Investment Management | PAPER IV – RETAIL BANKING & WEALTH MANAGEMENT | Module D: Wealth Management

Investment Management & Portfolio Concepts

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1. Element of Investment

Investment involves the allocation of resources, usually money, in expectation of generating an income or profit. The key elements include:

• Return: The gain or loss from an investment.
• Risk: The possibility of loss of capital.
• Time Horizon: The period the investor intends to hold the investment.
• Liquidity: The ease of converting the investment into cash.
• Tax Benefits: Associated with specific instruments like ELSS or PPF.

2. Basics of Investment Management

Investment Management refers to the professional management of different securities and assets to meet specific investment goals.

3. Steps in Investment Management

• Setting investment objectives
• Portfolio strategy formulation
• Securities selection
• Portfolio execution
• Performance evaluation

4. Investment Banking

Investment Banking involves underwriting, acting as an intermediary between securities issuers and investors, and assisting companies in mergers, acquisitions, and reorganizations.

5. Services Offered by Full-Service Investment Banks

• Underwriting
• M&A Advisory
• Market Making
• Asset Management
• Structured Finance

6. Investment Bank Organizational Structure

It typically includes divisions such as Corporate Finance, Sales and Trading, Research, and Asset Management.

7. Investment Management vs. Investment Banking

Investment Management focuses on managing assets for clients, while Investment Banking focuses on capital raising and advisory services.

8. Portfolio Management

Portfolio Management is the art and science of making decisions about investment mix and policy, matching investments to objectives.

9. Objectives of Portfolio Management

• Capital appreciation
• Regular income
• Capital preservation
• Tax efficiency

10. Key Elements of Portfolio Management

• Diversification
• Asset allocation
• Rebalancing
• Risk tolerance

11. Portfolio Management vs. Investment Banking

Portfolio Management is client-focused and long-term, while Investment Banking is transaction-focused and often short-term.

12. Role of Portfolio Manager

The Portfolio Manager designs, implements, and monitors a client’s investment portfolio based on risk-return profile and financial goals.

13. PMS vs. Mutual Funds

PMS provides customized portfolios and greater control for HNIs, whereas Mutual Funds are pooled investments regulated by SEBI with predefined objectives.

14. Types of PMS

• Discretionary PMS
• Non-Discretionary PMS
• Advisory PMS

15. Steps in PMS Process

• Assessing client’s goals
• Portfolio strategy design
• Execution
• Monitoring and review

16. Advantages of PMS

• Personalized portfolio
• Flexibility in investment
• Transparent operations

17. Disadvantages of PMS

• Higher costs and fees
• Limited liquidity
• High entry threshold

18. Recent Developments in PMS in India

• SEBI regulations on minimum investment (₹50 lakhs)
• Digital onboarding and real-time reporting
• Focus on ESG-compliant portfolios

Mathematical Examples

1. Calculate CAGR: Investment grew from ₹2,00,000 to ₹3,00,000 in 3 years.
   Answer: CAGR = ((300000/200000)^1/3) - 1 = 14.47%
2. Portfolio Return: Asset A (40%) at 10%, Asset B (60%) at 8%.
   Answer: (0.4×10%)+(0.6×8%) = 8.8%
3. Portfolio Beta: A = 1.2 (40%), B = 0.9 (60%).
   Answer: (0.4×1.2)+(0.6×0.9) = 1.02
4. Sharpe Ratio: Return = 15%, Risk-free rate = 6%, Std Dev = 12%.
   Answer: (15-6)/12 = 0.75
5. Value at Risk (VaR): ₹5L portfolio, 5% risk, z=1.645, σ=2%.
   Answer: VaR = ₹5L × 1.645 × 2% = ₹16,450
6. Expected Return (CAPM): Rf=5%, β=1.2, Rm=12%.
   Answer: 5% + 1.2×(12%-5%) = 13.4%
7. Alpha = Portfolio return – Expected return (CAPM): 14% – 13.4% = 0.6%
8. Effective annual return from 10% semi-annual compounding:
   Answer: (1+0.10/2)^2 - 1 = 10.25%
9. Weighted Average Maturity: 2 yrs (₹1L), 5 yrs (₹2L)
   Answer: (1L×2 + 2L×5)/3L = 4 yrs
10. Portfolio Standard Deviation: A = 10%, B = 15%, correlation = 0.5, weights = 0.6, 0.4.
    Answer: √[(0.6²×100) + (0.4²×225) + 2×0.6×0.4×0.5×10×15] = 11.66%

MCQs with Answers

1. Which of the following is not a feature of Investment Management?
   a) Risk Management
   b) Portfolio Diversification
   c) Currency Printing
   d) Asset Allocation
   Answer: c) Currency Printing
2. Which SEBI regulation sets the minimum investment in PMS?
   a) ₹25 Lakhs
   b) ₹10 Lakhs
   c) ₹50 Lakhs
   d) ₹1 Crore
   Answer: c) ₹50 Lakhs
3. Investment Banking primarily offers:
   a) Insurance products
   b) Mutual Funds
   c) M&A and underwriting
   d) Savings accounts
   Answer: c) M&A and underwriting
4. Portfolio beta > 1 indicates:
   a) Lower risk
   b) Higher market sensitivity
   c) Underperformance
   d) Diversification
   Answer: b) Higher market sensitivity
5. Sharpe ratio is used to measure:
   a) Liquidity
   b) Return
   c) Risk-adjusted return
   d) Capital growth
   Answer: c) Risk-adjusted return
6. Which PMS type allows complete manager discretion?
   a) Advisory
   b) Discretionary
   c) Non-discretionary
   d) Mutual Fund
   Answer: b) Discretionary
7. Portfolio rebalancing involves:
   a) Creating a new portfolio
   b) Eliminating all assets
   c) Realigning assets to target weights
   d) Liquidating the portfolio
   Answer: c) Realigning assets to target weights
8. CAPM is used to calculate:
   a) Alpha
   b) Expected return
   c) Net Asset Value
   d) Portfolio variance
   Answer: b) Expected return
9. Mutual Funds differ from PMS as they:
   a) Offer fixed returns
   b) Require lower capital
   c) Are customizable
   d) Are for HNIs only
   Answer: b) Require lower capital
10. Which is NOT part of the Investment Banking division?
    a) Equity Research
    b) Sales & Trading
    c) Wealth Management
    d) Insurance Regulation
    Answer: d) Insurance Regulation