REPORT

ON

1. PORTFOLIO MANAGEMENT SERVICES:

LANDSCAPE IN INDIA

2. WRAP ACCOUNT

3. MULTI-MANAGER INVESTMENTS

4. ALTERNATIVE INVESTMENTS

1
 1. PORTFOLIO MANAGEMENT LANDSCAPE IN INDIA
Contents
Page No.
1.0 OVERVIEW

1.1 INTRODUCTION……………………………………………….………………..……………………. 7
1.2 SCOPE OF THE STUDY……………………………………………………………..……………. 7
1.3 LIMITATIONS OF THE STUDY............................................................................................ 7

2.0 BRIEF REVIEW OF FEW OF THE PROVIDERS OF PMS IN INDIA

2.1 KOTAK SECURITIES……………………………………………………………………………….. 9

PRODUCTS
2.1.1 GEMS………………………………………………………………………………………………………. 9
2.1.2 ORIGIN…………………………………………………………………………………………………….. 9
2.1.3 SELECT PORTFOLIO……………………………………………………………………………………..9
2.1.4 SELECT OPTIMA…………………………………………………………………………………………. 10
2.1.5 KLASSIC PORTFOLIO – FLEXI………………………………………………………………………… 10
2.1.6 INVESTGUARD PORTFOLIO…………………………………………………………………………… 10
2.1.7 CORe PORTFOLIO……………………………………………………………………………………….. 10

2.2 ABN – AMRO ASSET MANAGEMENT……………………………….……………….……..11

2.2.1 EXCLUSIVE PORTFOLIO…………………….…………………………….…………………………… 11

2.2.2 ADVANTAGES OF PMS AT ABN AMRO…………….................................................................... 11

2.3 MOTILAL OSWAL PMS……………………………………..…………………………………….. 12

PRODUCTS
2.3.1 VALUE PORTFOLIO…………………………...………………………………………………………… 12
2.3.2 BULLS EYE PORTFOLIO…………...…………………………………………………………………… 13
2.3.3 NEXT TRILLION DOLLAR OPPORTUNITY PORTFOLIO……………………………………………14
2.3.4 ADVANTAGES OF PMS AT MOTILAL OSWAL………………………………………………………. 15

2.4 HSBC PORTFOLIO MANAGEMENT SERVICES………………………..……………… 16

PRODUCTS
2.4.1 CAPITAL GUARD PORTFOLIO……………………………. ………………………………………….. 16
2.4.2 SIGNATURE PORTFOLIO………………………………………...……………………………………..16
2.4.3 STRATEGIC PORTFOLIO…………………….……………. ………………………………………….. 16
2.4.4 85% CAPITAL PROTECTION ORIENTED PORTFOLIO……………………………………………. 17
2.4.5 LARGE CAP ORIENTED PORTFOLIO…………………..……………………………………………. 17

2.5 SHAREKHAN PORTFOLIO MANAGEMENT SERVICES………..…………………. 18

PRODUCTS
2.5.1 PMS PRO PRIME…………….……………………………………….………………………………….. 18

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 2.5.2 PMS PRO TECH………………………...…………………………………………….…………………..19

2.6 ICICI PRUDENTIAL PORTFOLIO MANAGEMENT……………….……………………. 20

2.6.1 ADVANTAGES OF PMS AT ICICI PRUDENTIAL…………………………………………………..... 20

PRODUCTS
2.6.2 AGGRESSIVE PORTFOLIO......................................................................................................... 21
2.6.3 DIVIDEND YIELD PORTFOLIO………………………………………………………………………... 21
2.6.4 DEEP VALUE PORTFOLIO.......................................................................................................... 21
2.6.5 THE FOCUSED PORTFOLIO………………………………………………………………………….. 21
2.6.6 ALPHA PORTFOLIO..................................................................................................................... 22
2.6.7 PRESERVATION OF INVESTMENT AMMOUNT (ASSET SHEILD)........................................... 22
2.6.8 DEFINED TENURE SERIES PORTFOLIO……………….…………………………………………... 23
2.6.9 ONLY OPTIONS PORTFOLIO...................................................................................................... 23
2.6.10 PRINCIPAL PROTECTED PORTFOLIO.......................................................................................
23
2.6.12 INFRASTRUCTURE PORTFOLIO................................................................................................ 23
2.6.12 DIVERSIFIED PORTFOLIO.......................................................................................................... 24
2.6.13 ABSOLUTE RETURN PORTFOLIO………………………….………………………………………...24
2.6.14 INDIA OPPORTUNITIES PORTFOLIO……………………………………………………………….. 24

2.7 RELIGARE PORTFOLIO MANAGEMENT……….………………………………………… 25

PRODUCTS
2.7.1 PANTHER…………………………………………………………………………………………………. 25
2.7.2 TORTOISE………………………………………………………………………………………………… 25
2.7.3 ELEPHANT………………………………………………………………………………………………... 25
2.7.4 CATERPILLAR…………………………………………………………………………………………..... 26
2.7.5 LEO……………………………………………………………………………………………………….... 26
2.7.6 ADVANTAGES OF PMS AT RELIGARE……………………………………………………………..... 26

2.8 ANGEL BROKING PORTFOLIO MANAGEMENT……….…………………………….. 27

PRODUCTS
2.8.1 ANGEL OYSTER…………………………….................................................................................... 27
2.8.2 ANGEL BLUE CHIP ………..……………………………………………………………………………. 28
2.8.3 ANGEL GROWTH FUND..………………………………………………………………………………. 28
2.8.4 EQUITIES AND DERIVATIVES FUND………………………………………………………………… 29
2.8.5 ADVANTAGES OF PMS AT ANGEL BROKING..……………………………………………………. 29

2.9 BONANZA PORTFOLIO MANAGEMENT……………….………………………………… 30

2.10 DEUTSCHE BANK………………………….……………………………………………………... 31

PRODUCTS
2.10.1 EQUITY ADVISORY PRODUCTS……........................................................................................ 31
2.10.2 CAPITAL PROTECTED PRODUCTS ……………………………………………………………….. 32
2.10.3 DERIVATIVE ARITRAGE PRODUCTS………………………………………………………………. 32
2.10.4 PURE DERIVATIVE PRODUCTS…………………..………………………………………………… 32
2.10.5 ALPHA PRODUCTS……………………………………………………………………………………. 32

3.0 PORTFOLIO MANAGEMENT & MUTUAL FUNDS………………….………………………… 33

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4.0 FUTURE OF PORTFOLIO MANAGEMENT SERVICES………………………..…………… 34
2. WRAP ACCOUNT
Contents
Page No.
1.0 OVERVIEW
1.1 INTRODUCTION………………………………………………………………………………………... 36
1.2 CONCEPT…………………..……………………..……………………………………………………….. 36
1.3 VARIATIONS OF WRAP ACCOUNTS…………….……………………….…………………… 36

2.0 THE EVOLUTION OF WRAP SERVICES

2.1 USA………..……………..….……………………………………………………………………………….. 37
2.2 AUSTRALIA………………………………………...……………………………………………………… 38
2.3 SOUTH AFRICA………………………………………….……………………………………………… 38

3.0 PROVIDERS OF WRAP PRODUCTS…………………………………………………………………. 39

4.0 ADVANTAGES OF WRAP…………………………………………………………………………………. 40

5.0 MUTUAL FUND WRAP…………………………..………………………………………………………….. 41

5.1 DISCRETIONARY…………..………………….………………………………………………………. 41
5.2 NON-DISCRETIONARY…………….……….………………………………………………………. 41
5.3 ADVISORY……..………………………………….………………………………………………………. 42

6.0 AMP WRAP PROVIDER...................................................................................................................... 43

6.1 ADVANTAGES............................................................................................................................... 44
6.2 DISADVANTAGES....................................................................................................................... 44
6.3 WEALTHVIEW eWRAP.............................................................................................................. 44

7.0 WRAP ACCOUNT AND MASTER TRUSTS……………………………………………………….. 45

8.0 WRAP ACCOUNT & MUTUAL FUND……………………………………………………………….... 45

9.0 WRAP ACCOUNT & PORTFOLIO MANAGEMENT…………………………………………..… 46

10.0 KEY FINDINGS………………………………………………….…………………………………………….. 47

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 3. MULTI MANAGER INVESTMENTS
Contents
Page No.

1.0 OVERVIEW
1.1 INTRODUCTION……………………………………...…………………............................................. 49
1.2 TYPES OF MULTI-MANAGER FUNDS………………………………………………………… 49
1.3 GLOBAL SCENARIO…..……….................................................................................................. 50

2.0 MANAGER OF MANAGER

2.1 INTRODUCTION……………………..……………...…………………............................................. 51
2.2 NEED FOR MULTI MANAGER FUND………………..…………………………………………. 51
2.3 ADVANTAGES OF MULTI-MANAGER FUNDS…….…….……………………..…………. 52
2.4 FRANK RUSSELL COMPANY…………..………..……………………………………………….. 53
2.4.1 SCREENING MONEY MANAGERS………………………………………………… 53
2.4.2 SELECTING THE BEST…………………….…………………………………………… 54

3.0 FUND OF FUNDS

3.1 INTRODUCTION……………………..……………...…………………............................................. 55
3.2 MOTIVE…………………..…………………………………………………………………………………. 55
3.3 ADVANTAGES OF FUND OF FUND……………………………….…………………………… 55
3.4 DISADVANTAGES…………………………………………………………..………………………….. 56
3.5 FUND OF FUNDS IN INDIA...................................................................................................... 57
3.5.1 FOF GUIDELINES………………………………………………………………………. 57
3.5.2 HISTORY OF FUND OF FUNDS IN INDIA……………………………........... 58
3.5.3 CURRENT SCENARIO………………………………………………………………... 59
3.6 THE DOWNSIDE OF FUND OF FUNDS: MULTI LAYERED COSTING…………... 60
3.7 LIFE CYCLE FUNDS………………………………………………………………………..…………. 62
3.7.1 THE CONCEPT………………………………………………………………………….. 62
3.7.2 LIFE CYCLE FUNDS IN INDIA……………………………………………………. 63
3.7.2.1 FRANKLIN LIFE STAGE FUNDS…………………………………...63
3.8 MYWRAP “A PMS FOF”……………………..……………………………………………………….. 65

5
PORTFOLIO MANAGEMENT SERVICES

Landscape in India

6
1.0 OVERVIEW

1.1 INTRODUCTION

In today's complex financial environment, investors have unique needs which are derived from
their risk appetite and financial goals. But regardless of this, every investor seeks to maximize his
returns on investments without capital erosion.

The art and science of making decisions about investment mix and policy, matching investments
to objectives, asset allocation for individuals and institutions, and balancing risk against
performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice
of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs
encountered in the attempt to maximize return at a given appetite for risk.

While there are many investment avenues such as fixed deposits, income funds, bonds, equities
etc. It is a proven fact that equities as an asset class typically tend to outperform all other asset
classes over the long run. Investing in equities, require knowledge, time and a right mind-set.
Equity as an asset class also requires constant monitoring & it may not be possible for investors
to give the necessary time, given other commitments. For those who need an expert to help to
manage their investments, portfolio management service (PMS) comes as an answer.

1.2 SCOPE OF THE STUDY

The scope of the report is to analyze the portfolio management services landscape in India. Few
of the leading portfolio management providers have been selected for in depth analysis of their
business model; with a special emphasis on their investment process/philosophy and the
products provided by them. The report aims to understand the product offerings and customized
services provided by the PMS houses. It will also help to understand the future prospects of
portfolio services.

1.3 LIMITATIONS OF THE STUDY

The SEBI rules and regulations for PMS are not very stringent and as a result, information is not
easily available to the general public as the AMC’s (Asset Management Company) do not need to
disclose it compulsorily. Information such as past performance, asset under management,
portfolio statements etc are not reported publicly. Therefore, it is tough to make a comparison
between the portfolio management service providers due to lack of information/data.

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"Portfolio manager" means any person who pursuant to a contract or arrangement with a client,
advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio
manager or otherwise) the management or administration of a portfolio of securities or the funds
of the client.1

PMS (Portfolio Management Service) offers customized solutions to the high net worth
investors and invests on their behalf in both the equity and debt markets. The fund management
industry using the PMS route has lately witnessed stunning growth with a large number of players
now offering specialized fund management services and catering to the needs of the investors.

Currently, there are 174 PMS providers in the country registered with SEBI.2

There are mainly three kinds of portfolio management services, namely

 Discretionary Portfolio Management

 Non-discretionary Portfolio Management &
 Advisory Services

Discretionary Portfolio Management is where the fund manager has the liberty to invest the
funds at his discretion without consulting the client. The fund manager independently manages
the funds of each client.

In non-discretionary fund management service, all investment decisions are carried out after
consultation with the client.

In advisory services, clients are given advice about investment prospects for a fee. It is up to the
discretion of the investor to invest or not to invest.

1
SEBI
2
www.sebi.gov.in

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2.0 BRIEF REVIEW OF FEW OF THE PROVIDERS OF PMS IN INDIA

2.1 KOTAK SECURITIES

Kotak Securities is one of India’s oldest portfolio management companies with over a decade of
experience. It is also one of the largest, with Assets Under Management of around Rs. 2500
Crores. At the very base of a financially sound portfolio lies the identification of one’s investment
objective. The PMS helps investors to identify their investment objectives and also outline
important requirements like liquidity, capital appreciation, current income, time span and fiscal
implications and then suggest an appropriate scheme.

PRODUCTS

2.1.1 GEMS PORTFOLIO

 The main objective of the scheme is to generate capital appreciation in the medium
term to long term through investments in equities and equity related instruments.
 Portfolio with companies across large cap, mid cap and small cap segments
 Option to participate in pre FPO or private placements of listed companies
 This is a diversified scheme investing across the sectors and does not have sectoral
restriction
 Benchmark: BSE 200 Index
 These investments have a lock in clause for a pre specified time horizon

2.1.2 ORIGIN EQUITY PORTFOLIO

 The portfolio would aim to invest in growth oriented companies with sustainable business
models backed by strong management capabilities with emphasis on smaller capitalized
companies with a market capitalization not exceeding Rs.2500 crores at the time of
investment.
 Buy & Hold a basket of 15-25 companies with a medium to long term horizon
 The portfolio is constructed with long term view for an investor who is unperturbed by
short term returns, volatility and market momentum.
 Any investor with a penchant for high risk taking qualifies for the portfolio.

2.1.3 SELECT PORTFOLIO

 Multi cap portfolio with companies spread across large cap, mid cap and small cap.
 Tenure - Long term (approx. 18 Months)
 Aggressive Concentrated Portfolio consisting of 10-12 stocks
 Buy & hold approach
 Investment Domain:
Sectors expected to be beneficiaries of demographic patterns & reforms.
Sectors expected to benefit from infrastructure spending.

9
2.1.4 SELECT OPTIMA

 Portfolio seeks to achieve returns through broad based participation in equity markets by
constructing a focused portfolio of sizably capitalised companies.
 Target Domain: Companies having marketing capitalisation of more than Rs. 4000
Crores.
 Investments driven by both medium and long term investment horizon
 Medium term: 9-12 months
 Long term: 12 to 24 months
 Portfolio shall be diversified over 15-20 stocks across the sectoral spectrum

2.1.5 KLASSIC PORTFOLIO - FLEXI

 The scheme will seek to achieve returns through broad based participation in equity
markets by creating a diversified equity portfolio of small, medium and large capitalized
companies
 Sectoral Composition - Across all market capitalization
 No of Stocks - up to 20
 Scan the investment universe
 Identify companies with higher growth as compared to the market
 Scout for companies which can result in higher growth in earnings on a sustained basis

2.1.6 INVESTGUARD PORTFOLIO

 Invests across shares and fixed income products, moving from shares into fixed
interest investments when the fund's value drops below a predetermined "floor".
When markets start to move up, the product increases its holdings in shares, tapping into
these growth opportunities
 Exposure: Equity: 0-100%; Debt: 0-100%.
 The debt portion will be invested in debt oriented schemes of mutual funds, Gilt
schemes, Liquid schemes, money market instruments, Government securities, Corporate
Bonds and deposits, securitised instruments and / or any other instruments permitted by
SEBI.
 The equity portion would be primarily invested in large cap stocks with high liquidity
and closely follows the BSE Sensex movement.
 Suitable for investor with a penchant for low risk taking qualifies for the portfolio.

2.1.7 CORe PORTFOLIO

 CORe Portfolio aims to capture the long term upside of the India Growth Story by
diversifying across the major themes.
 Sectoral Composition Diversified across sectors and Market Capitalisation with focus on
companies benefiting from:
 Increase in consumer spending
 Outsourcing
 Increase in infrastructure spending
 Real estate growth

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2.2 ABN – AMRO ASSET MANAGEMENT

2.2.1 EXCLUSIVE PORTFOLIO

OBJECTIVE

 To generate capital appreciation over the medium to long-term

 Achieved by concentrated investments in stocks across businesses
 Ideal for investors with a reasonably high risk appetite and with an investment horizon of
more than 18 months

Approach
Investments guided by fundamentals of:

 Growth Investing - companies with long-term earning growth at reasonable valuation

(GARP - Growth At Reasonable Price)
 Value Investing - stocks where asset value is more than enterprise value
 Investments governed by stage of business cycle of the company & not restricted by size
 Bottom-up stock selection process & screening based on financial health, earnings
visibility and management credibility
 Number of stocks in the portfolio will be restricted to approximately 15
 Cash will be used as an effective portfolio management tool
 Portfolio Benchmark - BSE Sensitive Index

2.2.2 ADVANTAGES OF PMS AT ABN – AMRO

 Advantage of globally proven investment management, processes & expertise

 Innovative & up-to-date Financial Solutions
 Complete transparency
 Information at your fingertips
 Strong client-servicing support
 Backed by a tradition of trust & confidentiality

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2.3 MOTILAL OSWAL PMS

Motilal Oswal Securities Ltd brings with more than 2 decades of experience & expertise in equity
research and stock broking. They are one of the leading portfolio service providers, with asset
under management worth Rs. 590 Crores.

PRODUCTS
 Value Portfolio
 Bulls Eye Portfolio
 Next Trillion Dollar Opportunity Portfolio

2.3.1 VALUE PORTFOLIO

Value Portfolio is meant for investors with a Long Term investment horizon in the Indian Equity
Markets. The portfolio’s investments philosophy revolves around finding value. As such, the
investment philosophy is not dependent on the market trends but banks on the power of the
intellect. A business is prudently picked for investment after a thorough study of its underlying
hidden long-term potential.

The Fund manager conservatively picks 12 to 15 value stocks for a portfolio with a long-term
investment philosophy, keeping the portfolio churn very low and high margin of safety. The aim of
the theme is to maximizing post tax returns.
Risk Return Matrix
Features

 Long Term Perspective:

Maturity 3-5years
 Medium Risk & Medium to High
Returns
 Investment identified with a bottom
up approach
 Investment approach – Buy & Hold
 Aim to maximize post tax returns due
to low churn
 Investments are identified by a Bottom
up Approach. The aim is to identify
potential long-term wealth creators by
focusing on individual companies and
their management bandwidth.

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2.3.2 BULL’S EYE PORTFOLIO

Bull’s Eye PMS Portfolio under is designed to invest in stocks with short-medium term
perspective, for a minimum 15-20% move. The investment philosophy is to find “Momentum
in Value”. It follows an active process driven method of profit booking and is parked temporarily
in the safety of liquid mutual funds/ exchanges traded liquid funds till further opportunities are
identified.

The stock selection lays greater emphasis on companies which good corporate governance and
excellent management track record. It would participate in emerging sector and turn around
stories so as to participate and capture sharp rallies.

Portfolio Objective

 The Scheme aims to deliver superior returns in Low to medium term by investing in
fundamentally strong stocks with momentum approach, coupled with active profit
booking.
 Investment Strategy
 The investments timing is event based and do not take help of technical analysis.
Buying when the stock is just ripe to begin its big move upwards or vise versa.
 The investments are done with a predefined price targets and portfolio follows an active
process of Profit Booking.
 In absence of investment opportunities, funds are temporarily parked in the safety of
liquid mutual funds or exchange traded Liquid fund.

Risk Return Matrix

Features

 Minimum Portfolio Value – 50 lakhs

(Investors can join at 25 lakhs and
scale up)
 Short to Medium Term Perspective
 Tenure 6 months to 1 year
 Investment Approach - Momentum In
value
 Medium – High Risk/Return
 Objective – Regular Profit Booking
 Ability to sit on cash

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2.3.3 NEXT TRILLION DOLLAR OPPORTUNITY PORTFOLIO

Objective

The Product aims to deliver superior returns by investing in Small & Mid cap ideas that are part of
the next Trillion Dollar GDP growth opportunity.

The portfolio is designed to invest in themes /stocks in the small and mid cap segment which are
going to be a part the “NEXT TRILLION DOLLAR GDP GROWTH”. The Portfolio would target to
invest in Small & Mid Cap Opportunities which have the potential of delivering above-average
growth over the next 2-3 years.

Investment Philosophy
The investment philosophy is to invest in stocks which are available at reasonable valuations and
promise more than average growth. The portfolio would aim to identify emerging themes.

 High Growth Story

Sector and Companies which promise a higher than average growth
 Reasonable Valuation
Invest in high growth companies at reasonable price / value
 Emerging Themes
Focus on Identifying Emerging Stocks / Sectors
 Buy & Hold Strategy
The Portfolio shall focus on above philosophies and hold them till it realizes it true
market potential. Wealth is created by sitting.
Risk Return Matrix

Features

 Tenure 3-5 years

 High Risk & High Return
 Target to invest in Small & Mid Cap
opportunities which have the potential of
delivering above average growth.
 Bottom Up selection approach
 Open ended scheme with Exit fee
 Benchmark – CNX Midcap
 Quarterly Disclosure of Portfolio
 Low Portfolio Churn – Buy & Hold
philosophy

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2.3.4 ADVANTAGES OF PMS AT MOTILAL OSWAL

 Professional Management
The service offers professional management of equity investments with an aim to deliver
consistent return with an eye on risk. .

 Risk Control
Well defined investment philosophy & strategy acts as a guiding principle in defining the
investment universe. Robust portfolio management software that enables the entire
construction, monitoring and the risk management processes.

 Convenience
Portfolio Management Service relieves investors from all the administrative hassles of
their investments. They provide periodic reports on the performance and other aspects of
investor’s investments.

 Constant Portfolio Tracking

Understand the dynamics of equity as an asset class, tracking the investments
continuously to maximize the returns.

 Transparency
Investors get account statements and performance reports on a monthly basis. That’s not
all; web access will enable them to track all information relating to their investment on
daily basis. A password protected web login will enable to access details on their
investment on click of a button. The following portfolio reports are accessible online:

o Performance Statements
o Portfolio Holding Reports
o Transactions Statements
o Capital Gain / Loss Statements

 Dedicated Relationship Manager

Relationship manager will help the investors carefully understand their financial goals and
advise the right product mix. The relationship managers, the one point contact will bestow
personalized service and ensure that the investors receive periodic updates, and account
performance reports.

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2.4 HSBC PORTFOLIO MANAGEMENT SERVICES

PRODUCTS

2.4.1 CAPITAL GUARD PORTFOLIO

HSBC Capital Guard Portfolio is the first Capital Guaranteed portfolio in India from HSBC.
Guaranteed by HSBC Bank, this portfolio is ideal for investors who wish to gain from a potential
equity upside, yet seek a capital guarantee on the investment amount.

The key strengths of this product are:

 100% Capital Protection Guaranteed – 100% of initial investment back at maturity

(after 4 years). For the guarantee to be applicable, the investor will need to remain
invested till maturity
 100% Initial Equity Exposure – They offer optimal allocation to actively managed
equities aimed at Capital Appreciation
 Profit Lock-in Mechanism – The portfolio endeavors to capture upside by providing a
3% lock-in for every 10% increase in initial portfolio
 Easy Liquidity – 4 year tenor with liquidity provided through the tenor of the product
(subject to exit loads)
 Minimum Investment Amount – Rs 25 lacs

2.4.2 SIGNATURE PORTFOLIO

With the ‘Signature’ investment strategy, the fund management team aims to deliver potential
results by investing in the Right Stocks, at the Right Value, with the Right Exposure. They choose
the stocks they believe in, ably guided by their talents and convictions. If they know it is a good
company, they buy enough to make a real difference to returns; and when they do not like a
company, they do not have to own it.

2.4.3 STRATEGIC PORTFOLIO

Fund Managers take a keen look at stocks that are undervalued as they are currently in an
unusual situation resulting in a significant price-value mismatch. With their knowledge and
training, they choose stocks that have the potential to provide long-term value to you.

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2.4.4 85% CAPITAL PROTECTION ORIENTED PORTFOLIO

 This is an open ended product that seeks to generate capital appreciation by investing
in equity / equity related securities while endeavoring to partially protect (i.e. 85%
of the capital) the downside by investing in debt / money market instruments /
funds.
 The Portfolio will invest primarily in a basket of stocks aimed at replicating the NSE
NIFTY Index composition and/or money market instruments through the liquid schemes
of HSBC Mutual Fund.
 The product is managed using CPPI methodology with Sinopia Asset Management, Hong
Kong as the Investment Advisor to the product.
 The allocation between the basket of stocks and the liquid, money market funds or
instruments will be managed in such a way that the Portfolio endeavors not to lose
more than 15% over a period of one year starting on the launch date and reset on
each subsequent anniversary date.
 The portfolio provides daily liquidity, with redemptions allowed on an ongoing basis
without any exit load applicable.
 Downside protection is an investment objective only and does not represent a
formal guarantee.

Protection orientation of 85% of the total asset value of the pooled account prevailing at the last
reset date. The protection level is reset every year as of the strategy’s launch anniversary date.
Protection is based on the subscription amount (net of subscription fees).

2.4.5 LARGE CAP ORIENTED PORTFOLIO

This portfolio thinks big, targets out-performance without compromising on the fundamentals. It
aims to generate capital appreciation by investing in predominantly large and established
companies having a proven track record and possessing high return potential.

 Key is in selecting scrip’s that would focus on the fundamentals of the business, the
industry structure, the quality of management, sensitivity to economic factors, the
financial strength of the company, key earnings drivers & valuations.
 The aim is to deliver above-benchmark returns by providing long-term capital growth
from an actively managed portfolio.
 The Scheme will have a preference for large-cap companies and would normally be
invested at least 70% in large-cap stocks.

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2.5 SHAREKHAN PORTFOLIO MANAGEMENT SERVICES

PRODUCTS

2.5.1 PMS PRO PRIME

 Ideal for investors looking at steady and superior returns with low to medium risk
appetite.
 This portfolio consists of a blend of quality bluechip and growth stocks ensuring a
balanced portfolio with relatively medium risk profile.
 The portfolio will mostly have large capitalization stocks based on sectors & themes that
have medium to long term growth potential.

Product Approach
Investments are based on 3 beliefs:
 Consistent, steady and sustainable returns
 Margin of Safety
 Low Volatility

Product Characteristics

 In-depth, independent fundamental research; bottom up stock selection

 High quality companies with relatively large capitalization.
 Disciplined valuation approach applying multiple valuation measures
 Medium to long term vision, resulting in low portfolio turnover

Product Details
 Minimum Investment: Rs 10 lakhs
 Lock in period: 6 Months
 Reporting: Online access to portfolio holdings, quarterly reporting of portfolio
holdings/transactions
 Charges:
o 2.5% per annum AMC charged every quarter
o 0.5% brokerage
o 20% profit sharing after
o 15% hurdle is crossed-chargeable at the end of the fiscal year.
 Profit withdrawal in multiples of 25000 after lock in period.

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2.5.2 PMS PRO TECH

Protech uses the knowledge of technical analysis and the power of derivatives market to
identify trading opportunities in the market. The Protech lines of products are designed around
various risk/reward/volatility profiles for different kinds of investment needs.

Protech is based on:

 Long Short strategies
 Focus on absolute returns
 Timing the market

Product Approach
 Superior performance can be achieved through sheer market timing, by picking
Stocks/Nifty before the infection points in their trading cycles
 Linear returns are possible from having sell market positions in downtrends and by using
the options market to change the portfolio beta
 Money management rules will be in place.

Product Characteristics
 Using swing based index -trading systems, stop and reverse, trend following and
momentum trading techniques.
 Nifty based products for low impact cost and low product volatility.
 Both long and short strategies to earn returns even in falling markets.
 The use of options to enhance the risk reward profile of the product and therefore offers a
higher Beta.

Product Details
 Minimum Investment: Rs 10 lakhs
 Lock in: 6 months
 Charges:
o AMC fees 0% fixed management charges;
o Brokerage 0.05% for derivatives,
o 20% profit sharing on booked profits on quarterly basis.
 Reporting: Monthly reporting of transactions.
 Profit withdrawal in multiples of 25000 after lock in period.

19
2.6 ICICI PRUDENTIAL PORTFOLIO MANAGEMENT

ICICI Prudential Asset Management Company, a joint venture between Prudential, U.K.'s leading
insurance company and ICICI Bank Ltd., India's largest private sector bank, is the investment
manager for ICICI Prudential Mutual Fund. ICICI Prudential Mutual Fund is the largest and
amongst the fastest growing mutual funds in the country with a rapidly growing family of over
14.50 lakh investors.

ICICI Prudential Portfolio Managers, a division of ICICI Prudential Asset Management Company,
is created especially to meet the investment needs of a select clientele who require focused
portfolios.

2.6.1 ADVANTAGES OF PMS AT ICICI PRUDENTIAL

 Commitment towards transparency and service.
 Strong research driven investment process.
 Information and accessibility is the key

Information that is updated on a daily basis and unmatched interactivity, a whole new era in
portfolio management has now been ushered in. A first in the industry; via a password protected
website, investors have access to:
 A portfolio disclosure statement where the entire portfolio will be disclosed.
 A financial summary comprising the Income Statement and Balance Sheet.
 A detailed client account statement that allows tracking inflows and outflows.
 A transaction statement listing all the transactions made.
 Calculations of capital gains.
 Comprehensive performance tracking.
 Convenience and customization through services.

Customer Relationship Manager

Every investor has their one point contact Customer relationship manager, and a personal
Portfolio Manager - their portfolio investment guide, to discuss in depth and understand
customer’s investment objectives, risk-return appetite and establish required service levels. On
the basis of this, they evolve a portfolio that is best-suited for the investor.

Thereafter, the Customer Relationship Manager will periodically interact with investors for any
other clarifications and services. Investors can review their portfolio with their personal Portfolio
Manager and Customer Relationship Manager at least once every quarter.

20
PRODUCTS

2.6.2 AGGRESSIVE PORTFOLIO

 This portfolio is aimed at investors who are looking for higher returns.
 The portfolio is constructed with a value-orientation and with adequate
diversification, but which will at times take on certain aggressive positions.
 Depending on the market conditions these could include a greater exposure to high
beta / mid-cap / illiquid stocks, an exposure in momentum stocks.

2.6.3 DIVIDEND YIELD PORTFOLIO

 This portfolio endeavors to generate superior risk-adjusted returns through a

combination of dividend income and capital appreciation.
 This portfolio may be considered appropriate for investors with a relatively low risk
appetite, who wish to earn potentially higher returns, offered through the equity
markets.
 It is also suitable for investors looking for tax-efficient investment options that offer the
scope for high-returns. Investments are proposed to be made primarily in stocks that
offer an attractive dividend yield.
 Portfolio Manager seeks to pay particular attention to the dividend track record,
sustainability of free cash flows / dividends, industry prospects, management quality,
business fundamentals etc., with an attempt to include only high-quality companies in the
portfolio.

2.6.4 DEEP VALUE PORTFOLIO

 The objective of the portfolio is to generate returns over the long term, by investing in a
diversified portfolio of undervalued stocks.
 Various parameters may be used to judge the degree of under valuation of the stocks
including, but not limited to, price/earnings (p/e), price/book (p/book), dividend yield (DY),
price/cash flow, replacement cost, valuations relative to history/sector/markets, etc.
 Due attention will be paid to qualitative parameters such as management quality, industry
prospects, liquidity etc.

2.6.5 THE FOCUSED PORTFOLIO

 The Focused Portfolio endeavors to generate capital appreciation by taking

concentrated positions in stocks and sectors.
 Greater concentration of the portfolio will increase both the risks and potential
returns from the portfolio.
 The Focused Portfolio is not limited by any particular theme / sector / market
capitalization and has the flexibility to choose between stocks across themes / sectors /
investment styles

21
2.6.6 ALPHA PORTFOLIO

 The Alpha Portfolio seeks to capture Alpha - which is out performance to index in the
client’s portfolio.
 The entire portfolio will be hedged against market movements by using Nifty futures.
 The portfolio would remain fully hedged at all times. The hedged portfolio would reduce
market risk (beta) by insulating the portfolio against market movements.

2.6.7 PRESERVATION OF INVESTMENT AMMOUNT (ASSET SHEILD)

The portfolio is invested in a mix of fixed income mutual funds / securities and equity
derivatives in such a manner so that the same endeavors to preserve the stated percentage of
the Investment Amount while at the same time an attempt would be made to enhance returns
by the use of equity derivatives.

Arbitrage opportunities between the cash and futures market may also be undertaken as
part of the fixed income component.

Cash future arbitrage

The cash futures arbitrage strategy can be employed when the price of the futures exceeds the
price of the underlying stock. Two simultaneous transactions are undertaken:
 Selling the futures
 Buying the underlying stock.

The sale of the futures would require a payment of an initial margin (of which 50% can be paid in
the form of securities i.e. the stock purchased) to the exchange and also mark to market margins
which are a function of market movements. The position may be held till expiry of the futures
contracts. By definition, the price of the futures will equal the closing price of the stock. Thus, the
price differential between the futures and the stock is realized.

The position could even be closed earlier in case the price differential is realized before expiry or
better opportunities are available in other stocks.

Index (Nifty) arbitrage (Future)

The Index (Nifty) arbitrage (Future) would attempt to capture arbitrage opportunities between the
futures on stocks comprising the Nifty Index (by market weightage) and futures on the Nifty either
by buying futures on stocks constituting the Nifty Index and selling futures on the Nifty or vice-
versa.

This strategy would require payment of initial margin to the exchange for taking position in both
Nifty and stock futures. The position would either be held till the expiry of the futures contracts or
may be closed earlier if arbitrage gets realized.

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2.6.8 DEFINED TENURE SERIES PORTFOLIO

Under this portfolio, the Portfolio Manager will seek to manage the funds of the client/invest in
securities by combining investments in

 Equity and equity linked securities

 Debt instruments
 Units issued by SEBI registered mutual funds and venture capital funds which have
open ended/closed ended or defined tenure structures which may be both long/short term
in nature as may be agreed with the client.

2.6.9 ONLY OPTIONS PORTFOLIO

 The objective of the portfolio is to earn capital appreciation on the client’s capital, by
investing in a mix of stock options and index options.
 The investment in options could include pure long positions in call and put options as
well as spreads where the total liability is limited to the premium paid.
 The total capital to be invested will be staggered over the investment tenure, so as to
spread the exposure to the option premiums through the investment tenure (i.e. only a
proportion of the total clients capital will be invested in stock option premium in any
month).
 In no month will an amount greater than the client’s capital be invested in options.
 Returns on the portfolio will be generated through capital appreciation on the options
investments. For the purchase of options, while the upside is unlimited, losses are limited
to the premium paid. Thus under all possible circumstances, the losses on the portfolio
will be limited to the clients initial capital.

2.6.10 PRINCIPAL PROTECTED PORTFOLIO

 The portfolio aims to achieve capital growth along with relatively low capital risk.
The portfolio would have a defined tenure and principal protection level.
 This objective is achieved by investing a part of the capital in an actively managed equity
portfolio, while rest of the capital is invested in fixed income, which forms the floor for
capital preservation.
 The portfolio aims to provide capital preservation with the help of a third party
guarantee. The third party guarantee would get invoked if the portfolio falls below a
certain level.

2.6.11 INFRASTRUCTURE PORTFOLIO

 The infrastructure portfolio will invest in companies that are directly or indirectly linked to
the infrastructure theme.
 This could include sectors such as construction, capital goods, power, cement,
metals, banking, logistics and other related sectors/sub-sectors.

23
2.6.12 DIVERSIFIED PORTFOLIO

 The portfolio will have a defined tenure.

 The Portfolio Manager has discretion to invest in a combination of different asset classes
including but not limited to listed equities, equity related instruments, or other unlisted
securities/instruments (private equity) including but not limited to units issued by SEBI
Registered Venture Capital Funds and money market instruments.
 The terms of tenure of the product, subscription and redemption etc. will be as per
the agreement executed with the Investor.

2.6.13 ABSOLUTE RETURNS PORTFOLIO

 The absolute return portfolio aims to capitalize on the fundamental stock picking ability of
the Portfolio Manager.
 The Portfolio Manager endeavors to deliver absolute performance irrespective of the
direction of the markets.
 The portfolio would buy the ideas with the highest scope for outperforming/appreciation.
The Portfolio Manager would sell stocks, which seem overvalued and may under perform
/ offer little scope for appreciation.
 The portfolio would invest / trade in cash equities and futures and options. Futures
and Options could be on both stocks and indices. Futures / options maybe both bought /
sold.
 Buying of stocks could be through cash equities and / or futures / options. Selling of
stocks could be done through the use of futures and / or options. Given the use of
futures in the portfolio, the notional value of all the portfolio positions may exceed
the amount invested.
 However, at all points of time sufficient cash will be maintained to enable payment of
margins and it will be ensured that in line with the SEBI Portfolio Manager Regulations,
at no point of time will the portfolio be borrowing for the purpose of taking its exposures.

2.6.14 INDIA OPPORTUNITIES PORTFOLIO

 The objective of this close-ended portfolio is to generate superior risk-adjusted returns

on clients’ capital over the long term
 Investing in instruments including but not limited to equity, equity-linked products, debt,
units, hybrid products, convertibles, mortgage backed securities, commercial paper(s),
notes and instruments offered by unlisted and listed companies involved in, investing in,
developing, constructing, owning, asset managing, project / facility managing and
operating real estate assets and related infrastructure opportunities.
 The portfolio manager would seek to generate capital appreciation as well as regular
returns (annual dividends / interest) on clients’ capital by such investments.
 Until such time the portfolio manager finds appropriate investment opportunities, the
Portfolio Manager may, at its discretion invest the funds in bank deposits, units of Mutual

24
 Funds, money market instruments and / or gilt securities issued by central / state
governments.

2.7 RELIGARE PORTFOLIO MANAGEMENT

Religare offers PMS to address varying investment preferences. As a focused service, PMS pays
attention to details, and portfolios are customized to suit the unique requirements of investors.

Religare PMS currently extends five portfolio management schemes:

 Panther
 Tortoise
 Elephant
 Caterpillar
 Leo

Each scheme is designed keeping in mind the varying tastes, objectives and risk tolerance of
investors

Investment Philosophy

 Stock specific selection procedure based on fundamental research for making sound
investment decisions.
 Focus on minimizing investment risk by following rigorous valuation disciplines.
 Capital preservation.
 Selling discipline and use of Derivatives to control volatility.
 Overall to enhance absolute return for investors.

PRODUCTS

2.7.1 PANTHER

The Panther portfolio aims to achieve higher returns by taking aggressive positions across
sectors and market capitalization. It is suitable for the “High Risk High Return” investor with a
strategy to invest across sectors and take advantage of various market conditions.

2.7.2 TORTOISE

The Tortoise portfolio aims to achieve growth in the portfolio value over a period of time by way of
careful and judicious investment in fundamentally sound companies having good prospects. The
scheme is suitable for the “Medium Risk Medium Return” investor with a strategy to invest in
companies which have consistency in earnings, growth and financial performance.

2.7.3 ELEPHANT

The Elephant portfolio aims to generate steady returns over a longer period by investing in
Securities selected only from BSE 100 and NSE 100 index. This plan is suitable for the “Low
Risk Low Return” investor with a strategy to invest in blue chip companies, as these
companies have steady performance and reduce liquidity risk in the market.

25
2.7.4 CATERPILLAR

The Caterpillar portfolio aims to achieve capital appreciation over a long period of time by
investing in a diversified portfolio. This scheme is suitable for investors with a high risk appetite.
The investment strategy would be to invest in stocks which are poised to get a re-rating either
because of change in business, potential fancy for a particular sector in the coming years/months,
business diversification leading to a better operating performance, stocks in their early stages of
an upturn or for those which are in sectors currently ignored by the market.

2.7.5 LEO

Leo is aimed at retail customers and structured to provide medium to long-term capital
appreciation by investing in stocks across the market capitalization range. This scheme is a mix
of moderate and aggressive investment strategies. Its aim is to have a balanced portfolio
comprising selected investments from both Tortoise and Panther. Exposure to Derivatives is
taken within permissible regulatory limits.

2.7.6 ADVANTAGES OF PMS AT RELIGARE

 No experts, only expertise

PMS brought by Religare with its solid reputation of an ethical and scientific approach to
financial management. They offer the services of a Dedicated Relationship Manager
who is at service 24x7; they do not depend on individual expertise alone. This means
lower risk, higher dependability and unhindered continuity. Moreover, investors are not
limited by a particular individual’s investment style.

 No hidden profits
They ensure that a part of the broking at Religare Portfolio Management Services is
through external broking houses. This means that the portfolio is not churned
needlessly. Using more broking firms gives us access to a larger number of reports and
analysis, enabling us to make better, more informed decisions.

 Daily Disclosures
Religare Portfolio Management Services gives daily updates on investments. Investors
can pinpoint where their money is being invested, 24x7, instead of waiting till the end of
the month to keep track.

26
2.8 ANGEL BROKING PORTFOLIO MANAGEMENT

Investors with substantial financial assets confront a situation of considerable complexity and
opportunity. The Portfolio Management Services (PMS) team at Angel helps clients navigate
these complexities by enabling them to take advantage of opportunities and manage risk by
diversifying their portfolio across many different sectors and styles. Our family of funds is
designed to offer a range of investment options for investors with different objectives and
temperaments. There is a Large-Cap Fund, Growth Fund, Value Fund, Equity Derivatives Fund
and an Interest Arbitrage Fund. There are differences in investment style, fund size, portfolio
concentration and volatility. But there is a common thread which runs through all the five funds -

PRODUCTS

2.8.1 ANGEL OYSTER

The objective of the scheme is wealth generation by delivering superior returns over long term
through investments in equities.

Investment Strategy
 To generate wealth on consistent basis rather than outperform by taking higher
risk.
 Logic works well and thus will be given weightage along with financials.
 Early identification of stocks to ride through the entire investment cycle.
 Timing of investment is important to generate superior returns.
 Bottom-Up approach.

Parameters Driving Investment Decision

 Blend of growth and value stocks.
 Investments in companies regardless of market capitalization.
 Keen selection of stocks based on potential for value unlocking based on key events.
 Focus on companies which display:
 Scalable business potential
 Large market opportunity
 Beneficiary of favorable economic cycle
 Valuation at steep discount to asset value

Sectoral Composition
 Diversified Portfolio.
 May include under-researched companies.

Investor Profile
 Safety of capital will be of utmost importance.
 The scheme would be suited for Investors having medium to long term perspective. (i.e.
12-18 months)

27
2.8.2 ANGEL BLUE CHIP

The objective of the scheme is to generate capital appreciation in the medium to long term
through investments in equities and equity related instruments comprising predominantly large
cap companies.

Investment strategy
 Overweight on large Cap stocks. However quality mid cap stocks may also be
considered for investment.
 The portfolio strives to insulate an investor from cyclical themes by investing in sectors
offering secular growth outlook.
 Combination of Top-Down & Bottom-Up approaches. Portfolio to comprise of a
combination of growth & value stocks.
 The allocation of sectors and stocks in the portfolio may be dynamically structured in tune
with changes in broader market conditions.

Parameters Driving Investment Decision

 The portfolio strives at all times to achieve a 70% allocation to large cap companies.
 The portfolio strives to limit the exposure to any sector to less than 25% of the
portfolio size.

Investor Profile
 Ideal for investors with low to moderate risk appetite.
 Angel Bluechip suggested time horizon is 12-15 Months.

2.8.3 ANGEL GROWTH FUND

The objective of the scheme is to generate capital appreciation in the medium to long term
through investments in equities and equity related instruments comprising of predominantly Mid-
Cap and Small-Cap companies.

Investment strategy
 Focus on growth themes such as Infrastructure, Services, Manufacturing & domestic
consumption.
 Overweight on Mid-Cap and Small-Cap stocks. However quality Large-Cap stocks
may also be considered for investment depending on market conditions.
 The scheme will seek to achieve returns through broad based participation in equity
markets by creating a diversified equity portfolio .The portfolio will however, be
overweight on Mid-Cap and Small-Cap companies.
 Combination of Top-Down & Bottom-Up approaches. Portfolio to comprise of a
combination of growth & value stocks

Investor Profile
The scheme would be suited for investors with moderate risk appetite. Recommended investment
horizon is 15 to 18 months.

28
2.8.4 EQUITIES AND DERIVATIVES FUND

Objective
 To generate moderate returns by deployment into Equity assets and partially
hedging the portfolio using options and futures & achieving this with a margin of
safety.
 Additionally the funds lying idle would be deployed in arbitrage between cash and
future and /or place in low maturity debt funds and low risk F&O Strategies.

Features
 Investments would be in fundamentally strong large cap and Mid Cap companies
having high liquidity in Options.
 Partial hedging of open positions would be done by writing options.

Investor Profile
 The scheme would be suited for investors with low to medium risk appetite, having long
term perspective.
 Suitable for HNI’s and Corporate who want to park money for consistent Return from
the market even if market remained flat.

2.8.5 ADVANTAGES OF PMS AT ANGEL BROKING

 Understanding Risk: At Angel, utmost emphasis is given to understanding the risk

profile of an investor.
 Regular Analysis & Monitoring: Investments undergo regular monitoring and analysis
to check any deviation from the structured goal ensuring creation of wealth over a period
of time.
 Professional Management: PMS is provided through professional management by
experts on equity with an aim to optimize returns.
 Transparency: Regular statements and updates from us, as well as online access so
you are just a click away from all the information that you require about your investments.
 Administrative Convenience: Angel focuses on providing hassle free administrative/
operational support & customized services.

29
2.9 BONANZA PORTFOLIO MANAGEMENT

Bonanza provides a highly professional fund management services that is yet flexible to deliver
maximum returns to investors. Some highlights of their process:

 Professional research brings out the brightest stock and sector ideas for the portfolio.
 Proactive management facilitates monitoring the operational and stock market
performance of all companies in the portfolio regularly.
 Prudent risk management practices provide better downside protection for investor’s
portfolio and also help convert paper gains into real profits.
 Greater flexibility to hold cash and allocate investments across sectors and adjust for
market trends.
 Investment in bonanza PMS does not automatically become an equity investment. The
flexibility of the PMS allows them to convert cash to equity over period of time- this
process can be speeded up or slowed down to adjust for market trends.

Recent Past Performance

Returns % (From Aug 13, 2004 to Nov 30, 2007)

Absolute Annualized

Bonanza PMS    327.28 % 99.22 %

Sensex  277.68 %  84.18 %
Nifty     260.58% 79.00 %

Source: Bonanza
Other benefits
 Dedicated portfolio manager contact
 Expert initial and ongoing advice
 Continual fund monitoring
 In-depth reporting on portfolio performance, including graphs & charts.

Features & Fee structure

 Minimum portfolio size: Rs.10 lacs. One can also open a PMS account by transferring
existing portfolio of stocks or mutual funds.
 Charges:
o PMS Fees: 15% of profits plus government taxes. Charged quarterly;
due only if the portfolio has made profits in that quarter.
o Brokerage: 0.50% plus all applicable regulatory charges and
government taxes.
o Other charges: Depository and other charges, expenses and taxes
will be on actual.
 Exit: No lock-in period. No exit charges. Exit any time with a notice of minimum 3 working
days.

30
2.10 DEUTSCHE BANK (THIRD PARTY PMS)

Deutsche Bank offers its professional services to recommend Portfolio Management Services
from seven reputed third party providers (fund houses / financial institutions), who, for a fee,
invest funds after scientifically analyzing the pros and cons of the various options.

Portfolio Management Service Providers

Depending on investor’s risk appetite and desired returns, he can select from a range of superior
PMS products in the country, including the products from Reliance Capital, Prudential ICICI,
Franklin Templeton and Benchmark Asset Management.

Reliance Portfolio Management Services

Reliance Portfolio Management Services is an exclusive offering from the portfolio management
division of Reliance Capital Asset Management Ltd., a wholly owned subsidiary of Reliance
Capital Ltd.; Reliance Capital Asset Management Ltd. is also the investment manager for
Reliance Mutual Fund.

Prudential ICICI
Prudential ICICI Asset Management Company is a joint venture between Prudential Plc. - UK‘s
leading insurance company and ICICI Ltd. - India’s premier financial institution. The Company
serves as the investment manager for Prudential ICICI Mutual Fund, one of India’s largest private
sector mutual funds.

Franklin Templeton
Franklin Templeton, based in California, USA, is one of the largest financial service groups in the
world.

Benchmark
Benchmark is India’s first Asset Management Company to focus exclusively on passive and
quantitative asset management. It is promoted by professionals with vast experience in domestic
and international capital markets.

PRODUCTS

There is a wide range of PMS product options in the market. It gives access to a wide choice of
the best fund managers of AMC’s offering customised Portfolio Management Services (PMS).

2.10.1 EQUITY ADVISORY PRODUCTS

Equity investment has become a more involved activity. It calls for awareness and understanding
of the business and economic variables that affect equity valuations. There are several products
that help to make the appropriate equity investments. One can opt for dividend yield portfolios,
equity portfolios investing in stocks across market capitalisations or products investing in large or
mid-cap stocks.

31
2.10.2 CAPITAL PROTECTED PRODUCTS

Equity and derivative-linked capital protection products offer a flavors of the equity markets with
capital preservation. Prudential ICICI and Benchmark offer options in this category of PMS
products.

2.10.3 DERIVATIVE ARBITRAGE PRODUCTS

These are a range of products that enable to take advantage of arbitrage opportunities in the
derivative markets. They also take advantage of spreads between the price of a stock future and
the underlying stock. Such products are suitable for people with investments in relatively low-risk
assets who are looking for potentially higher risk-adjusted returns.

2.10.4 PURE DERIVATIVE PRODUCTS

These products endeavor to achieve significant appreciation in capital, by investing in a mix of

stock and index options. The portfolio may be considered suitable for investors with a high-risk
appetite who desire significant appreciation in their capital and are willing to take on risk for the
same.

2.10.5 ALPHA PRODUCTS

The Alpha Portfolio seeks to capture Alpha - which is out performance to the index on the client’s
portfolio. Thus, the entire portfolio will be hedged against overall market movements by using
derivatives. It seeks only to gain from out performance vis-à-vis market while eliminating beta.
The Alpha Portfolio is suitable for investors with a low to medium risk profile and an investment
horizon of more than 12 months.

32
3.0 PORTFOLIO MANAGEMENT & MUTUAL FUNDS

 PMS providers target specific segment of investing community which is the rich and
affluent class, where as mutual funds attracts diverse set of investors, which may include
small investors, corporate, provident funds, banks etc.

 Both Mutual Funds as well as PMS industry are regulated by Securities and Exchange
Board of India (SEBI) but Mutual Funds work in more regulated and restricted
environment and their investments are based on common investment objectives and
mandated asset allocation as specified in the offer document. Portfolio Management
Service providers on other hand are authorized by the investors to take investment
decision on their behalf and have relatively more freedom to choose securities as the
investment norms are flexible and depend on the agreement signed with the client

 While Mutual Fund investment services could be
investment amounts as low as Rs. 500, PMS is a
investors could afford. Most of the PMS providers ask
from a few lakhs to several crores. As per SEBI,
portfolio management service is Rs 5 Lakhs.3
availed by retail investors, with
luxury which only a few affluent
for minimum portfolio size ranging
the minimum amount to avail

 The fees charged by mutual funds and PMS also vary considerably. The fund
management expenses charged by mutual funds are regulated and are subject to certain
limits specified by SEBI. The fee structure in PMS could also vary from client to client and
is decided while signing the contract with the client.

 PMS is only feasible for a large portfolio as lot of time is spent into managing the
individual portfolios. Mutual Funds help to balance time & cost requirements by grouping
investors according to there preferences.

 Mutual Fund management is a discretionary service whereas PMS may provide

discretionary, non discretionary or advisory services.

 Client–fund manager relationship: In PMS, the portfolio manager, before taking up an

assignment of management of funds or portfolio of securities on behalf of the client,
enters into an agreement in writing with the client clearly defining the inter se relationship
and setting out their mutual rights, liabilities and obligations relating to the management
of funds or portfolio of securities containing the details as specified in the SEBI (Portfolio
Managers) Regulations. Thus when the portfolio manager deploys the funds, he only
considers the needs of specific client. Mutual Fund schemes on other hand have a
common investment objective for all the investors of the scheme and no investor can
influence the fund manager’s investment decision.

3
SEBI

33
4.0 FUTURE OF PORTFOLIO MANAGEMENT SERVICES

Portfolio management aims to provide customized investment solutions to high net worth
individuals, these investment avenues are tailored to suite the investors risk and return appetite.
Portfolio management services cannot be provided to investors with small sized portfolio’s as it
takes a lot of time and effort to manage a portfolio and thus it is not cost efficient to customize
small sized portfolio. Therefore, in order for portfolio management services to prosper, it is very
important that more and more high net worth investors are provided with customized solutions for
their investments.

The HNI Growth Story in India

India, along with Singapore, Indonesia and Russia, had the highest growth in HNI population in
2006, according to the 2007 World Wealth Report, prepared by Merrill Lynch and Capgemini SA.
India had an HNI population of 100,000 in 2006, and the annual growth rate of HNI population
(millionaires) in the country that year was 20.5%. The global growth rate in HNI population
was 8.3% in 2006, which adds up to 9.5 million individuals.

The global trends in the attitude of the wealthy are already apparent in India too, with a significant
number below 40 years in age. The Invest India Income and Savings Survey 2007, produced by
Noida-based market research firm IIMS Dataworks, showed that a little over a quarter of the
8.87 lakh people, who earn in excess of Rs1 million a year, are in the age group 36-40.

Other studies suggest these trends will strengthen in future. A May 2007 study by the McKinsey
Global Institute titled The Bird of Gold: The Rise of India’s Consumer Market, said that an
assumption of an average growth rate of 7.3% between 2005 and 2025 would create a large
number of wealthy people in India. The McKinsey study predicted that more than 23 million
Indians—more than Australia’s current population—will be among the country’s wealthiest
citizens by 2025. The study did not define “wealthy”

The total assets under management (AUM) in India would grow by 33 percent every year to
reach as much as $440 billion by 2012 with mutual funds and portfolio management
services as key drivers.4

Besides, the overall economic growth will attract participation from the international investment
community across retail and institutional segments.

The report also said that the retail segment would grow by between 36 percent and 42
percent annually to $160 billion to $200 billion by 2012 while institutional investments
would grow by 25 percent to 33 percent annually to $160 billion. Currently India has 33 fund
houses, which manages 5.7 trillion rupees ($141.12 billion) at the end of February. 5

4
McKinsey Report
5
AMFI

34
WRAP ACCOUNT

35
1.0 OVERVIEW

1.1 INTRODUCTION

A wrap account is one in which a brokerage manages an investor's portfolio for a flat quarterly or
annual fee. This fee covers all administrative, advisory, commission and management expenses.
All the costs are "wrapped" into a single fee equal to a percentage of assets under
management.

A wrap account brings together all investments - including shares, bonds, cash, investment
trusts, unit trusts and pensions - under one roof. They can also bring together the various tax
wrappers such as ISA (Individual Savings Account), and self-invested personal pensions
(SIPPS), making completing the investor’s tax return a much easier task.

A Wrap Account is sometimes referred to as a "Investment Universe", “investment platform“,

"master trust", "asset aggregation" and "hypermarket" and they are about to change the way
people view their investments in the future.

1.2 CONCEPT
The initial intent, and probably the major continuing aspect of such accounts, is to allay the fears
of stock and bond purchasers that a single broker would merely be trying to sell products solely
for the commission. As differentiated, wrap accounts charge the overall account an annual fee
irrespective of how often the stocks within the account are bought or sold. Wrap accounts are
great if investors don't have time to invest on their own and wish to have a money manager take
care of their assets.

The Wrap-Account has been popular for some time in the United States of America and Australia
and is starting to break into the mainstream financial market in the UK. In Australia, about 65 per
cent of new funds are going into wraps. In the USA, wrap accounts have experienced a 40 per
cent growth rate in assets year on year since 1996. 6

1.3 VARIATIONS OF WRAP ACCOUNTS

 TRADITIONAL WRAP
A traditional wrap account offers many different types of securities to meet the investment needs
of the individual investor. The main attraction of traditional wraps is that they offer investors
access to one or more investment managers to manage their funds.

 MUTUAL FUND WRAP

A mutual fund wrap account is a basket of mutual funds that caters to the investment goals of the
investor.

6
www.datamonitor.com

36
2.0 THE EVOLUTION OF WRAP SERVICES

2.1 USA
Wrap services were first developed in the USA in the 1970s, for wealthier clients who wished to
manage their finances through a professional intermediary. Their advantages, then as now, were
to ensure that customers received professional advice that served their interests rather than the
advisers’ interests. As direct equities formed a larger part of investors’ portfolios in the USA than
elsewhere, so they formed a larger part of the wrap service. Because advisers are paid on a
percentage of the value of the assets in the wrap service, they had no incentive to encourage
frequent trading in order to generate broking commissions. This system could be worthwhile to
customers with relatively complex portfolios because the fees were significantly higher (as much
as 3 per cent) than managed mutual funds.

A second version of the wrap service appeared in the 1990s, termed the “mutual fund wrap” in
contrast to the earlier “consultant wrap”. Here, investments are placed in brand-name mutual
funds, whereas the consultant wrap tended to place funds in equities and institutional money
managers. These were initially limited to the fund managers’ own funds, but have now expanded
to cover third-party funds as well. The fees for both types of wrap have fallen as well,
encouraging their take-up.

Cerulli Associates (a Boston-based research and advisory firm specializing in trends in financial
services) estimate that the average fee paid for a consultant wrap is now 2.1 percent,
compared to 1.25 per cent for a mutual fund wrap. 7 The entry level for a consultant wrap is still
high, at a minimum of $100,000, compared to $10,000 for a mutual fund wrap. As wrap services
have gained flexibility and reduced their costs, they have attracted investments very fast.
Consultant wraps now hold over $200bn, while the newer mutual fund wraps have been catching
up with them, and are already worth about half that amount.

There are other aspects of wrap services in the USA which differ from those in other countries:

 The underlying assets are more commonly invested in fixed interest products, such as
CDs, as well as in equities. Internationally, mutual fund wraps are more common.

 The assets are often held in the investor’ name, which makes it more costly to
administrate and makes transactions take longer. In Australia, assets are held in
nominees’ names, reducing both costs and transaction times.

One example of the expansion of wrap services comes from Skandia Asset Management. The
service offers access to funds from different providers as well as bonds, savings and equities,
depending on the level of risk an individual is willing to take. Altogether, wrap products and
mutual funds make up more than 50 per cent of sales in the independent broker-dealer
channel and Skandia is currently one of the largest vendors of investment products to the
independent broker-dealer channel worldwide. Skandia was one of the first providers in the US to
introduce the concept of ‘multimanager’ funds, which makes many of the world’s best money
managers available to investors.

7
Cerulli Associates, Survey

37
 In the US, as in Australia, product providers offer wrap products to independent brokers and
dealers who then provide advisory services to their clients. Skandia does not manage the
funds itself, rather it aggregates the funds of a number of managers, including Alliance
Capital, Deutsche Asset Management, INVESCO Funds and ProFunds Advisors. The
company is a typical example of a wrap product provider, since it mainly offers services to
financial advisors, who in turn service their clients. The reason why wrap services are popular in
the US lies in high investor sophistication. Moreover, both Australia and the US have a high
concentration of independent advisors that acts as a further stimulant to the development of wrap
products as these can be the most suitable distribution channel.

2.2 AUSTRALIA
A distinctive characteristic of the wealth management market in Australia is the existence of wrap
products and master trusts. These allow individuals to have a single service incorporating
different products, including bank deposits, property funds, bonds, equities and other investment
vehicles.

On a simplistic level these are ‘product menus’ offering a consolidated access point, a form of
financial services shop including information tracking and presentation of these investments.
However, they can also offer sophisticated management systems and advisory services that
facilitate a total wealth management solution. These services will offer management and advice
of all investment types including pensions and insurance. Macquarie, Westpac and Suncorp
Metway are examples of providers of these types of services.

The main reason for the popularity of wrap services in Australia is the high level of
investor sophistication combined with the popularity of IFA (independent financial
adviser) services.

Indeed, wrap services are mainly offered by means of IFAs, who then offer the wrap service
together with advice to their clients. In general, wrap products are available to all, but are
mainly used by the upper mass market and high net worth individuals. This is because the
wrap service is transaction-based rather than fee-based and, therefore, for small investments
the costs would be extremely high. Investors with more than $75,000 mainly use the service
although, in some cases, those with $10,000-15,000 can also use the service.

2.3 SOUTH AFRICA

The unit trust industry has been one of the great success stories of the South African financial
services market over the past decade. One of the key drivers of growth in the retail mutual funds
sector has been the development of wrap funds, which emerged onto the investment scene after
1998 as a means of offering some protection against market volatility through spreading
funds over several unit trusts rather than a single fund. With wrap funds the client is
essentially deciding only on the level of risk he or she is willing to take with the rest being
managed by the fund managers.

However, the introduction of capital gains tax in October 2001 has brought about an
adverse change in the environment for wrap funds as investors are liable to be taxed each
time they switch fund within a wrap structure.

38
 As such, fund managers have offered investors the opportunity to invest in “funds of funds” in
which switches between individual funds are invisible and, therefore, not liable for capital gains
tax. Indeed, many fund providers have converted wrap propositions to “funds of funds” in
order to circumvent this tax loophole. For example, BoE Asset Management, formerly a
leading provider of wrap structures, has followed this approach.

3.0 PROVIDERS OF WRAP PRODUCTS

AMP – (www.amp.com.au)

The My Portfolio service provides a complete picture of clients’ assets. Clients can view all their
assets and liabilities including AMP products such as investment funds, superannuation and
investment accounts, financial products from other institutions, other assets such as personal
possessions or investments, insurance, and loans or other liabilities.

Godfrey Pembroke – (www.godfreypembroke.com.au)

One of Australia's premier financial planning organizations, offering investment, superannuation

and insurance options and related taxation services.

The network of over 190 consultants offers financial planning services to a wide range of clients
including individual investors, small businesses and corporations.

Macquarie – (www.macquarie.com.au)
Macquarie Portfolio Services is a provider of wrap account solutions to financial intermediaries
and advisory dealer groups.

The company specializes in superannuation, pension and non-superannuation administration

solutions for the back office and practice management needs.

Macquarie's wrap account allows its clients to take clients' portfolios online with the internet as
the interface, to transact and report on their investments. At the same time, clients can benefit
from flexible investment choice and consolidated performance and tax reporting on their entire
portfolio. Initial set up and ongoing training support for advisers and back office staff are available
to ensure that they are utilizing the service in the most beneficial way.

39
4.0 ADVANTAGES OF WRAP
The advent of wraps has allowed smaller investors to access professional portfolio
managers, which were once only available to large institutional investors and the extremely
wealthy. A traditional wrap typically requires an initial investment of at least $25,000 - $100,000.
But with their ever-increasing growth and popularity, the deposit minimums are continually being
lowered. Mutual fund wraps have relatively smaller investment minimums of as low as $2,000 -
$25,000.8

Another advantage to a wrap is that it protects investors from overtrading, or churning. This
is when a broker or money manager trades an account excessively to create extra commission.

Other Benefits of a Wrap Account include:

 Wrap accounts are an uncomplicated and simple service

 In addition to investments being kept under one roof, they also provide for the new
“mass affluent” class with a route to the sort of quality financial advice normally available
only to the very rich.

 Wrap accounts have a simple charging structure - usually a single annual management
charge instead of a range of separate costs such as set-up charge, dealing costs and
management fees.

 Wrap accounts allows investors to adjust investment goals as income and lifestyle
change without high cost

 Wrap accounts are available on the Internet to give immediate information (often in real
time) meaning investors can review their wrap account Information 24 hours per day, 7
days per week, 52 weeks per year

 The popularity of wrap accounts is widely attributed to their flexibility. One of the principal
advantages is that whole families can organize their affairs together. So, while they
maintain their individual aims and objectives, the arrangements take full account of each
other’s situations.

 For investors, completing tax return is a much easier task with all their investments stored
in a wrap account

8
www.investopedia.com

40
5.0 MUTUAL FUND WRAP
The mutual fund industry is enormous. The Investment Company Institute (ICI), a trade
organization representing mutual fund providers, cites more than 8,120 U.S.-based mutual
funds, and worldwide, there were about 61,506 mutual funds as on Jan 2007, and assets
totaling about $25.82 trillion as on Feb 2008.

With so many funds to choose from, selecting one can be a real challenge. Building and
monitoring a diversified portfolio can be an overwhelming burden. To ease this burden, the
industry has created the mutual fund advisory program, also known as the mutual fund wrap.

5.1 DISCRETIONARY
A discretionary mutual fund advisory program provides a variety of portfolios that incorporate
multiple mutual funds into pre-selected asset allocation models. Many of the portfolios divide the
equity and fixed-income portions among multiple mutual funds, each fund representing a specific
discipline.

Investors work with a professional financial advisor to map out their personal financial goals.
Based on those goals, the advisor reviews the offerings in the mutual fund advisory program and
selects the asset allocation model that matches the investor's goals. For example, a conservative
investor interested in income generation would be guided to select a portfolio that allocates the
majority of its assets to fixed-income investments. An aggressive investor primarily interested in
capital appreciation would be guided to select a portfolio that allocates the majority of its assets to
equity investments. The structure of a discretionary mutual fund advisory program is similar to the
structure of a multi-discipline account. Like a multi-discipline account, a mutual fund advisory
program offers a diversified portfolio, professional advice and guidance, ongoing due diligence of
the investments in the portfolio and automatic rebalancing of the portfolio to maintain the desired
asset allocation. The discretionary mutual fund advisory program delegates authority to the
program sponsor (often the financial advisor's employer or a subsidiary of the advisor's employer)
to make changes to the asset allocation model and to add or remove mutual funds from the
portfolio without approval from the investor.

5.2 NON-DISCRETIONARY
In the non-discretionary program, the investor and the financial advisor review a list of mutual
funds that have been pre-screened and selected for inclusion in the program, and choose funds
from that list to create a customized asset allocation model. The investor is responsible for
providing approval of the rebalancing of the portfolio and for the decision to replace any of the
mutual funds. Both discretionary and non-discretionary mutual fund advisory programs provide
consolidated performance reporting, making it easy for investors to review results at the portfolio
level.

41
5.3 ADVISORY
A mutual fund advisory program offers more benefits than those generally associated with a
mutual fund purchase. In addition to a professionally managed, diversified portfolio that includes
multiple mutual funds, a mutual fund advisory program provides three levels of oversight. The
mutual fund managers each oversee their portfolios, the program sponsor oversees the mutual
fund managers and the investment advisor provides assistance with the initial investment
selection and ongoing monitoring of the portfolio's performance in relation to the investor's
objectives. The fee-based compensation reduces concerns about the objectivity of the advisor's
recommendations. As one adviser stated, by removing the firm's vested interest in commission
based products, its advisers would retain more objectivity and flexibility in structuring and moving
client investments.

Mutual fund advisory programs offer significantly lower minimum investment requirements than
other managed-money products. Some mutual fund advisory programs are available at
investment minimums as low as $25,000, compared to $100,000 or more for other managed-
money offerings. While mutual fund advisory programs offer many of the same benefits provided
by their more expensive managed-money cousins, there is also an important difference. Assets in
a mutual fund advisory program are not separate and distinct from the accounts of other
investors. Mutual funds, as the name implies, are mutual investments. The basic premise of a
mutual fund involves a group of investors who pool their assets so that they can afford the
services of a professional money manager. The money manager then makes portfolio
management decisions on behalf of the collected pool of investors.

Fees generally range from 1% to 3% of the account value, perhaps 2% to 3% for equity
accounts and from 1.25% to 1.75% for income accounts. 9

The charges are also usually based on a sliding scale similar to that of break points on mutual
funds- the larger the account, the lower the overall fees. Brokers may also discount the fees to
better customers (20% to 30%) or when they simply want to gather additional accounts.

The fees are split between the broker offering the account to the client, the money manager and
the wrap account provider.

A further split, provided by the WSJ (Wall Street Journal) noted the following breakdown on a
3% fee on a $100,000 account.
 $750 went to the money manager;
 $1350 to the brokerage firm;
 $400 paid for the manager selection and
 $450 went to cover custody of securities and clearing charges.

9
Wall Street Journal, Article (July, 2006)

42
6.0 AMP WRAP PROVIDER

A wrap account is basically an administrative service that combines - or wraps - investments into
a single manageable account so that investors can see their total portfolio at a glance and
eliminate a whole heap of paperwork. It is not a product in which to invest, but rather a service.

But it delivers much more than just administration. By pooling investor’s money with others, a
wrap account gives access to a wide range of wholesale funds, which have the attraction of lower
fees than their retail counterparts. Ordinarily one needs a minimum $500,000 to invest in a
wholesale fund. With a wrap account, investor can still make all decisions about his investments,
although he may need the services of a financial planner to help with the asset allocation and
fund manager selection to best suit his risk profile. Wrap Account holders remain the beneficial
owner of these investments, so they can still enjoy dividend payments and other direct investor
benefits such as shareholder discounts.

The technology associated with a wrap account gives the financial planner more time to deal with
the more constructive tasks of working out asset allocation, helping with investment decisions and
generally giving financial planning advice. This is one of the key reasons why wrap accounts have
become so popular.

Choice and convenience

Not only do investor’s get access to wholesale funds at cheaper rates, but they also no longer
have to worry with the endless paperwork associated with a diversified portfolio. One single
document will present a complete picture of all investments. And generally, investors can
instantly see their portfolio at a glance on a daily basis via the Internet. Most importantly,
the wrap provider will send a consolidated tax statement at the end of each year to help with
tax returns.

Choice is another key element. For instance, the ASGARD wrap account 'eWRAP' has more than
200 managed funds and investors can buy shares in any ASX listed company. Another plus is the
ability to switch between investments or change strategies without incurring any exit fees.

As with all things in life, a wrap account comes at a price. While the fees on your wholesale fund
investments are lower than if you were in a retail fund, you also have to pay a fee for the wrap
service. According to ASGARD's Gillett this is usually between 0.8 % and 1.5%, or much
less if investors have a larger amount to invest.

While it makes sense to move existing direct assets such as shares into a wrap account, it's
probably not wise to include current retail managed fund investments as investor’s would end up
paying unnecessarily high fees. After all, one of the main advantages of a wrap account is to give
access to the cheaper fees from wholesale funds. There would seem little point in still paying the
higher retail fees plus the wrap account charges.

Generally speaking, if someone has a diversified portfolio and are tired of working their way
through a mountain of paperwork at the end of each financial year, a wrap account may well
deliver the goods.

43
6.1 ADVANTAGES

 Access to wholesale funds and therefore wholesale fees

 Wide choice of investments and flexibility to change portfolio
 Consolidation of reporting into one single document
 Generally an instant view of total portfolio at any given time
 Consolidated end-of-year tax statement
 Maintain greater control of investment decisions
 Hold beneficial ownership of investments

6.2 DISADVANTAGES

 Minimum of $100,000 to make it cost effective

 Possible capital gains tax implications from selling current retail funds
 Generally not suitable for investors with a non-diversified portfolio

6.3 WEALTHVIEW eWRAP

Overview
AMP's Wealth View eWRAP is an administration service, which allows investor’s to wrap all
investments into the one simple Investment, Superannuation and Pension account.

With Wealth View eWRAP, investor’s can:

 Invest in an extensive range of wholesale funds
 Buy and sell shares listed on the ASX
 Choice of cash accounts offering competitive interest rates, BPAY, phone and Internet
banking and branch access

Benefits of WealthView eWRAP

The WealthView eWRAP offers:
 Convenient account information online 24 hours a day, 7 days a week
 Flexible fees across managed investments and shares, with a single administration fee
 Access to the expertise of experienced and reputable fund managers
 Access to wholesale funds offering lower fees
 Flexibility to change and mix investments
 Quick online processing of investment transactions
 Consolidated transaction reports across all investments
 A simpler, consolidated tax statement
 The convenience of a cash account with competitive interest rates

44
7.0 WRAP ACCOUNT AND MASTER TRUSTS

 Master trusts are primarily offered through investment banks, retail banks and asset
managers. Master trusts are a way of administering investment portfolios giving access to
a range of different investments vehicles through one consolidated reporting document
and one trustee. They can be discretionary or non-discretionary.

Wrap is to be contrasted with a master trust.

 All investments held in a master trust are in the name of the trustee so investor’s don't
retain beneficial interest and will probably have to pay Capital Gains Tax if they move
from trust to trust.

 Wrap products offer more sophisticated services and access to wholesale prices.

 They are similar to master trusts but include a wider range of assets such as shares,
managed funds, property and cash holdings, and managed on a consolidated
administration system. The complexity of this system makes them relatively expensive,
thus they are only really viable for individuals within the upper levels of the wealth
spectrum.

 Both products are fee-based.

But generally speaking, aside from the different legal structures, wrap accounts and mastertrusts
are fairly similar. Indeed, wrap accounts are often referred to as the next generation of
mastertrusts.

8.0 WRAP ACCOUNT & MUTUAL FUND

The closest proxy for a mutual fund is a wrap account. For a single fee, investor’s get the services
of a professional money manager, who then invests their assets in a diversified portfolio of stocks
and bonds. The brokerage commissions and advisory fees are wrapped in the overall fee.

It sounds like a mutual fund, but it is not. It carries some significant baggage since
 It is difficult to ascertain the validity of past performance data.

 The choice of a manager is left to the stockbroker and, depending on the relationship
between the adviser and the broker, may involve a potential conflict of interest.

 Most importantly, the costs involved in wrap accounts are very high. Maximum annual
fees typically total 3% of assets, with reduced fees available to investors with assets of
$1 million (2.5%) or $5 million (2%).

45
9.0 WRAP ACCOUNT & PORTFOLIO MANAGEMENT SERVICES

 The main objective of a wrap is to minimize the charges (brokerage, advisory,

management. etc) and charge the investor a flat or fixed percentage of the investor’s
asset under management.

 Brokerage firm’s use wraps to shift from commission based charge to fee based charge,
and in doing so they also provide the investors with other facilities such as asset
management, advisory services, etc.

 However, the main objective of Portfolio Management is to offer customized solutions to

the high net worth investors and invests on their behalf in both the equity and debt
markets. PMS providers aim to increase the investor's capital.

 The fee’s structure for WRAPS and Portfolio Management differ in the sense that in
Wraps there is a fixed percentage of fees charged on the assets under management
whereas Portfolio Management involves different fee structures; apart from having a fixed
percentage charge on the asset under management as for the management charge, they
may charge percentage share of the profits, etc.

 Another difference would be that Wraps also allows investors to combine their pension
account (self invested pension plan), individual savings account etc whereas portfolio
management allows investors to invest through cash, stocks, bonds, mutual funds, etc.
The amount of assets required to avail Portfolio management services is considerably
higher than the assets required for setting up a wrap account.

46
10.0 KEY FINDINGS

Key findings of the work are as follows:

Wrap services have the potential to change the relationship between financial advisers and
their clients, by moving away from commissions paid per transaction to fees based on
regular advice and money management.

Such services have enjoyed strong development already in some countries, notably the USA and
Australia, and the growth in the Indian Financial markets theoretically paves the way for the
development of wrap services whereby the products of different providers are packaged together
into individualized financial services solutions.

In Australia, many of the leading financial services providers, including AMP, Macquarie and
Westpac, offer wrap services, generally by means of the independent financial advisory
channel which plays an important role in the distribution of investment products in that country.

The main stimulants to the development of wrap products in India are increasing investor
appetite for customized financial services. The future of wrap services (move from
commission to fee based advice) will largely depend on the distribution channels in use and
on customers’ attitudes.

The increasing base of individual investors in India and the growing likelihood of their contracting
multiple products across the savings and investments spectrum from a variety of providers
potentially create an environment in which wrap products can prosper.

Moreover, the increasing availability, effectiveness and security of the technology supporting
wrap services should encourage financial services institutions to offer such services, and
encourage customers to use them.

47
MULTI-MANAGER INVESTMENTS

Manager of Managers
&
Fund of Funds

48
1.0 OVERVIEW

1.1 INTRODUCTION
The use of other funds and fund managers within the one product is known in the financial
services industry as ‘multi-manager investing’. Multi-manager investment is an investment
product that consists of multiple specialized funds. Each specialized fund may invest across
different sectors and markets, or having managers investing in the same asset class but have
different investment styles. For example, large cap value fund versus large cap growth fund.
‘Multi-manager investing’ concept enables to use the best fund managers from many of the
world’s largest and highly respected investment companies. Using the multi-manager concept
within a range of portfolio funds is a suitable solution for investors who do not wish to take day-to-
day responsibility for the management and ongoing monitoring of their investment portfolio.
The simple fact is no one individual or group will lead the fund management league tables at all
times as no single investment organisation has the best funds in all areas. Many fund groups are
recognised as being a specialist in certain sectors. Another very important benefit of the multi-
manager approach is the flexibility to include funds with different management styles and
techniques. This use of complimentary investment styles adds further diversification to an
investment portfolio and therefore helps reduce risk.
This theory is founded on the
premise that not all investment
managers are good in all markets
and that not all managers are
successful at all times. Spreading
the investment money across
different asset class or markets
allows the investor to achieve the
necessary diversification, reduces
risk without sacrificing the return.
A Multi-Manager fund aims with
the help of its manager to cherry
pick and invest in the best funds
on the market.

1.2 TYPES OF MULTI-MANAGER FUNDS

 MANAGER OF MANAGERS - This is where a manager will allocate money directly to fund
managers (not therefore investing in funds themselves) to invest into the market.
 FUND OF FUNDS - This fund has one manager who looks to invest in a portfolio of funds
offered by other fund managers, always trying to add/delete funds that he expects to over or
under perform the market.
FOF are easy to setup. FOF’s allow the assembler to effectively “purchase” an asset manager’s
existing portfolio, as opposed to a managers-of-managers (MOM) arrangement, where the
assembler effectively “hires” the manager as a sub advisory. MOM arrangement requires
contractual agreements between the two parties, the FOF arrangement is fluid and
undocumented—assemblers may “sell” underlying managers and invest the proceeds into
another manager’s collective scheme.

49
1.3 GLOBAL SCENARIO

(Multi-manager assets are one of

the fastest growing product
segments. Annual compound
growth rate of the fund size is
18% in the five years to the end
of 2004, compared to a 3%
CAGR for all mutual funds
during the same time frame,
and 1% for all professionally
managed assets. Multimanager
products continue to represent
one of the fastest growing subsets
of the fund management
industry.)

Assets in multimanager products—a segment that includes both funds of funds and managers-of-
managers vehicles—expanded by 40% during 2005 to exceed US$1.3 trillion. Managers-of-
managers assets grew by 31% to $668 billion. However, this rapid growth was outstripped by
funds of funds, which grew by 51% to $665 billion.

Funds of funds (FOF) made up the fastest growing multimanager product segment. The torrid
pace of lifecycle funds made up a huge component of this growth.

Cerulli Associates expects that multimanager vehicles will maintain their five year compound
annual growth rate of 16% until 2010, with multimanager products worldwide doubling in size to
more than $2.8 trillion before the end of the decade.

50
2.0 MANAGER OF MANAGERS

2.1 INTRODUCTION

There are three ways for an institution to manage their investment programs: do it themselves,
which is outside the core competency of many organizations; hire a consultant, who in turn helps
them select a line-up of investment managers; or hire a manager-of-managers.

Rather than build extensive in-house teams, organizations providing Multi Manager Funds rely on
objective third-party investment managers to manage and advise on security selection. These
include fund houses, portfolio managers (PMS) and even independent, professional fund
managers whose core competency is evaluating and identifying quality securities.

A "manager of manager’s fund" (MoM fund) is an investment fund that uses an investment
strategy of directly selecting different investment managers and gives them mandate to make
investment decisions. This is different from the traditional mutual fund where only one manager
invests the fund capital in stock, bond (finance) or other investment vehicles.

The assumption underpinning MoM is that diversification and balance can be achieved more
readily by having a group of specialists, instead of one individual, investing the fund's capital.

This means that the role of the manager of managers is to assemble a group of investment
experts, closely monitor their performance, and alter the composition of the team to adapt to
market conditions or fund performance.

For example, the manager of a large pension fund would appoint different investment managers
for different asset classes such as equities (stocks), bonds, and commodities. The performance
of those managers will then be measured against their respective benchmarks, replacing as
necessary to maintain the fund’s overall performance and risk control measures.

2.2 NEED FOR MULTI MANAGER FUND

Investment styles go in and out of favor, managers stray from their investment styles, and
industry sectors and market segments rise and fall. With the multi-manager approach investors
are spreading their risk among various managers and different investment themes.

Basic portfolio theory tells that combining different risks enables a better risk return payoff within
the portfolio. This extends to managers style, whether it’s growth or value, small cap or mid cap.
These styles can all be combined and produce a richer mix than anyone of the components on
their own and deliver a better risk return payoff over time.

51
2.3 ADVANTAGES OF MANAGER OF MANAGERS FUNDS

 Access to the leading funds and fund managers

For individuals, choosing fund managers can be just as difficult as choosing which assets to
invest in. Factors such as track record, industry reputation and charges are valuable
information that affects each person’s decision process. One of the key benefits of a multi-
manager fund is that it brings together the expertise of different specialist fund managers
under one single product. Each specialist manager may have their strength in a particular
asset class such as equities or bonds, or in regional markets such as Hong Kong or US
equities, or in market focus such as large caps or small caps. Individual investors will
therefore have access to the leading managers in the industry, without having to conduct the
research themselves.

 Fund selection process

Funds and specialist managers are selected through a vigorous research process that
includes both qualitative and quantitative analysis from track record to team dynamics. With
all factors considered, the process is aimed at delivering a portfolio combination that can
achieve the maximum return for a given level of risk.

 Diversification of manager risk

Each specialist manager has their unique investment approach and process. Their strategies
may produce different results in different market conditions and it is difficult to determine
which strategy will work best. The multi-manager fund aims to reduce the uncertainty of
performance attributable to the specialist manager’s unique style. The combination enables
investors to attain a level of diversification that may be difficult for them to achieve by
themselves.

 Active management of fund investments

Unlike a traditional mutual fund, the asset allocation and stock selection process is separated
in the multi-manager fund. Specialist managers exercise their unique style and select
securities in their area of expertise, while the fund manager actively manages the asset
allocation of the portfolio of specialist funds.

52
2.4 FRANK RUSSELL COMPANY
Frank Russell Company remains the global market leader among manager-of-managers
investment firms. Russell has devoted considerable resources to identifying, hiring, and
managing some of the best money managers in the world, for more than three decades.

Manager-of-Managers AUM Market Share by Vendor, 2005

Russell uses a manager-of-managers approach within investment products. No matter which

asset or style is in favor at any given time, this complementary blending of managers can reduce
risk and help provide more consistent returns through all kinds of market environments.

2.3.1 SCREENING MONEY MANAGERS

Each year, through an integrated worldwide network of
analysts, Russell evaluates more than 3,800 investment
managers and more than 9,000 investment products
globally.

Russell's analysts hold more than 2,000 research

meetings annually — the majority of which are face-to-
face — to study each manager's quantitative and
qualitative characteristics. Russell research and
monitoring identifies managers worth further scrutiny.
Additional research leads to decisions about which
managers will ultimately be selected for Russell products
globally. Using various proprietary factors, Russell
determines which managers are currently adding value in
their style through superior processes and exceptionally
talented individuals.
These main factors include:
 Stability: Which manager teams and organizations will have the lowest turnover.
 Superior Environments: Which organizations are most likely to produce above-average
returns.
 Performance Indicators: Which style and investment techniques and organizational traits
best support potentially superior manager performance.

53
Russell evaluates these factors, covering regional and multicurrency products in all major equity
and fixed-income markets:
 Equities (single country, emerging markets, and
global/international)
 Fixed income (single currency, multicurrency, and
convertibles)
 Global and domestic asset allocation
 Currency strategies

2.3.2 SELECTING THE BEST

Because research confirms that past performance is not predictive of future performance,
Russell's approach gives the most weight to the value of the manager's investment process and
the strength of the manager's organization.

Picking Today's Hot Manager Isn't the Solution

To be on top one year, a manager has to take a lot of risk — risk that is just as likely to land them
on the bottom in the following years. Our goal is to select managers who have historically
performed better than average on a consistent basis.

If you simply pick today's top

manager for your investment,
you may not be prepared for the
long run. For example, in 1998,
of our total of 109 U.S. equity
managers, 27 managers
composed the top quartile, or
the top 25% of U.S. equity
managers. Out of those 27, 18
remained in the top quartile the
next year. Exodus from the top
quartile was swift and no
manager was still there in 2000,
2001, 2002 or 2003.
Source: Russell Investment Group's Equity Accounts Universe of 109 major banks,
Insurance companies and investment advisors with six years of return history

Russell's research analysts use an unmatched, proprietary database of qualitative and

quantitative characteristics to identify managers most likely to outperform their benchmark
indexes and their peers. The following table includes some of the characteristics that Russell
analyzes.

Qualitative
Personnel/administration
Investment philosophy
Decision-making procedures
Economic and securities research
Quantitative
Performance against peer groups
Performance against benchmarks
Transactions
Portfolio characteristics

54
3.0 FUND OF FUNDS

3.1 INTRODUCTION

A regular mutual fund invests in stocks, bonds and fixed income securities depending on its
objective. Hence the investor gets an opportunity to participate in these market-linked instruments
while utilizing the fund manager's expertise.

Fund of funds further extends this concept wherein a mutual fund invests in units of other mutual
fund schemes. The rationale behind the FoF is that even if one scheme does not perform, the
loss risk is significantly reduced because the investments are spread over a number of schemes.

3.2 MOTIVE
The answer is - Diversification. Fund of funds takes diversification to a new level. Investing in a
fund of funds means greater diversification for the investor concerned; since he is hedging his
risks across the sector. It works on the same principle as diversifying investments across a
basket of securities.

FoF could invest in equity funds and income schemes simultaneously offering the investor a
diversified-across asset class portfolio. The risk levels associated with such holdings are
theoretically even lower than those of conventional mutual fund schemes.

3.3 ADVANTAGES OF FUND OF FUNDS

 One point touched on is diversification which leads to risk mitigation. FoF’s allow
investors to diversify risk by stage and size of investment and industry sector by investing
across a wide spectrum of leading funds.
 Further, just investing in a mutual fund scheme saves the investor the trouble of investing
in the shares of so many companies and keeping track of them. Investing in a fund of
funds also saves the investor the bother of keeping track of all the schemes in the market
as the fund manager does it for him.
 All the investor has to do is to select his general risk profile - since fund of funds also
need to be categorized according to the type of schemes they are investing in.

 Professional Management
o Diverse management styles: If a FoF were to invest in top performing funds, the
investors would benefit from the expertise of more than one leading fund
manager. With each fund manager comes his unique style and strategies.
o Fund Selection: Fund selection is important and it stands to reason that an
experienced fund manager is in a better position to make superior fund selection
decisions. FoFs also provide access to top-tier fund investments which are often
inaccessible to small or new investors
o Convenience: The investor doesn't have to churn his portfolio. Fund managers
will undertake systematic portfolio re-balancing to maximize gains and phase out
non-performing funds.

55
 E.g. if the equity markets hit a rough patch while the debt markets start looking up,
the investor won't have to reduce his holding in equity funds and invest in debt
schemes. The fund manager from his FoF will do the needful. The fact that his
portfolio is not tampered with implies that the incidence of tax (capital gains) is
avoided.

 Cost
o Fund of Funds also remove the requirement for a dedicated in-house team which
would be expensive to recruit and retain. It allows the outsourcing tasks such as
investment screening, due diligence, negotiation and monitoring to specialists.
o The cost of investing can reduce significantly for an investor. Instead of investing
say Rs 2,000 each in 5 schemes i.e. Rs 10,000 totally; the investor can invest the
desired amount in one scheme. Fund of funds provides the investor an
opportunity to be invested in all the schemes at a fraction of the original cost.

3.4 DISADVANTAGES

However one must not run away with the idea that fund of funds are the best thing to happen so
far and the solution to all the problems.
 For the funds the downside is that expense fees for such schemes are higher that in the
case of ordinary schemes since management fees have to be paid twice - since their cost
structure will include the fees already charged by the funds in which the investments are
made.
 There will be a management fee accruing to investors if the AMCs floating the FoF are to
invest in funds of other AMCs. Also, if there is going to be a churn in the portfolio, a
certain percentage of returns will be lost due to the cost of re-balancing. All of these
would end up reducing the returns on FoF’s.
 Another flipside - since the fund of funds is investing in a whole host of schemes which
are themselves invested in a wide range of stocks it is possible - sometimes inevitable -
that it will be investing in the same stock through the different schemes.

56
3.5 FUND OF FUNDS IN INDIA
The Securities and Exchange Board of India (SEBI) cleared the proposal for Fund of Funds (FoF)
in 2003, paving the way for an altogether new element in the domestic mutual fund industry.

Investment
The investments made out of a fund of funds scheme can belong to the same mutual fund house
as the FoF or belong to different mutual fund houses.

Fee
The Securities and Exchange Board of India (SEBI) mandates that FoF’s charge a maximum of
0.75 per cent as expenses. Although this is much lower than what equity and debt funds charge,
what needs to be noted here is that FoF’s pay expenses to all their underlying schemes too. Over
and above this, it charges 0.75 per cent as its own expense ratio. Expenses will, however, be the
only area where a Fund of Fund will be charging anything extra. Loads will be levied only when
the investor buys into a FoF and not when the FoF itself invests in the underlying funds.

Advantage
One of the biggest advantages of a FoF is that it is very tax friendly from an asset rebalancing
point of view. If an investor tries to rebalance his own fund or stock holdings then he is liable to
pay the capital gains tax that is applicable. But a FoF by virtue of its being a mutual fund scheme
is exempt from capital gains tax on its internal transactions. So when a FoF rebalances to
maintain its stated allocation between equity and debt there is no element of capital gains tax.

FoF’s can also be very convenient to handle as they reduce the number of funds that have to be
managed. So there is just one folio and just one NAV to track. With asset rebalancing built into
them these funds automatically carry out one of your major responsibilities. That is shifting
between equity and debt according to your pre-decided asset allocation.

3.5.1 FOF GUIDELINES

 The total expenses of the scheme including the management fees shall not exceed
0.75% of the daily or weekly average net assets. Investors bear this expenditure in
addition to expenses of other schemes in which FoF has invested.
 No scheme of a mutual fund shall make any investment in any fund of funds
scheme
 A fund of funds scheme shall not invest in any other fund of funds scheme;
 A fund of funds scheme shall not invest its assets other than in schemes of mutual
funds, except to the extent of funds required for meeting the liquidity requirements
for the purpose of repurchases or redemptions, as disclosed in the offer document
of fund of funds scheme
 Investments in the schemes which are under the same fund management should
be restricted to five per cent of the asset of the fund.

Source: SEBI

57
3.5.2 HISTORY OF FUND OF FUNDS IN INDIA
The first FoF to be launched in India was Franklin India Dynamic PE Ratio Fund. This FoF
has as its underlying schemes Franklin India Bluechip and Templeton India Income Fund.
The fund reallocates between these two schemes on the basis of the PE ratio of the S&P
CNX Nifty. This reallocation is done on a monthly basis.

Prudential ICICI is the other fund house, which has launched a FoF. This FoF, known as
“ICICI Pru Advisor Series”, offers five FoF’s with varying equity and debt exposure. The
range starts with a 'Very Cautious' plan that will have no equity exposure and will invest in
cash and money market funds.

At the other extreme there is the 'Very Aggressive' plan that will invest 90 to 100 per cent of
its corpus in equity. In between lay the 'Cautious', 'Moderate' and 'Aggressive' plans, each
with a larger equity exposure than the preceding fund. All the existing schemes of
Prudential ICICI are possible candidates for its FoF plans. Specific funds have not yet been
announced by the AMC.

And recently, Birla mutual fund has also launched its FOF called Birla Asset Allocation
Fund. The scheme provides four different plans - Aggressive plan, Moderate plan,
Conservative plan and Dynamic Debt Plan each having separate asset allocation.

The holy grail of sensible investing is figuring out a good asset allocation and then
rebalancing your portfolio dispassionately to stick to your asset allocation. With the advent
of FoF’s, this task could now be made much easier and of course less taxing.

India’s first and only multi manager fund of funds (FoF) mutual fund house is OptiMix— a
division of ING Mutual Fund (MF). What sets OptiMix apart from other mutual funds is that
it is the only one to avoid investing in schemes managed in-house. In other words, it does
not invest in ING MF schemes; a fact it mentions in all its offer documents.

However, the moot question to be addressed is will it make sense for retail investors to
invest in a Fund of funds in the present scenario. Recent times have seen mutual fund
schemes offer record performances. By opting for a FoF over a mutual fund (which in any
case offers a fair degree of diversification) the investor may lose out on a good investment
opportunity.

Fund of funds is an untested concept for retail investors. At best it can be regarded as
`imported' concept whose feasibility in local conditions remains to be seen. For instance,
index funds had made their debut in the country with much fanfare, but did not find much
favor with investors as actively managed funds continued to outperform benchmark indices.
Index funds clicked in markets like the US, where active funds have not had it as easy. It
makes one wonder whether Fund of funds is also not a concept that is ahead of its time.

58
3.5.3 CURRENT SCENARIO
In 2003, Securities Exchange Board of India gave clearance to mutual fund houses to
launch Fund of Funds. Now after 5 years, the FoF industry is almost worth Rs 3800 crores.
DSP Merrill Lynch stands out with a staggering market share of 45%, assets under
management of Rs 1726 crores. Out of the 33 mutual fund houses in the country, only 12
have launched FoF schemes.

AUM
(Rs in Market
Asset Management Company lacs) Share
ABN AMRO Mutual Fund  22479.35 5.94%
Birla Sun Life Mutual Fund  1789.64 0.47%
Deutsche Mutual Fund  6740.78 1.78%
45.60
DSP Merrill Lynch Mutual Fund  172683.63 %
Fidelity Mutual Fund  2871.01 0.76%
Franklin Templeton Mutual Fund  23683.21 6.25%
HSBC Mutual Fund  2652.53 0.70%
ICICI Prudential Mutual Fund  3325.84 0.88%
ING Mutual Fund 78294.75 20.68%
Kotak Mahindra Mutual Fund  33988.57 8.98%
Standard Chartered Mutual Fund 3856.03 1.02%
Sundaram BNP Paribas Mutual
Fund 26306.27 6.95%
FoF Industry Corpus 378671.61 100%
Rs. in Lacs
Data source: AMFI
As on 31st March 2008

AUM of FoF as on 31st March 2008

1% 7% 6% 1% 2%
9%

21%
45%
1% 6%
1%
1%

ABN AMRO Birla Sun Life Deutsche

DSP Merrill Lynch Fidelity Franklin Templeton
HSBC ICICI Prudential ING
Kotak Mahindra Standard Chartered Sundaram BNP Paribas

59
3.6 THE DOWNSIDE OF FUND OF FUNDS: MULTI LAYERED COSTING
The domestic mutual fund industry continues to witness a buzz in the fund of fund (FoF) segment.
However, one aspect of a FoF that rarely gets the attention it deserves is the costs/expenses.
For illustration purpose let’s take Templeton's Fund of Funds -- FT India Life Stage Fund of
Funds, one of the leading FoF’s in the country.
Costs keep mounting
Underlying fund 20s Plan FoF 50s Plus Plan FoF
  Invest. Proportionate Invest. Proportionate
  Pattern (%) Exp (%) Pattern (%) Exp (%)
Franklin Bluechip 50 0.96 10 0.19
Franklin Prima Fund 15 0.33 - -
Templeton Growth 15 0.35 10 0.23
Templeton India Income 10 0.16 40 0.64
Templeton Income Builder 10 0.18 40 0.7
FoF expenses - 0.75 - 0.25
Total expenses (excl. entry
load) - 2.71 - 2.02

(Data sourced from Franklin Templeton's fund fact sheet. Expenses are as percentage of net assets)
As is evident there is a multi-layered cost structure in a FoF. Typically, the expenses are dividend
in the investment pattern of the underlying schemes. For instance, take the 20s Plan of
Templeton's FoF. The fund invests in Franklin Bluechip (50%), Franklin Prima Fund (15%),
Templeton Growth (15%), Templeton Income (10%) and Templeton Income Builder (10%).
The FoF expenses are apportioned based on the investment made in each scheme. So
Franklin Bluechip's expense apportioned to the FoF is 0.96% (half of 1.91%) since Franklin
Bluechip accounts for 50% of the FoF's investment.
FOF Management Fees: Over and above this, the FoF has its own expenses (0.75% in the 20s
Plan). Based on this, the FoF 20s Plan's expenses amount to 2.71% of net assets, which is way
higher than the expenses that regular diversified equity funds incur (Franklin Bluechip itself incurs
only 1.91% as expenses).
Entry Fees: Investors need to add a 2.00% one-time entry load in the 20s Plan FoF. So the
expenses in the first year of investment for the 20s Plan FoF will be 4.71% (2.00%+2.71%).
Since FoF is a concept/product 'imported' from the US, it is right that we see how the costs work
out in that country. To facilitate a like-to-like comparison, I have taken a FoF from Franklin
Templeton of USA - Franklin Templeton Founding Funds Allocation Fund.

FT Founding Funds Allocation Fund

Entry load 5.75%
Annual fees 1.16%

(The information is sourced from Franklin Templeton's global website.)

The expenses structure in this case is pretty uncomplicated. While there is a high entry load of
5.75%, the operating expenses are fairly low - 1.16%.

60
 Comparing the expenses over a period of 5 years
FT India Life Stage Fund of Funds
1st yr 2nd yr 3rd yr 4th yr 5th yr
Entry Load 2.00% 1.00% 0.667% 0.5% 0.4%
ADD: Annual Management Fees 2.71% 2.71% 2.71% 2.71% 2.71%
Total Expense 4.71% 3.71% 3.38% 3.21% 3.11%

FT Founding Funds Allocation Fund

1st yr 2nd yr 3rd yr 4th yr 5th yr
Entry Load 5.75% 2.88% 1.92% 1.44% 1.15%
ADD: Annual Management Fees 1.16% 1.16% 1.16% 1.16% 1.16%
Total Expense 6.91% 4.04% 3.08% 2.60% 2.31%

One can see that the cost of FT Founding Funds Allocation FoF borne by the investors
considerably reduces with time; this also encourages investors to keep invested in the scheme
over a longer period of time. This is also beneficial for the investors as any fund takes time to
earn returns and the investors will benefit in the long run.

TOTAL EXPENSE

8.00%
7.00%

6.00%
EXPENSE

5.00%
4.00%

3.00%
2.00%
1.00%
0.00%
1st yr 2nd yr 3rd yr 4th yr 5th yr
YEAR

FT Founding Funds Allocation Fund FT India Life Stage Fund of Funds

One aspect that needs highlighting with the FoF is that the underlying funds are rebalanced
periodically to maintain the ideal allocation level. In Templeton's FoF, the rebalancing is done
every 6 months, so the investor does not incur short-term capital gains in his books, which he
would otherwise have incurred.
Viewed in this context, the FoF does not seem as expensive as the higher costs are set off
against capital gains tax. Of course, for the investor to incur short-term capital gains there has to
be an upward trend in equity markets over time. Otherwise the higher FoF expenses he is
incurring could pull down his investment portfolio.

3.7 LIFE CYCLE FUNDS

The 'Lifecycle' theory of investing - first deciphered 50 years ago by Italian born American
economist Franco Modigliani - offers a logical framework for long-term investing. The theory says

61
that each individual will go through various life stages, with different income levels and investment
needs in each of these: the 'accumulation phase', between the age of twenty and thirty years; the
'consolidation phase', between forty and fifty; the 'de-accumulation phase', between ages 60 and
70, when the individual is no longer working and is living off the interest and dividend income and
capital accumulated in the first two phases. The lifecycle theory recommends that the individual
may hold high-risk bearing assets when young, but must move towards eliminating the risks of
the portfolio, as he grows old.

The correct asset allocation and timely portfolio re-balancing are two of the key ingredients of
a successful investing strategy. Asset allocation refers to investing money across equity and debt
securities to suit one's needs and time horizon.

For a mutual fund investor it would involve selecting the right combination of equity, balanced and
debt funds. Portfolio re-balancing means buying or selling the funds in one's portfolio so as to
restore the proportion of different assets classes. This may sound straightforward, but is easier
said than done. Most investors do not decide upon their asset allocation before investing. Even if
some do, they are guilty of not re-balancing the proportion of various asset classes which may get
disturbed with time. There are two problems in this:

Firstly, re-balancing is a repetitive task and most of the investors do not devote that much of time
to it. Secondly, rebalancing may involve selling off the asset class which has been doing well
recently. For example, after a tremendous run-up in the stock markets, the proportion of equities
in one's portfolio may go up significantly and call for a re-balancing by selling some of the equity
holdings while adding debt. But the lure of extracting more out of equities often keeps the investor
from taking a timely action. To add to this, there are tax considerations that are to be considered
which an individual investor can't often ignore.

3.7.1 CONCEPT
Life stage funds are basically fund of funds, which maintain an asset allocation suited to
investors of a particular age group and keep on re-balancing their asset allocation after fixed
intervals of time to maintain the defined allocation.

Hence, they offer a readymade answer to an investor's re-balancing needs. For example, a life
stage fund for an investors in his 40s currently will allocate say 35 per cent of assets to equity
oriented schemes and 65 per cent to debt oriented ones. If the equity markets go up substantially,
the asset allocation may get distorted as the proportion of equities may go up to 40-45 per cent
which makes the portfolio riskier. At this time, the fund would itself sell some of the equity funds'
holdings to bring the allocation between debt and equity instruments back to the defined one. The
idea is to give the investor the right asset allocation at all times without the need of him doing
anything.

Introduced in the US in the 1990s, the product has caught the fancy of investors there only in the
last few years and is fast becoming one of the most popular tools for retirement planning. In India,
Franklin Templeton is currently the only fund house that has a variation of a Lifecycle Fund to
offer. That apart, such funds have not yet made an entry into the Indian market.
The original Lifecycle Fund in the US is a fund of funds and is designed to make retirement
investing easy. This is then rebalanced by fund managers as the investor gets closer to
retirement, going from a growth stage (when the investor is young) to more of an 'asset-
protection' stage as the years go by. As the investor ages, he holds assets that are most

62
appropriate for his age profile. These funds are close-ended, which means the investor has no
option to exit the fund before the stated date. It is thus a one-stop solution for retirement planning.

According to the Financial Research Corporation, a research organisation in the US, assets
held in Lifecycle Funds has ballooned to $ 255 billion in 2006 from $106 billion in 2003.
Analysts are projecting a compounded annual growth rate of 23 per cent over the next five
years.

3.7.2 LIFE CYCLE FUNDS IN INDIA

In India, Lifecycle Funds have hardly registered their presence. The only one available is Franklin
Templeton's version of the original, and it's open-ended - the investor can quit the fund when he
wishes. However, it rebalances the risk of the portfolio automatically. It's called Stage of Life
Fund of Funds (FOF). When used for investment, it helps investors access a portfolio of various
top-performing funds with a single investment; minimizes worries about which fund to buy and sell
(FOF does this, automatically, and in a tax-efficient manner); its in-built rebalancing feature
ensures that market movements do not allow the asset allocation to change; and that there's
diversification across asset classes and investment styles.

3.7.2.1 FRANKLIN LIFE STAGE FUNDS

Globally, the concept of life stage funds has been gaining momentum and all major fund
management companies like Vanguard, T. Rowe Price and Fidelity offer such funds. In
India, Franklin Templeton offers five such funds in its series of life stage funds. Though
these funds have not really taken off, but they can add a lot value to investors who want to
invest over a long-term in a planned yet hassle-free way.

Another advantage of these funds is that they prevent an investor from acting
unnecessarily on his own and trading frequently. In fact one of the reasons for such funds
not becoming popular in India is that investors have a very short-term investment horizon.
For such investors, the concept of life-stage funds simply won't work.

The five funds offered by Franklin, namely, Franklin India Life Stage FoF 20s, 30s,
40s, 50s Plus and 50s Plus Floating Rate are designed to suit largely to the investors in
the respective age groups. For example, The 20s plan is meant for an investor in his
twenties, who is supposed to have a higher risk appetite.

Therefore, the 20s Plan invests heavily in equities (around 80 per cent of the assets) while
maintaining a small portion in debt. As we move to the plans for higher age brackets, the
proportion equities will continue to decline progressively.

How this will work for an investor in a hassle-free way is simple. An investor in his 20s, can
simply invest in the 20s Plan. Once he reaches his 30s, he can move his money to the 30s
Plan and so on till his retirement. This way he will ensure that he has an appropriate asset
allocation at all times without him having to do much.

The FT Stage of Life Fund of Funds has five funds for persons with different risk appetites:

Plan name Proportion of

  Equity Debt

63
 The 20s Plan 80% 20%
The 30s Plan 55% 45%
The 40s Plan 35% 65%
The 50s Plan 20% 80%
The 50s Plus Floating rate
Plan 20% 80%

On should note here that a particular plan merely indicates the age group for which it is
suitable but there is no age restriction. Therefore, a risk-averse investor in his 20s can very
well choose the 30s plan if he thinks 20s plan will be too risky for him.

All the life stage plans of Franklin Templeton invest in other funds of Franklin Templeton,
namely, Franklin India Bluechip Fund, Franklin India Prima Fund, Templeton India Growth
Fund, Templeton India Income Fund and Templeton India Income Builder Account.

The proportion of these funds in each life stage plan varies and portfolio re-balancing is
done on a half-yearly basis to ensure adherence to the defined asset allocation.

The drawback of such plans is that they offer a limited choice as they will only be
investing in a combination of five Franklin Templeton Funds. However, they come
from a very reputed fund family and are investment worthy on a stand alone basis.
Therefore, there is little to doubt as far as the quality of portfolio is concerned.

Reason why life cycle fund have not done well in India
Given its user-friendly features and success in developed countries, one wonders why there is so
little interest on part of other fund houses in offering 'lifecycle' products in India.
 Retail investors have a very small presence in the Indian mutual fund market.
 Those who would form the bulk of Lifecycle Fund investors prefer to hold securities like
government bonds, National Savings Certificates and post office savings
 Short term Investment horizon: Indian investors might not be willing to keep their funds
locked in for a period of 20-25 years or longer, which is typically required for a normal
Lifecycle Fund.

It is only when the Indian market gains maturity and small investors accept mutual funds as an
important component of retirement planning that the concept of Lifecycle Funds will catch on. As
the concept of financial planning becomes more prevalent and there is clarity on tax status, we
could expect such products along with FOF gaining acceptance.

3.8 MyWrap “A PMS FoF”

MyWrap Account is a joint initiative of Bajaj Capital and OptiMix, a division of ING
Investment Management. The product will provide an opportunity to invest in a basket of mutual
funds without any entry load. The product comes after SEBI’s recent stipulation to not to charge
entry load for direct investments in mutual funds. Bajaj Capital has outsourced the portfolio

64
management and technology part to OptiMix, which will implement the solution. Bajaj Capital will
design the portfolio and give it to OptiMix to manage it. As OptiMix is a partner in this product, the
scheme will qualify for ‘no entry load’.

This offering is essentially a PMS (portfolio management scheme) FoF that will invest in
different asset classes through mutual funds. This is like a PMS of mutual funds where
investors would invest in a PMS and this PMS would invest in several mutual funds on
behalf of the investors.
 It gives investor four options namely growth, high-capital growth, all equities and
liquid plus.
 The product requires a minimum investment requirement of Rs 5 lakh.
 Besides exit charges, there will be annual management fee of 1.6 per cent.
 There is also the flexibility to shift from one option to the other at zero switching cost.
 Investments will be made in funds that have exposure to Indian and international equities,
commodities, debt, real estate and other structured products.
However, investments made through this scheme will be done only in mutual funds. The fund has
not specified whether the exposure would be taken in diversified equity, thematic or sectoral
funds.

STRENGTHS
 Eliminates paperwork and administration of investments becomes easy because
investment done through single account facility.
 Tax treatment for a PMS–FoF scheme will be at par with its underlying schemes.
 There is no exit load after 18 months. Before that, it is about 0.5-1.5 per cent.

WEAKNESSES
 Lack of investment profiles. Every individual’s portfolio needs to be customized according
to his goals, returns required, liquidity needs, time horizon, risk profile and other
investments made. This offering only provides four options which are limiting.
 There are very limited choices in terms of real estate funds and commodity funds. For
instance, in the real estate space, the only choice is ING Global Real Estate Fund. And,
OptiMix, the portfolio manager, is a part of ING who run the Global Real Estate Fund.
 Expenses for Liquid Plus option in the scheme is on the higher side. If one is opting for
the Liquid Plus option, which invests 90 per cent of assets in Indian Debt funds, then the
Fund Management fee of 1.6 per cent is extremely high.
 Unlike PMS, there is no scope for direct investments in stocks or other asset classes.

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