Wealth Management

and
Alternate Investments

Term Project
Phase-1

Submitted by:
Group 8

Chhavi Gupta (271073)

Karan Kedia (271082)
Ketan Gupta (271084)
Raghav Pratap Singh (271096)
Shrey Gupta (271110)

Submitted to:
Prof. Vinay Dutta

FORE School of Management

 Chapter 1: Introduction
The etymology of the word ‘wealth’ comes from English Language and is a combination two
English words – ‘weal’ (well-being) and ‘th’ (condition). The condition of well-being is different
for different people. Some equate it with knowledge, some with good relationships in life, some
with their capacity of fulfilling their dreams and many with having lots of money.

Behavioural finance is a new subject in the field of finance and is very popular in stock markets
across the world for investment decisions. Behavioural finance is the study of investors'
psychology while making financial decisions. Investors fall prey to their own and sometimes others'
mistakes due to the use of emotions in financial decision-making. Behavioural finance tries to
understand how people forget fundamentals and make investments based on emotions.

Financial planning subject areas denotes the basic subject fields covered in the financial planning
process which typically include, but are not limited to:

● Financial statement preparation and analysis (including cash flow analysis/planning and
budgeting)
● Insurance planning and risk management
● Investment planning
● Income tax planning
● Retirement planning
● Estate planning

Financial statement preparation and analysis

This area is concerned with understanding the personal resources available by examining net worth
and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets
under that person's control, minus all liabilities of the household, at one point in time. Household
cash flow totals up all the expected sources of income within a year, minus all expected expenses
within the same year. From this analysis, the financial planner can determine to what degree and
in what time the personal goals can be accomplished.

Insurance planning and risk management

The analysis of how to protect a household from unforeseen risks. These risks can be divided into
liability, property, death, disability, health and long term care. Some of these risks may be self-
insurable, while most will require the purchase of an insurance contract. Determining how much
insurance to get, at the most cost effective terms requires knowledge of the market for personal
insurance. Business owners, professionals, athletes and entertainers require specialized insurance
professionals to adequately protect themselves. Since insurance also enjoys some tax benefits,
utilizing insurance investment products may be a critical piece of the overall investment planning.

Investment planning

Planning how to accumulate enough money to acquire items with a high price is what most people
consider to be financial planning. The major reasons to accumulate assets is for the following: a -
purchasing a house b - purchasing a car c - starting a business d - paying for education expenses e
- accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.
Achieving these goals requires projecting what they will cost, and when you need to withdraw
funds. A major risk to the household in achieving their accumulation goal is the rate of price
increases over time, or inflation. Using net present value calculators, the financial planner will
suggest a combination of asset earmarking and regular savings to be invested in a variety of
investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher
rate of return, which typically will subject the portfolio to a number of risks. Managing these
portfolio risks is most often accomplished using asset allocation, which seeks to diversify
investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be
invested in stocks, bonds, cash and alternative investments. The allocation should also take into
consideration the personal risk profile of every investor, since risk attitudes vary from person to
person.

Income tax planning

Typically, the income tax is the single largest expense in a household. Managing taxes is not a
question of if you will pay taxes, but when and how much. Government gives many incentives in
the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most
modern governments use a progressive tax. Typically, as your income grows, you pay a higher
marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning
your personal finances can make a significant impact upon your success.

Retirement planning

Retirement planning is the process of understanding how much it costs to live at retirement, and
coming up with a plan to distribute assets to meet any income shortfall.

Estate planning

Involves planning for the disposition of your asset when you die. Typically, there is a tax due to
the state or federal government at your death. Avoiding these taxes means that more of your assets
will be distributed to your heirs. You can leave your assets to family, friends or charitable groups.
 Chapter 2: Literature Review
In this section various journals and articles have been studied and reviewed to have a better
understanding of financial planning and wealth management.

2.1 Hiral Thanawala - Financial planning tips for parents-to-be

In the article the author talks about how to do financial planning for a child and the family when
parents are deciding to expand the family. Expenses can burdensome if left unplanned, and in
India not many parents take steps to remain financially prepared. For parents-to-be, hospital bills
on birth fall neatly into the expected category, so they plan in advance or have an insurance policy
with maternity benefit to cover the costs.
The author mentions certain dos and don’ts.
Do’s: Keep emergency corpus, Pre-plan your new budget, Check policy terms of employer group
insurance, Clear-up outstanding debts, start mutual fund investments aligning to goals, increase
your life cover in term plan, Investing gift money
Don’ts: Avoid investment products with a very high lock in period, do not display your love by
spending on things for your child which have doubtful utility, do not postpone your financial
planning

2.2 Financial goals are changing: Do you really know the future expenses you need to
save for?

In 2009, the top five goals of an average Indian family included children’s education, marriage,
buying a house and a car and saving for retirement. In 2019, international vacation figures
prominently in the list, with almost every participant in the study identifying it as a key goal of
their clients. On the other hand, children’s marriage seems to have dropped down the list of
priorities. More than half of the study’s participants say this was a key goal for their clients in
2009. However, only a quarter identified it as a priority goal in 2019. Children’s education,
buying a house and retirement, however, remain the constants in the list. Between 2009 and
2019, the share of discretionary expenses in a household’s monthly outgo shot up from 10-20
percent to 25-60 percent, according to financial planners. Saving for a child’s marriage made way
for saving for an international vacation. Similarly, prioritise your retirement. “You can manage,”
Melvin Joseph, Founder & Chief Financial Planner, Finvin Financial Planners. says that
children’s higher education through loans, but no bank will give a retirement loan. He advises
focus on liquid assets and shunning real estate as investment.

2.3 Hugo Moreno, the Future of Wealth Management:

A great transfer in wealth from aging baby boomers to younger generations is under way, and it is
reshaping the wealth management industry in ways that demand greater efficiency and adaptation
by incumbent firms. The shift to new investors is happening against a backdrop of disruption—
an explosion of data, the rise of digital generations and the robo-advisors to serve them, and secular
headwinds in the global economy. Generations X and Y move effortlessly across both the analog
world of face-to-face meetings and the virtual world of digital platforms that enable the fast and
accurate service they expect.
To move in lockstep with these young investors—to remain competitive as the future unfolds,
with a tech-forward brand—wealth management firms must invest in a transformation built
around a modern core banking system. And they must do it without alienating older clients, still
the bedrock of their business.

2.4 Asset allocation in private wealth management

Nowadays, wealth managers have started using different approaches and have started using
different techniques for helping their clients for wealth management.
Wealth managers now focus on wealthier families for wealth management as they allow them to
put into practice the partly complex dynamic investment strategies advocated by theory.

2.5 Millennials and wealth management challenges of the new clientele:

The authors of the paper have recognized that the millennials pose a new challenge when it comes
to their personal wealth management. Although self-directed, 72 percent of these millennials lack
financial knowledge and hence depend on someone to manage their wealth.
About 27% are self-employed and other 54% plan on starting a business, hence their financial
planning can’t be done on similar lines as their previous generations. Before any advice only 30%
tend to invest in equity and contrary to their previous generations demand greater physical assets
and simple to understand products.
With every information being available on the net simple advice is highly valued as many
complicated products are already been served on the net to them. Even the internet companies
have divided the investor class into 3 major classes

2.6 Uma Shashikant, “Why many high income earners are left with little money in the
end”

“I was so busy earning it that I found no time to manage it.” Was a common statement that the
author came across while talking to many of the big earners who managed to not manage their
earnings and in turn had to lead a normal or below normal lifestyle compared to as they would
have pleased.
The author mentions various reasons for the same and how can this be avoided
First, the high stakes of earning too high an income are not well evaluated.
Second, high income earners suffer the curse of poor money management strategies guided as tax
planning. Many believe their wealth puts them above law and they can buy their way out of
problems.
Third, wealth attracts parasitical associations but high income earners ignore the perils of these
hangers on. Worse, they cultivate them for want of anyone else to trust. These associates are
relatives or friends, who take advantage of the high income earner, who loses control to them
Fourth, allocation of income to current expenses, for furthering professional skills, and for the
future of the high income earners and their family, is not taken strategically. When there is too
much to go around, the distinction between essential and luxury is wiped away
How to avoid
First, there is tremendous merit it keeping all earnings above board, accounting for them and
paying taxes. Accounted wealth can be held, managed, and transferred with greater ease, flexibility
and care.

Second, creating an asset pool that will generate income and be insulated from the risk of the
income earner’s main profession is necessary.
Third, investing in professional assistance for keeping records, staying within legal boundaries,
ensuring that paperwork and taxes are clean
Fourth, allocating time periodically to review and understand how the money is being managed is
also critical. It is as important as the focus on health, appearances, and networking for which many
professionals find the time and the best talent to work for them.

2.7 Shivani Bazaz - Mutual fund advisors are recommending FMPs. Should you invest?

Yields are climbing up in the last six months. The benchmark yield of 10-year government security
touched the highest of 8.12 in the month of November. Even though the yields seem to be
stabilising, some mutual fund managers believe that it is a good idea to lock in to FMPs at the
current rates.
Although this being said the article also mentions that yes these FMP’s are giving more returns
than a traditional FD even after tax implications are seen but then they do have very low liquidity
and do not solve any problem in case of emergencies as they have a lockin period. Thus, every
investor should carefully select and according to his/her need go for these FMP’s.

2.8 Lou Carlozo, the Irrational Investor and Behavioural Finance:

The world of behavioural finance, where academics, researches and market observers strive to
connect how investors behave, the forces that drive that behaviour and bottom-line impact. hire
irrational exuberance and its just-as-evil twin, irrational anxiety, get their due in the rational,
statistical world of quarterly reports, earnings per share and market cap.
And here the field is growing – and hence, the experts are having a field day.
Two hot topics in behavioural finance include loss aversion and herd mentality. With the former,
"The biggest investor behaviour by far that is common, but irrational, is selling an investment after
it has lost money and/or overall investor sentiment is weak," says Bill Van Sant, senior vice
president and managing director at Girard Partners, a Univest Wealth Management firm.
That decision, Van Sant notes says, "most often stems from fear and does not factor in rational
behaviour such as, have the fundamentals of the investment changed, have my goals changed, etc.
The same can be said about purchasing investments: Many investors buy high and sell low."

2.9 Plan your finances smartly and invest wisely – Moneycontrol

There is no denying that financial planning and asset allocation are the key to building a robust
portfolio. The investment strategy is also based on the risk appetite. Another aspect that investors
need to be clear about is guaranteed, partially guaranteed, and non-guaranteed returns. Thus, any
product or plan designed revolves around risk, return and goals. But before all this every person
should be crystal clear about the financial pyramid. The bottom or base is the protection which
should be taken even if it takes the last penny of the salary remaining after all compulsory expenses
have been met. Next is savings for building a liquid emergency fund and last comes investing.

The Financial Pyramid

2.10 Mutual fund investing

Websites like bankbazaar.com, mutualfundssahihai.com etc. mention in their investor education

block that knowing why you need to invest in a mutual fund is the foremost requirement based
on which funds can be selected. This means that the investor needs to be clear about his/her
financial goals.
Then based on these financial goals and after judging the risk appetite of the client only can any
fund be selected for the client or recommended to him/her. Over a plethora of funds under
different classifications it becomes really easy if the client is crystal clear as to what he/she wants.
Hence before doing anything one needs to sit and ponder seriously about the goals required to be
achieved.
2.11 Wealth Management Isn’t Just for The Rich

It is true that personal wealth management is not only for the rich people in the world. An ordinary
individual would require wealth accumulation and management more than the rich people because
they will have more pressing needs in the future for different requirements such as saving for
child’s education, retirement plans, securing future financial positions and many more.
In other words, money management plays an important role in realising our personal and financial
dreams by taking a multi-disciplinary approach which enables us to plan for a broader set of
opportunities and risks. Wealth management may be the key to peace of mind and financial security
for all.

2.12 Asset Allocation: Risk Models for Alternative Investments

This article proposes solutions to measuring mark-to-market risk in alternative and illiquid
investments. The authors describe how to estimate risk factor exposures when the available asset
return series may be smoothed (owing to the difficulty of obtaining market-based valuations). They
show that alternative investments are exposed to many of the same risk factors that drive stock
and bond returns. This article proposes solutions to measuring mark-to-market risk in alternative
and illiquid investments. They describe how to estimate risk factor exposures when the available
asset return series may be smoothed (owing to the difficulty of obtaining market-based valuations).
Author showed that that alternative investments are exposed to many of the same risk factors that
drive stock and bond returns.

2.13 Asset Allocation Effects of Adjusting Alternative Assets for Stale Pricing
As institutional interest in alternative asset classes such as private equity and hedge funds has
grown, plan sponsors are confronted with difficulties applying traditional asset allocation models.
Estimating the risk and correlation parameters of these asset classes is often less than
straightforward. One culprit is the infrequent and appraisal-based pricing necessitated by investing
in illiquid securities. This “stale pricing” can reduce the perception of volatility. In this study they
have apply a methodology for estimating true volatility and correlation in the presence of stale
pricing to alternative investments. They have also measure the impact of adjusting for stale pricing
on asset allocation and the diversification benefits of private equity and hedge fund investments.
They conclude that much of the perceived diversification benefits associated with allocating to
private equities and hedge funds is attributable to stale pricing and thus illusory. Nonetheless, they
observe that efficient portfolios still contain substantial allocations to alternative investments after
adjusting for the effects of stale pricing.

2.14 Benefits and risks of alternative investment strategies

As a result of the complex trading strategies they implement, and the full flexibility they have
with respect to their ability to use derivatives and trade in illiquid markets, hedge fund managers,
even those following zero-beta non-directional strategies, are exposed to a variety of risk factors
(volatility risk, liquidity risk, credit risk, etc) in a potentially complex manner. This paper argues
that a proper understanding of hedge fund risk extends much beyond a straightforward measure
of linear exposure to market risk, and provides a detailed analysis of how modern portfolio
theory allows the presence of these rewarded sources of risk to be accounted for when assessing
the performance of hedge fund managers. The contrasted exposures of hedge fund managers to
a large number of risk factors poses serious challenges to the investor, as it requires the use of
appropriate techniques dedicated to their measure and control. In contrast, it is argued that this
is also the driving force behind the diversification benefits investors enjoy when investing in
hedge funds. The main message can be summarised as follows: the benefits and risks or
alternative investment strategies are two facets of the same coin.

2.15 Successful Financial Goal Attainment: Perceived Resources And Obstacles

The author attempts to identify why do some individuals and families achieve their financial
goals while others, who earn the same income or more, fail to make progress. Over the years,
researchers have studied demographic characteristics of U.S. households and other factors (e.g.,
financial management styles, homeownership) as predictors or indicators of financial success
and/or distress. Some of these indicators have included asset ownership, retirement savings
adequacy, net worth adequacy, emergency fund level, and financial ratios, all of which are
common factors used to measure financial status. Other researchers have investigated factors
that help or hinder financial progress by simply asking people to share their thoughts in small
focus groups, through qualitative studies of the financial management practices of specific
households. The author also explains the applicability of the Transtheoretical Model of Change
(Prochaska,DiClem ente & Norcross, 1992), self-change is a gradual process that occurs in stages
based on an individual’s readiness to change. The six stages of behavioral change, according to
the Transtheoretical Model, are pre-contemplation, contemplation, preparation, action,
maintenance, and termination. Understanding resources and obstacles to financial goal
attainment can provide valuable clues to appropriate helping strategies matched to the learners'
stage of readiness for change and the typical barriers they must overcome to move forward.

2.16 The Psychology of Wealth: Psychological Factors Associated with High Income

Using a sample of financial planning clients, this paper investigated the financial psychology of
high earners. For this study, high income was defined as individuals in the top 2.5 percent of
earners in the United States ($154,000 or greater), with the comparison group reporting a median
income of $80,000. When compared to other high-income financial planning clients, significant
financial psychological differences were observed in the highest earners. Membership in the high
earning group was associated with lower levels of money avoidance and money worship scripts,
higher levels of money status scripts, higher levels of financial knowledge, more financial
enabling behaviors, and a greater likelihood to attribute financial success to a fundamental drive
to increase wealth. A deeper understanding of the financial psychology of high-income clients
can help financial planners better serve this market niche, predict possible behavioral risks to
those with high incomes and net worth, and help clients aspiring to increase their income and
net worth through insights gleaned from this population.

2.17 Neurofinance and investment behaviour

The purpose of this paper is to present a review as well as a synthesis of the extant literature in
the field of Neurofinance. The paper has been divided into eight parts. The first and second
parts introduce the paper and dwell upon the brain functions in financial decisions. Part three
presents the origin of Neurofinance and part four explains the difference between traditional
finance, behavioural finance and neurofinance. Part five and six of the paper look into the
research studies in Neurofinance and their application. Part seven gives a brief discussion on the
limitations of neurofinance studies and part eight gives the conclusion. Neurofinance is a very
young discipline. It tries to relate the brain processes to the investment behaviour. Most of the
researches in the domain of neurofinance focuses on trading behaviour. It would be interesting
to explore the workings of the brain for other investment behaviours too like personal financial
planning decisions, etc. Neurofinance is emerging as an alternate field of study and practice and
this paper is an attempt to look at the development of Neurofinance and its role in developing a
better understanding of investor behaviour.

2.18 The Future of Wealth Management: Incorporating Behavioural Finance into Your
Practice

Irrational investor behaviour is commonly observed by wealth management practitioners when

creating and administering investment solutions for their private clients. Many advisors would
like to address behavioural issues, but lack diagnostic tools and application guidelines to employ
behavioural finance research with clients. Many clients would be well served by adjusting their
asset allocations to account for biased behaviour. By doing so, they would stand a better chance
of adhering to their investment programs and enjoy better long-term investment results. In
applying behavioural finance research to client situations, practitioners must decide whether to
attempt to change their clients’ biased behaviour or adapt to it. Furthermore, quantitative
guidelines need to be available when modifying asset allocations to account for biased behaviour.
Practitioners should adapt to biases at high wealth levels and attempt to modify behaviour at
lower wealth levels. They should adapt to emotional biases and moderate cognitive biases. These
actions will lead to a client’s best practical allocation. Three case studies illustrate how these
guidelines are applied. A quantitative model is also unveiled that calculates acceptable
discretionary distances from the mean variance output for determining the best practical
allocation. The article offers practitioners a framework to better understand how behavioural
finance can be applied to their individual clients.
 Chapter 3: Client Profile

Details

Name Piyush Kapoor

Age 33

Profession Manager

Marital status Married

Children One

Residence Gurgaon, Haryana

Risk Appetite High

Life Estimates

Habits

Smoking No

Drinking Yes

Adventure Sports Yes

Retirement 60

Life Expectancy 80
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