Client : Mr. Prakash Golwala
Investor in DAAP since 04 Oct. 2010
NJ Partner: VA Advisory Services Pvt. Ltd.

1) Please describe your overall experience of investing with NJ PMS provider (NJ Advisory Services Pvt. Ltd.)
Answer: As a client, I was always confused as to how much Debt and Equity Ishould have in my portfolio at any given time. I am a long-term investor in equity market, and this problem use to constantly puzzle me. I was also looking for a solution, which could help me buy equities when the markets dropped.

I found the answers to my questions in NJ PMS – DAAP Strategy, as it assures an ideal balance between Equity and Debt asset classes. I think this is the best way to invest in long equity mutual funds.

2) What were your objectives at the start when you invested in Dynamic Asset Allocation Portfolio? Do you think your objectives have been fulfilled by the portfolio manager?
Answer: Yes, my objectives have been fulfilled by the portfolio manager. My objectives for investing in DAAP were to manage my portfolio in a proper and disciplined manner. I wanted timely re-balancing and re- structuring of portfolio and schemes and finally risk adjusted returns.

3) Do you think the portfolio manager churns the portfolio frequently?
Answer: No I don't think so. I am aware that the re-balancing is done based on market movements and valuation basis. I am against frequent churning of portfolios.

4) What is your experience related to reports shown on website of NJ PMS?
Answer: The reports are transparent and descriptive. They meet our requirements and being able to see them online, adds to the user experience.

5) What are your suggestions to existing and prospective investors of DAAP?
Answer: For investors, who are looking at investing in equity as a long term asset class, I feel this is the best method and strategy to plan your investments. You will never regret your Equity investments!

6) What are your expectations from the portfolio manager?
Answer: Although I am sure that NJ is doing their due diligence, I want them to keep selecting good equity funds and monitoring them regularly.

7) What role has your introducer VA Advisory Services Pvt. Ltd. played in helping you to select DAAP for you?
Answer: VA Advisory has not sold a product to me. They have sold the logic and science behind investing through the Asset Allocation strategy, which is the core of this PMS. They have given direction to my portfolio and that was the key factor in selecting the DAAP strategy for my investments.

Content: Welcome to the second part of the series on time value of money. Just to rewind, in the last article we had introduced how to calculate the effective rate for any given period given any rate for a different time frame. We had were introduced to the basic terms used in excel /spreadsheet functions which we are again repeating in this piece. We also saw how we could use FV function for calculating future value of lumpsums and this is from were we will pursue our journey further...

Primary Sources of Change:

Basic Excel Function Terms: FV = Future value. PV = Present value. Rate = Interest rate per period. NPer = Number of periods (payment period). Pmt = Regular Payment made “per period”. Type = Due date for payments where '1' means due at the beginning of a period and '0' (default) means due at the end of the period.

<p">The PV Calculations (Lumpsum)

The present value calculations are important when you want to know the value of any future amount (either lumpsum or annuity) in today terms.

Client question 1: I want to become a crorepati in 10 years. How much should I save today?
Excel Function: PV(rate,nper,pmt,fv,type) since we want to know the investment needed today.
Inputs: Investments returns or rate is assumed at 15%. We will be using the fv value here since the future value is already known. Since it is already a yearly problem, we will go ahead with nper as 10 and rate as 15%.
Solving Function: PV(rate,nper,pmt,fv,type) = PV(15%,10,0,-10000000,1) = Rs.24,71,847/-
Formula: I = FV / (1+r)^ n where I is the lumpsum investment needed today, n is the number of periods and r is the rate of returns = 10000000 / (1+15%) ^ 10 = 24,71,847

The Rate Calculations (Lumpsum)

Rate can mean any rate of increase or decrease in a problem. It can be investment returns, interest rates, inflation or deflation. We need to find ates in circumstances were we are aware of an required amount and period but do not know the rate which will be required to bridge the gag.

Client question 1: I have Rs.500,000 today which I wish to double in 5 years. How much returns should I earn to make this happen?
Excel Function: Rate (nper,pmt,pv,fv,type,guess) since we the period and the starting and end amounts but not the rate.
Inputs: pv = -500,000 since it will be an outflow and fv = 10,00,000 after 5 years. There is no recurring payment so pmt is '0' and type we assume to be 1 for beginning period calculations. Guess of '0' works very often and even if we leave it blank, the excel will take it as '0' default.
Solving Function: Rate (nper,pmt,pv,fv,type,guess) = Rate(5,0,-500000,1000000,1) = 14.87%. The client will have to invest in an asset class that will possibly give Rs.14.87% returns in 5 years. We skipped writing guess as excel assumes it as '0'.

Annuities:

Let us first understand what an annuity is. An annuity is simply a series of payments occurring for a defined period. There are many applications of annuities for financial advisors and it is something very commonly found while planning investments and withdrawals which do not happen in lumpsums but installments. Yes, you guessed it right. An SIP is an annuity that you are saving while a pension is an annuity that you are withdrawing.

When while with annuities or in other words, series of payments, we will enter the annuity value as “pmt” in our excel functions. Note that for lumpsum or one time calculations, we were entering values as pv or fv. Calculating for annuities in formulas is not simple so we deliberately intend to skip them since excel functions can easily do that boring job for us.

The FV calculations (Annuity)

This function is most commonly used find the future value of annuities with or without beginning investment. It can be effectively used to choose between different annuity options or between a lumpsum or an annuity payment option for a defined period and rate.

Client question: I plan to save Rs.5,000 p.m. in an equity SIP. How much will I get after 5 years? Excel Function: FV(rate,nper,pmt,pv,type) since we want to know the end value in future. Inputs: Investments returns or rate is assumed at 12% conservatively and the SIP is beginning today (annuity due = type 1). Since, it is a monthly investment, we will calculate monthly figures for period and rate. Thus, nper of 5 years is 60 months and we now we need to change the 12% effective annual returns to monthly effective returns. It is not 12% /12 as we read in last article. Try to find that yourself before you read ahead.
Note that we also have to use pmt here since it is periodic payment talking here. We will not use any value for pv since there is no accumulated wealth /lumpsum amount given here. Had it been a lumpsum problem or any starting amount was given, we would have used that figure in pv.
Solving Function: FV(rate,nper,pmt,pv,type) = FV(0.949%,60,-5000,,1) = Rs.4,05,518/-

The PV Calculations (Annuity)

This function can be effectively used to find money needed to fund an annuity in future or to basically decide between multiple annuity options with differing periods and/or annuity amounts. This function can be also effectively used to decide between a lumpsum today or an annuity in future. This decision can be very important as your client can potentially make more money with a lumpsum today than a deferred payments in future.

Client question 1: I have just retired and I wish plan for a monthly withdrawal of Rs.5,000 every month from my investments for the next 20 years. How much should I invest?
Excel Function: PV(rate,nper,pmt,fv,type) since we want to know the investment needed today for an annuity.
Inputs: Investments returns or rate is assumed at 8% for a conservative investment. Since the time period is considered as monthly, we will take the monthly effective rate of 8% which is 0.64%; nper is 20*12 and pmt is -5000 since it is an annuity withdrawal, fv is '0' and we will assume it to be ordinary annuity (withdrawals at each period end).
Solving Function: PV(rate,nper,pmt,fv,type) = PV(0.64%,240,-5000) = Rs.6,10,389/- is the investment required to made today in an asset class with returns of 8% p.a. Note, we skipped entering values for fv and type as they are '0' and excel considers them as default '0' when missing.

The Rate Calculations (Annuity)

Rate function is also most commonly used for loans where we need to find the effective rate of interest with an EMI. It can also be effectively applied to choose between different investment or loan repayment options. For rate calculations, one needs to be careful as the results are for the 'period' considered and we may need to convert it into annual rate if the used period in the function differs.

Client question 2: I have borrowed Rs.1,0,000 today from my bank for purchase of a bike. The loan is for 1 year and I need to pay an EMIs Rs.9,000. What is the interest rate charged?
Solving Function: Rate (nper,pmt,pv,fv,type,guess) = Rate (12,-9000,100000,0,1,0) = 1.43% monthly. Converting this to annual will give us 18.59% as the effective annual interest rate charged by the bank.

We can also use Rate to find the required returns on an SIP, just like lumpsum, for a target value. Client question 2: I wish to accumulate Rs.10 lakhs in 5 years by saving Rs.10,000 monthly. What will be estimated returns required on this?
Inputs: We are quoting all figures in monthly standard here. SIP = Pmt = -10,000. FV = 10,00,000, Nper = 60 months.
Solving Function: Rate (nper,pmt,pv,fv,type,guess) = Rate(60,-10000,0,1000000,1,0) = 1.57%. Since we were talking of monthly standard, converting this to effective annual rate will give us the figure of (1+1.57%)^12 -1 = 20.54% required annual returns.

Friends, we started this series in order to help you get more familiar with the excel functions which can be effectively used in our day-to-day practice. We have assumed that you are familiar with the basics of excel and if not, we urge you to get familiar as it is something basic to being a financial advisor. We will continue this series with the hope and belief that you are practicing these problems yourself and getting better and better at it each day.

Functions covered till now...

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Today is an internet driven world and almost every worthy business, big or small, is on the internet. About 80% of the consumers use the internet to search for products and services they need before they make a purchase. Most consumers today will assume your company has a website and may even search for your business. Imagine, what happens if you do not exist online?
Having a website has many great advantages and many great businesses have grown and succeeded driven by their websites. In our industry, every big IFA name has a quality website to highlight their services and achievements. In this piece, we take a closer look at the compelling reasons for you to own your own website.

• 1. Your clients expect it!

  Let us look at how we ourselves check companies, products, services and even for doctors, plumbers, electricians, etc. online before we even commit to any engagement. Any new consumer or investor is very likely to make a search for you online if he is looking to engage meaningfully with you. On the other side, whenever you are introducing yourself to any new investor, having a website helps you in a big way in your introduction.

• 2. To add credibility to your brand

  Being a financial advisor /planner requires trust on part of the investor. Having a good credibility in the market is one thing that helps greatly. But unfortunately, if you are new to business and/or meeting new clients who do not know you, then establishing this credibility becomes very difficult. Having a website to showcase you and your offerings can make a big difference here. Whether you are new or old in business, having a business website is one good way to build credibility.

• 3. Share info about your business /developments

  Let us now talk about what having a website really does. First & foremost, it introduces you to the outside world. Every basic website speaks about the business like the product basket, services, team, achievements and contact details. Beyond that, you can effectively use it to convey messages, information, sales pitch, product promotions, resources, etc. to your existing and/or new clients. A website provides the proper medium and a comprehensive platform to showcase yourself and your work.

• 4. Market your business 24/7, every day!

  If you want a marketing material for your business that never exhausts, is very dynamic, is comprehensive, always available and accessible from anywhere – the only answer is a website. A website, just like internet, is like a 24 by 7 marketing tool which will keep working for you even when you are not. Due to this, a website is also a very scalable and very cost effective compared other marketing activities, like for eg. giving adverts in newspapers which has a limited shelf life and reach.

• 5. Generate leads!

  In an increasingly internet dependent world, most potential investors are looking for advisors who can offer quality services. A website with proper tools and content invariably attracts more visitors and thus helps you to generate leads. Even sharing your website details with your natural market and in your other marketing materials will greatly help you to eventually convert the audience into leads and customers.

• 6. Get an edge over competition /other advisors

  Being in a competitive industry, IFAs need to stand out from the crowd especially when acquiring new customers. Having a high quality, professional website can make a big difference in your favour against any competition. Further, if you belong to a smaller city, a website greatly adds to the first impression. Needless to say, one without a website is always a step behind other IFAs.

• 7. Helps improve customer service

  A website can also be very effectively used to improve customer service for your investors. For eg., you can share FAQs, promote customer awareness, provide easy calculators, share forms, share newsletters and articles, receive queries, etc. These and many other things can be done to improve the customer experience meaningfully.

Conclusion:

As an independent financial advisor, we should not see ourselves as a totally offline entity and only pursue traditional ways of marketing to promote self and win customers. There is a risk attached to this when more and more investors are moving to the digital, online world and spending more time there for looking for everything.

Leveraging the website an effective tool for business activities has become critical today for many businesses, even if the business is largely offline. Of course, to succeed in business, website alone cannot be an answer. There is so much more required to be successful. But the importance of an effective website can never be overestimated and will play an important part for your business. To what extend you can leverage it and make use of it, it is up to you. So no matter how big or small you are or how well established you are, you should not wait any longer. It is time for you to have a proper professional presence in the digital world through your own website.

We at NJ understand the importance of having a proper website for our Partners. Many Partners were looking out for an in-house website solution from NJ. Well, the Good News is that we have recently launched our NJ Web Nest service to meet the expectations and the needs of our Partners.

With NJ Web Nest service, you have much more than a static website. You have a professionally, managed website complete with financial tools and resources, which will be regularly updated. It is a one stop, comprehensive solution for all your website needs. We are sure and confident that you will love the many great features that we offer at a great price point for you. So why wait? Visit NJ Web Nest today and realise your dream of having your own, professional, managed website.

Link > Partners Desk > Marketing > Web Nest > Web Nest Registration

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Executive Summary: Indian Financial Distribution at the cusp: Vision 2020

(Download Report)

The financial distribution industry in India is expected to see tremendous growth in the coming decade as a galloping economy boosts employment and raises incomes, and the much-vaunted demographic dividend drives investments into the capital markets. India is expected to log high GDP growth, which will push up household incomes and savings significantly. This will catalyze household investments of a ‘young’ nation where the number of households having annual income in excess of Rs 5 lakh is estimated to rise from around 6.24 crore in 2014 to around 12.14 crore by 2020.

We believe the next six years can very well spell boom time for financial products, specifically mutual funds and insurance plans, given that the economy is shifting to a higher-growth path. And as average household income rises, money managers and financial planners will have their task cut out: to steer the teeming millions towards financial investments and better potential returns for their hard-earned monies.

India’s financial distribution industry has a large footprint, accounting for around Rs. 7.92 lakh crore ($126.63 billion) of assets under management of mutual funds (MFs) as on March 2015 and Rs. 3.57 lakh crore ($57.08 billion) of insurance premium collected in 2013-14. Yet, less than 5% of India’s household financial savings of Rs. 8.19 lakh crore ($130.95 billion) was invested in the capital markets in 2013-14. There are three primary reasons for the abysmal level of interest: lack of awareness about financial products, market volatility, and a conservative mindset arising from low per-capita income. We believe it is in the nation’s interest that we have long-term policies for channelling household savings into the capital markets.

Indeed, financial intermediaries and distributors will have a seminal role to play in fully realising that enormous potential. Today, the average working person, because of inadequate awareness and limited knowledge of investments, requires guidance and handholding. While the proliferation of internet helps many find answers to their investment questions, a good lot require the personal touch -- of a friend, philosopher and guide, as it were -- to wade through the complex world of investments and arrive at the optimal choice.

Developing a vast pool of financial advisors and distributors is thus an imperative. This also helps in employment creation and retail penetration, and thereby benefits the economy at large. And since the industry requires specific skill sets, it is equally important to put in place initiatives that will foster such human resource development. Existing distributors are expected to resort to digital distribution to grow the industry significantly and at the same time reduce costs.

Implementation of the Securities Exchange Board of India's move to bring in a self-regulatory organisation (SRO) for mutual fund distributors would aid the industry. Additionally, creation of a single SRO for the entire distribution industry will help monitor and regulate financial intermediaries. This body could establish best practices and guidelines for its members, while keeping the interests of investors in mind, helping drive financial penetration further and spreading investor awareness. However, recent changes in the mutual fund industry including the recently imposed service tax on MF distributor commissions, and distributor commission capping can be a major dampener for the MF and the distribution industry unless resolved soon.

High potential
Within the financial products universe, mutual funds have the potential to grow the fastest as investors move away from traditional products and explore market-linked ones for long-term wealth creation. The mutual fund industry has potential to grow at 23% annualised over the next six years to an asset size of Rs 37 lakh crore ($591.57 billion). This is likely to be supported by distribution channels, which are estimated to grow at around the same pace. The pace will be aided by an increase in penetration in order to meet the financial aspirations of the rising middle-class as well as capital market performance. Banks, both private and PSUs, are in a sweet spot to capture the large middle class population across geographies. Independent financial advisors (IFAs) and national distributors (NDs) through technology-enabled sub-broker models are expected to expand their reach and presence in the B-15 cities (non-metros) to capture the biggest chunk of this growth opportunity.

In the Insurance industry, rise in penetration will be fuelled by increase in population, particularly the working age population, rising income levels, as well as other socio-economic factors such improvement in lifestyle, higher medical costs and nuclear family system. We estimate that although the Life Insurance Corporation of India (LIC) will continue to be far ahead of the private sector in terms of market share, the private sector will grow faster. Traditional products would continue to reign due to pricing disparity. Premium in life insurance is projected to more than double to nearly Rs. 9 lakh crore ($143.58 billion) by 2020 from Rs. 3.14 lakh crore ($50.20 billion) in 2014, while premium in the non-life insurance industry is presaged growing two-and-a-half times from Rs. 70,610 crore ($11.35 billion) in 2014 to nearly Rs. 1.8 lakh crore ($29.26 billion) by 2020.

As alternative investment funds (AIFs) and portfolio management services (PMS) are niche products, mainly targeting the high net-worth individual (HNI) and ultra-high net-worth individual (UHNI) segments, they form a small part of the overall product pie. India being a developing economy is yet to see significant investment flow in this category. This segment is likely to rise among private sector banks, boutique wealth management firms and national distributors due to the increase in HNI base at the end of 2020. However, this figure may likely be marginal compared with other products.

Key drivers

Hands on the deck: There has been a decline in the number of active distributors in recent years for both mutual funds and insurance. Retaining distributors and retail agents becomes a huge challenge for insurers in particular, considering they invest a lot on training. High level of churn affects long-term plans and costs of companies. With fewer players, the reach across different income and geographical segments is limited and penetration that much more difficult. We believe having players catering to multiple client segments will improve the economics of business. Skill enhancement and training would be imperative to expand the network of distributors. As such, the number of distributors should potentially grow by 3 to 5 times by 2020 to meet the industry potential.

Awareness: Low financial literacy levels and lack of awareness, unless addressed well, will inhibit the industry’s growth. Financial products continue to be ‘push’ products in India and regular connect plays a huge role in fostering trust, retaining investors and attracting more investment. Asset allocation and financial planning help in goal planning and meeting various objectives. However, till such time investors remain unaware of such concepts, money will continue to flow into gold and real estate. Development of new distribution channels, government support through schemes such as the inclusion-driver Jan Dhan Yojana and greater focus on retirement planning through introduction of schemes on the lines of the 401(k) in the US will help the mutual fund industry realise its potential.

Business Viability: Rising employee costs (fixed and variable) and real estate prices also threaten the distribution industry’s growth - particularly the national and regional players. The industry is currently grappling with changes in its business model, such as capping of commission and inclusion of distributors under the service tax regime, which could be a major dampener for the industry. This can affect players who haven’t adopted a scalable model. While automation cuts costs, complex systems can add to costs when business plans are revised.

Technology: As investors become more tech savvy, the pace of integration of newer technologies will also become easier. Recent initiatives to extend financial inclusion through mobile banking and trading and initiatives to enable tablet-based investments are precursors to the great role technology will play in years to come. Appropriate technology can also help reduce transaction costs. A reduction in physical costs (paperwork, labour) enables the distributor to focus on value additions for the client, bring in efficiency of time and enable the distributor to increase volume. In addition, technology can play a major part in compliance of rules and regulations in maintaining up-to-date database in keeping with norms. Thus new-age technology models, with ease of transaction and better reporting, can lead to better results for industry growth by distributors.

(Download Report)

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