of investment tends to be around 10%,

similarly, after 6 months, the CPT is 7% and on maturity the CPT is exempted. Lastly, the fundis considered to be highly volatile and lucrative and thus it is proposed that the investment shouldbe made for at least one to two years.Return: one of the highest in the market 18.5%

Risk: High

Management Fee: 1.75%

Entrance Fee: 5%The calculation for the NAV is as follows:

NET ASSET VALUE: Amount-Management fee / outstanding no. of stocks500000087500/ outstanding no. stocks

As we are investing 6 million in stock funds and we will get a return of 18 to 19%

depending on the stock market


Total value of stock funds Rs.6,000,000


Total return before

deduction of management

cost

Rs.1,110,000

Less M.C (1.75% of thetotal)

Rs.19,425

Total return after M.C: Rs.1,090,575

Total monthly return

after M.C

Rs.9,0881.25


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INVESTMENT #5-NITINCOME FUND:

The objective of NIT Income Fund is to generate competitive stream of return with

moderate level of risk for its unit holders, by investing primarily in fixed income

Securities/instruments.

National Investment Trust Ltd. (NITL) is the first Asset Management Company of

Pakistan, formed in 1962. NITL is the largest asset management company of Pakistan

with approximately Rs. 73 billion assets under management. In order to cater to varied

needs of investors, NITL for the very first time in the 48 years history of the company,

ventured in to fixed income category by launching two Funds in the FY10. NIT

Government Bond Fund, a very low risk product was launched in Nov. 2009 followed by

NIT Income Fund which was introduced in Feb. 2010. With the launching of these two

funds the family of Funds of NIT has increased to six funds including 4 equity Funds and

2 fixed income Funds. NIT's distribution network comprises of 21 NIT branches, various

Authorized bank branches all over Pakistan and Arab Emirates Investment Bank (AEIB)in Dubai (UAE). The Board of Directors of NITL consists of representatives of leading

financial institutions, prominent industrialists and nominee of Govt. of Pakistan. All

Investment decisions are taken by the Investment Committee of NITL.

The fund experienced significant returns mainly due to its healthy exposure in TFCs and

Treasury Bills. The funds asset allocation at the end of the month has around 28% of its

total assets in TFCs. While around 66% of total assets are invested in Treasury Bills. 2%

of exposure is in Commercial paper and the remaining is in the form of cash and other

assets.

Risk: Moderate

Return: 15% p.a.

Amount investing: 1.25 million



Rate of return per annum 15%

Total return beforededuction of management

cost

Rs.187,500

Less M.C (1.25%) Rs.2,343.75

Total return after M.C: Rs.185,156.25


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INVESTMENT #6:HABIB METROPOLITAN BANK-HMBIZAFA CERTIFICATE

Habib Metropolitan Bank was incorporated in Pakistan as a Public Listed Company in

1992 under the name, Metropolitan Bank Limited.On October 26, 2006 Habib Bank AG

Zurichs Pakistan Operations merged into Metropolitan Bank Limited and the merged

entity was named Habib Metropolitan Bank Limited (HMB). HBZ is the principalshareholder of HMB.

Denominations: Rs. 10,000/-, Rs. 25,000/-, Rs. 100,000/-, Rs. 250,000/-, Rs. 1,000,000/-

and Rs. 2,500,000/-.

Maturity:HMB Izafa certificates are offered as 6 years Deposits Certificate

Return:16.67 % p.a

Risk: High

Amount investing: 3000000

Advantages:

Investment doubles in Six years. Easy Loan Facility. Encashable any time. Your profit grows daily. Can be linked to any of the regular accounts.Comparison:

Habib bank limited was the other option for us but we chose HMB because HBL was

giving the same rate of return only if the investment was made for 10 years where as

HMB was giving this rate of return for the 6 year investment. As the inflation rate in

Pakistan is increasing drastically, according to us its better to invest in HMB and get the

same return within 6 years.



Rate of return per annum 16.65%Total return Rs.499,500

Total return after

Tax(10%)

Rs.449,550


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INVESTMENT #7:HABIB BANKLIMITED - HBL ADVANTAGE ACCOUNT

Introduction

HBL was the first commercial bank to be established in Pakistan in 1947. Over the years,

HBL has grown its branch network and become the largest private sector bank with over1,450 branches across the country and a customer base exceeding five million

relationships.

HBL established operations in Pakistan in 1947 and moved its head office to Karachi.

Our first international branch was established in Colombo, Sri Lanka in 1951 and Habib

Bank Plaza was built in 1972 to commemorate the banks 25th Anniversary.

With a domestic market share of over 40%, HBL was nationalized in 1974 and it

continued to dominate the commercial banking sector with a major market share in

inward foreign remittances (55%) and loans to small industries, traders and farmers.International operations were expanded to include the USA, Singapore, Oman, Belgium,

Seychelles and Maldives and the Netherlands.

On December 29, 2003 Pakistan's Privatization Commission announced that the

Government of Pakistan had formally granted the Aga Khan Fund for Economic

Development (AKFED) rights to 51% of the shareholding in HBL, against an investment

of PKR 22.409 billion (USD 389 million). On February 26, 2004, management control

was handed over to AKFED. The Board of Directors was reconstituted to have four

AKFED nominees, including the Chairman and the President/CEO and three Government

of Pakistan nominees.

It offers the highest profit rate with the deposit for the period of 3 months, 6 months, one

year, three years, five years and ten years which offering a different profit rate. This form

of investment can increase our profits.

Procedure: For getting the account opened with HBL, it is necessary to get the

form filled specifying details like name of the accountholder, amount invested, NIC

number, terms of maturity, profit mentioned and so on. This account is subjected to

withholding tax and zakat. Withholding tax and zakat are paid on maturity. Zakat is paid

once a year.

Maturity: 5 years

Return: 13.5%

Risk: Moderate


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Comparison:We chose HBL because it was giving a better rate when compared to

other banks for example Bank Al Habib is giving us a rate of 9.07% for 5 years.


Total value Rs.1,250,000


Total return Rs.168,750

Tax(10%) Rs.16,875

Return after Tax Rs. 151,875


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FACTORS AFFECTING INVESTMENT DECISIONS

RATE OF RETURN

The total rate of return that is being obtained via this portfolio excluding the management fees

and other taxes is as follows:

Total Return = 189,000 + 190,200 + 111,800 + 1,110,000 + 187,500 + 499,550 + 168,750 +

435,000

= 2,891,800

= 2,891,800 + 18,500,000

= Rs. 21,391,800

Portfolio Return Percentage = 21,391,800 - 18,500,000 / 18,500,000

= 15.63%

Total Cost = 18,900 + 4,755 + 15,000+ 19,425 + 15,625 + 49,955 + 16,875 + 6,525

=Rs. 147,060


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RISKINESS

A Portfolio should always be balanced with some products giving high yield and posing high

risk; whereas some giving low return and low risk. This is important so that the risk from higher

return avenues can be hedged. We have kept this in mind while making our investment portfolio.

The Risk analysis of our Portfolio is shown in the chart below:

20,000,000

Low Risk, Low Return

Defence Saving Certificates, 1ear maturity with a return of

12.68% p.a.

(Rs. 1.5 million)

Regualar Income Certificate,

maturity 5 years with a return

of 12.60% p.a.

(Rs. 1.5 million)

BMA Empress Cash Fund,return is 11.18% p.a.

(Rs. 1 million)

PIEF, maturity 3 years, 14.5%

return

(Rs. 3 million)

Moderate Risk,Moderate Return

HBL advantage

account, maturity

of 5 years, 13.5%

p.a.

(Rs. 1.25 million)

NIT Income Fund,

15% p.a.(Rs. 1.25 million)

High Risk, Highreturn

HMB Izafa Certificate,

maturity of 6 years

with a return of

16.67% p.a.

(Rs. 3 million)

Alfalah Stock Fund,

with return of 18.5%p.a.

(Rs. 6 million)


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OPPORTUNITY COST

There are always comparisons that are necessary to make as humans can possibly not make

accurate decisions because of incomplete information, knowledge, time and money constraints.

Similarly, we have forgone higher return investment avenues in order to avoid risk.

INFLATION RATE

High inflation rate decreases the overall return on investments. Therefore, it should be kept in

mind that the return is more than the prevailing interest rate. We have considered the interest rate

of September which is 10.5%.


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BIBLIOGRAPHY

http://www.savings.gov.pk/ric.asp

http://www.savings.gov.pk/dsc.asp

http://www.bmafunds.com/

www.alfalahghp.com/alfalahghp/blmfavf.asp#IP

http://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274

http://www.hmb.com.pk/HMBIzafaCertificates.htm

http://www.hbl.com/individual-customers-accounts-terms.php

http://www.mcbah.com/
http://www.savings.gov.pk/ric.asphttp://www.savings.gov.pk/ric.asphttp://www.savings.gov.pk/dsc.asphttp://www.savings.gov.pk/dsc.asphttp://www.bmafunds.com/http://www.bmafunds.com/http://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.hbl.com/individual-customers-accounts-terms.phphttp://www.hbl.com/individual-customers-accounts-terms.phphttp://www.mcbah.com/http://www.mcbah.com/http://www.mcbah.com/http://www.hbl.com/individual-customers-accounts-terms.phphttp://www.hmb.com.pk/HMBIzafaCertificates.htmhttp://www.nit.com.pk/index.php?option=com_content&view=article&id=183&Itemid=274http://www.alfalahghp.com/alfalahghp/blmfavf.asp#IPhttp://www.bmafunds.com/http://www.savings.gov.pk/dsc.asphttp://www.savings.gov.pk/ric.asp

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