“A comprehensive book from a professional who has seen it all in the financial world. If all wealth seekers and wealth professionals read Wealth Engine, the investment world will be a much safer place.”

— Mani Subramanian CEO, Barclays Bank PLC, India

“For too long, financial planning and wealth management services in the country have tended to follow text books that do not consider the uniqueness of Indian markets or the cultural context of Indians. Wealth  Engine uses data and intuitive analytical frameworks to force you to re-think some of the fundamental assumptions in the street.”

— Mr. Deepak Chatterjee, MD & CEO, SBI Funds Management Pvt. Ltd.
Preface 13
Acknowledgements 15
Part 1
Wealth Engine
1. The Wealth Engine 19
Part 2
2. Pension 27
Defined Benefit Pension Plans 27
Defined Contribution 28
Choice of Portfolio and Pension Fund Manager 28
Annuity 29
Commutation 30
Family Benefit 30
Pension of Government Employees 30
Pension under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
New Pension Scheme (NPS)
3. Equity — Passive Exposure Approach 34
Absolute Returns from Equity 34
Equity and Inflation 35
Rolling Returns from Equity 39
4. Equity — Active Exposure Approach 44
Standard Terms in Equity Analysis 44
Types of Shares 47
Risk in Equity Investing 52
Value Drivers in Equity Market 58
Management of Equity Portfolio 64
Pearls of Wisdom and Best Practices 66
Investment Fables 70
Five Issues of Particular Concern 71
Three Cognitive Biases 72
Ten Lessons for Investors 72
5. Equity — Business Value Approach 73
6. Debt 78
Interest 78
Instruments 79
Absolute Returns from Debt Securities 83
TRI Returns and Inflation 84
Rolling Returns from Debt 87
Risks in the Debt Market 90
Yield to Maturity and Price 93
Debt Valuation 96
Investment Style 98
Management of Debt Portfolio 98
7. Insurance 100
Types of Life Insurance Products 100
How Much Life Insurance is Adequate 102
General Insurance 104
Part 3
8. Mutual Funds 109
What is a Mutual Fund? 109
Scheme and Units 110
Types of Schemes 111
Schemes versus Options or Plans 122
Scheme Selection 125
Investors in a Mutual Fund Scheme 125
Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP) 127
Benefits of Investing in Mutual Funds 129
Exit from Mutual Fund Schemes 131
Comparison with Other Investment Products 131
Appendix 8.1: SIP — NAV up 1% 135
Appendix 8.2: SIP — NAV down 1% 136
Appendix 8.3: SIP — Random 137
9. Alternate Assets 138
Gold 139
Real Estate 145
Art 151
Temptations 153
10. New Investment Structures 154
Portfolio Management Schemes (PMS) 154
Hedge Funds 155
Venture Capital (VC) / Private Equity (PE) Funds 155
Angel Networks 156
Structured Notes 156
Derivatives 156
Structured Obligations 162
Securitisation 163
Evaluating a New Investment Structure 164
Part 4
11. EconoView — Economy and Markets 171
Appendix 11.1: Will the Tremors of Japan Hit the World Economy? 175
Part 5
12. Cash Flow Planning 181
Future Value of Bullet 181
Future Value of SIP 182
Pitfalls of Future Value Calculations 182
Cash Flow Planning for the Wealthy 183
13. Asset Allocation 185
Asset Classes 185
Portfolio Performance Analyses 187
Asset Allocation Types 192
14. Succession Management 195
Dear Business and Enduring Business 195
Stakeholders in Enduring Businesses 196
Best Practices in Succession Management for Family Businesses 197

17.Estate Planning233

15. Tax Planning 201
Income Tax Concepts 201
Setting Off Capital Gains and Losses; and Speculation Profits and Losses 208
Taxation of Mutual Funds and Other Investments 209
Wealth Tax 225
Direct Tax Code (DTC) 225
16. Liability and Leverage Management 227
Business Debt 227
Personal Debt 229
Leverage 231
Assets and Associated Records 233
Liabilities and Associated Records 234
Scheme of Transfer of Estate 235
Formats for Estate Transfer 236
Living Will 239
Part 6
18. Misrepresentation 243
19. Insolvency and Bankruptcy 247
20. Scam 252
Stock Exchange Scams 252
Illiquid Asset Scams 254
“Exercise of Authority” Scams 254
Phishing and Vishing Scams 255
21. Circular Trading 256
22. Hawala 259
23. Illegal Transactions 262
24. Easy Money Schemes 264
Ponzi Schemes 264
Nigerian Scheme 264
Easy Loans 265
25. Fraud 266
26. MISCHIEF — Cases from India and Abroad 268
“Big Bull” Harshad Mehta 268
Nick Leeson (Barings Bank) 270
Ketan Parekh 271
Worldcom 272
Bernard Madoff (Ascot Partners) 273
Ramalinga Raju (Satyam) 274
Shivraj Puri (Citi) 275
Part 7
Paradigms in Financial Advising and Wealth Creation
27. Financial Planning Tradition 279
Steps to Financial Planning 279
Comprehensive Financial Plan and Goal-Oriented Investing 290
Tips and Tricks 291
28. 3-D Framework for Optimal Portfolio (3-D FOP) 294
Risk Profile and Model Portfolio 294
3-D Framework 295
Towards an Optimal Portfolio 296
Speculative Component in Portfolio 297
3-D FOP Profile 297
Classification Scheme for Investment Products
Why a Standard Classification Scheme is Essential
The SSELECTIVY Sub-set 301
30. Risk Management and Recovery Framework 303
Risk Management Framework 303
Selection of Market Intermediaries 307
Recovery Framework 308
31. Financial Blood-Test Report (FBR) 311
The Financial Planning Ritual 311
The Financial Blood-Test Report (FBR) 312
Conclusion 314
32. Building a Sustainable Financial Advising Organisation 316
Financial Adviser — Generalist or Specialist? 316
The Role of Fees 317
Know Your Customer (KYC) 318
Client Management 320
Likely Shape of the Industry 321
33. Ethics in Financial Advising 322
Key Ethical Standards 322
Association of Mutual Funds in India (AMFI) and Code ofEthics [ACE] 323
AMFI Guidelines and Norms for Intermediaries [AGNI] 328
34. Dawn of a New Era of Riches 334
Wealth Engine — the Indian Context: Points to Ponder 330
Wealth Engine — the Story So Far 336
What is Rich? 337
How Much is Enough? 338
A Balance in Life 338
Negative Balance — No Aspiration, No Drive 339
Institutionalising a Positive Balance — The Heart of Giving 339
Virtuous Wheels of Earning and Giving 340
Annexure 1: Future Value of Bullet 341
Annexure 2: Future Value of SIP 343
Annexure 3: Present Value of Bullet 345
Annexure 4: Equated Monthly Instalment 347
Epilogue 349
Further Learning 350
References 351
Index 357

As strategy consultant for companies, I have always valued the importance of analysis in suggesting strategies that are relevant. I do not believe in “strategy through LBR”, namely last book read.

I have tried to bring the same analytical rigour to the field of financial planning and wealth management in the Indian context. This has led me to question various postulates, developed in the western world, but not validated by Indian data. While including analytics, I have avoided complex statistics that tend to derail most readers. Therefore, you will find that the analytical frameworks used are simple — and the explanations based on the analysis, intuitive. Hopefully, the book will help readers understand the world of money in a better context.

Wealth creation is not just about product. Psychology is a critical aspect that is often forgotten. In this book, I have combined the “market” and “management” perspectives — legal and behavioural approaches. Embellished with anecdotes, I hope you will find it interesting and informative to read.

O. P. Bhatt, former Chairman and Managing Director of State Bank of India (SBI) spoke eloquently at the 5th Banking and Finance Conference organized by the Indian Merchants’ Chamber in Mumbai on 11 November 2010. He spoke about the challenges of capacity creation in the field of managing the wealth of the Indian masses.

I have had the pleasure of interacting with various professionals and academicians who are involved in building this capacity. The lack of talent — even inadequate appreciation of the market opportunity — is mind-boggling. Hopefully, this book will be a useful resource in carrying forward the relevant knowledge.

Readers like you and participants in my programmes contributed to the phenomenal success of my first book, Indian Mutual Funds Handbook. It has been a best-seller, year after year, since the first edition in 2003. Authors need this kind of motivation to keep investing time in writing. I look forward to your support for this book as well. I believe it bridges an important knowledge gap in the market.

As with Indian Mutual Funds Handbook, the purpose of the book is educative. Therefore, you will not see any specific institutions mentioned in either a positive or a negative light. However, rest assured that the frameworks presented are based on real and current data, and are absolutely practical. You will be able to apply the frameworks on data that is easily and freely available on the net to make your own analyses, and draw your own conclusions on the performance of organisations and products in the market place, from time to time.

Despite the analytical rigour in the book, subjectivity is part of the domain. Feel free to get in touch, if you do not agree with any thoughts, or would like to share your own experiences, or feel that something can be added in future editions of this book. Until the next publication, I propose to share knowledge on the subject at www.wealthengine.info.

As a tool for better interactivity, and to give you a platform to share your comments, I also maintain a blog at http://WealthEngineRich.blogspot.com. Do join the blog to stay updated on the developments.

Best wishes to you in designing an effective wealth engine for yourself and your clients. Welcome the dawn of a new era in richness.

SUNDAR SANKARAN is founder-director of Advantage-India Consulting Pvt. Ltd. (www.advantage-india.com), a thirteen-year old strategy consulting and knowledge incubation boutique. He has also founded Finberry Academy Pvt. Ltd. (www.finberry.org) and Stratberry Publishing (www.stratberry.com).

Sundar has won renown as an effective trainer who can simplify concepts and catalyse learning through linkages with day-to-day examples. He operates with equal ease at macro-level perspective programs as well as micro-drill-down programs. His programmes cover the entire range from leadership to product to selling, and are not limited to knowledge dissemination; they also seek to bring change within the participants, so that they are enthusiastic about the desired behaviour.

Wide experience across geographies, markets and products have helped Sundar conceptualise several unique seminars and workshops, such as WealthEngine (www.WealthEngine.biz), EconoView (www.EconoView.biz), ThinkStrat (www.ThinkStrat.biz), AssetClass (www.AssetClass.biz) PondSkill (www.pondskill.biz), Don’t Sell (www.Dont-Sell.biz), MISCHIEF (www.mischief.biz) and Riskey (www.Riskey.biz).

Over the years, Sundar has trained over 20,000 participants from an array of India’s largest mutual funds, banks, financial services companies, press and the media across a range of innovative programmes.

Sundar has worked in senior capacities at Bajaj Auto and Kotak Mahindra. His hands-on feel of financial markets and industry is well complemented by his academic qualifications — Post-Graduate Diploma in Management from Indian Institute of Management, Ahmedabad (1988), Associate of the Institute of Company Secretaries of India (1992) and Associate of the Institute of Cost Accountants of India (1988). He graduated from Podar College (Mumbai University).

Sundar is active with various industry bodies. He is a member of the Banking & Finance Committee and the Accounting Standards Committee of the Indian Merchants’ Chamber.

His other passions include reading, Indian classical music and travel.

“The book is available at Amazon, Flipkart and reputed book-stores all over India.  You can also buy it from the publisher, Vision Books.”