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Introduction

1. Introduction to Wealth Management

Financial planning is for everyone today. Even middle-income families, for whom financial planning

once meant little more than front-load mutual funds and annuities, now have access to range of

options formerly available only to the wealthy, like comprehensive plans and fee-only advisers.

If you sat 100 wealth managers in one room and asked them to define wealth management, you may get

100 different answers. This is partly because of the personal and individualistic way in which wealth

management should be offered to each client.

Wealth management is about taking care of all your financial needs, as well as those of your family and

in some cases businesses through a long-term, consultative relationship. Depending on the demands of

the client, this can comprise different levels of service.

Clearly, the full wealth management service covers many areas of expertise, from tax through pensions

to investment management. It is unlikely that any one wealth manager will have expertise in all these

areas.

The investment strategy will depend on his new objectives and risk tolerance, as well as existing

wealth. He will probably want to plan for how the money is passed on to his children and grandchildren

before and on his death. He may also want to give some money to charity but have some control over

how this money is distributed and used through the establishment of a trust.

One of the key phrases of wealth management should be comprehensive financial planning. A

wealth manager should seek to find out what is important to you and your family. What financial

goals do you have and how do you want to accomplish them?

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2. The "New Wealth"

When speaking of "wealth" in this industry, there tends to be a focus on "investable assets." In addition to

historic sources of inherited and/or accumulated wealth, changes in the "retirement paradigm" have

created a new "source of wealth" and new issues in managing it. With the trend away from defined

benefit to defined contribution plans, and with many plans now existing for 20 years or more, there are

increasing numbers of people with very significant wealth accumulated in their retirement plans. This

growing number of potential "wealth management" clients will need to manage their funds differently

since they now have, in essence, a "personal pension their own control.

3. Definition of Wealthy People

Organizations are increasingly recognizing that one size does not fit all, and it is necessary to match

products/services and distribution to specific customer segments. The use of investable assets ("liquid

wealth") is one means of segmentation that can indicate both likely customer needs and the "value" of

the customer. This then impacts how we can (afford to) serve them. The following segmentation

scheme reflects what we often see in the industry.

o Mass Market: up to INR 1 Million in investable assets.

o Mass Affluent: Over INR 1 Million to say INR 10 Million.

o High Net Worth: Over INR 10 Million to say INR 50 Million

o Ultra High Net Worth: over INR 50 Million in investable assets.

Generally speaking, when institutions talk about the "Wealth Management Market," they are talking

about the two highest categories above.

4. Definition of Wealth Management

With the background outlined above, "Wealth Management" can be defined as providing appropriate

financial products and services to meet the needs of people with significant investable assets. Broadly

speaking this can include:

Continued growth of wealth by appreciation of existing assets as well as continued accumulation

of new assets.

Protection of assets from inappropriate investment risk and unnecessary taxes.

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Appropriate use of assets to support a desired lifestyle. This may include

development of a structured income stream, periodically liquidating assets as needed, etc.

Transfer of assets. This includes determining when, how and to whom assets are to be transferred.

Institutions that can most effectively fulfill these needs on a coordinated basis will be the winners in the

wealth management market space.

5. Current Wealth Management Market in India

Indias dollar millionaires club is growing faster than most other economies. The number of HNIs

grew by 19.3% in 05 with individuals with financial assets of INR 4.5 crore and above. India now

stands at 95,000+ as compared to 70,000 in 04 and 83,500 in 2005, according to the World Wealth

Report from Capgemini and Merrill Lynch.

India and China are today considered to be the economic powerhouses of the world. India has

benefited in the post-liberalization era which has seen the economy record robust year-on-year

growth. Today, affluence is no longer considered the bad word that it used to connote about three

decades ago. Rising affluence levels has seen the concept of wealth management gain ground.

This is a new segment but is gaining significant ground in the country. Various institutions have

different types of benchmarks. One parameter could be the quantum of financial assets owned. This

segment excludes home and jewellery. The number of persons in India who have wealth of over INR

2.5 crores which was placed at 1.60 lakhs in the financial year 2004 should rise to four lakhs in the

financial year2010.

Industry estimates put the wealth ofthe top 70,000 rich individuals in the country at $260 billion.

Today, there are numerous agencies looking at wealth management. Banks for one are at an

advantage given the nationwide presence. Almost all banks notably the private sector and foreign

banks are looking at this segment.

This business of wealth management runs like other businesses on the element oftrust. This means

that you are willing to allow a person whom you trust to handle your wealth. The growth of

independent financial advisors (IFAs) would help this industry also. Already some regulations are

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coming in place like the AMFI certification for distributing mutual funds which

should also help the growth of this industry.

6. Growth Drivers of Wealth Management in India

One reason is the economicliberalization which India witnessed in the early 90s. The rise of the

knowledge-based economy has proved to be a boon what with an increase in the number of

professionals. They enormously benefited thanks to employee stock options (ESOPs).

The returns on assets are a mixed bag. While fixed income products have seen a decline, the stock

market and real estate has done very well in the last 3 years. Therefore, there is a rising demand for

Equity and equity related instruments, e.g., Equity Mutual Funds and Unit Linked Products.

Commodities as a class of asset is becoming popular. The key point is that investors are aware of the

ground realities. They would look at preservation of capital in a volatile scenario rather than seeking

maximization of returns. This is an opinion many investors cutting across age or background are

demanding. In India, various Banks are providing the services of so called Wealth Management by

forming a different department called Private Banking

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Products to choose from

1. Traditional Products

a) Banks:

Considered as the safest of all options, banks have been the roots of the financial systems in India. For

an ordinary person though, they have acted as the safest investment avenue wherein a person depositsmoney and earns interest on it. The two main modes of investment in banks, savings accounts and

Fixed deposits have been effectively used by one and all. However, today the interest rate structure in

the country is headed southwards, keeping in line with global trends. With the banks offering little

above 9 percent in their fixed deposits for one year, the yields have come down substantially in recent

times. Add to this, the inflationary pressures in economy and you have a position where the savings are

not earning.

c) Company Fixed Deposits:

Another oft-used route to invest has been the fixed deposit schemes floated by companies. Companies

have used fixed deposit schemes as a means of mobilizing funds for their operations and have paid

interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule.

However, there are several potential roadblocks in these. First of all, the danger of financial position of

the company not being understood by the investor lurks. The investors rely on intermediaries who more

often than not, dont reveal the entire truth. Secondly, liquidity is a major problem with the amount

being received months after the due dates. Premature redemption is generally not entertained without

cuts in the returns offered and though they present a reasonable option to counter interest rate risk

(especially when the economy is headed for a low interest regime), the safety of principal amount has

been found lacking. For those who are not adept at understanding the stock market, the task of

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generating superior returns at similar levels of risk is arduous to say the least. This is

where Mutual Funds come into picture.

d) Gold

Gold's natural advantage of being an asset independent of inflation or currency gives it the ubiquitous

status of being nobody's liability. In other words, the very fact that gold price is not linked to any

country's currency or inflation automatically makes it the only asset which remains unaffected by the

changing economic environment in any particular country.

Gold proved to be their safety net at a time when stocks, currencies and property went bust. As the

region recovers, the gold buying is back with a vengeance. A more recent example was the increased

demand for gold coins in the US to hedge against potential losses due to the Y2K fall-out. Gold has

again emerged as the asset of the last resort and proved its effectiveness as the only dependable hedge

against inflation and currency risks.

History has shown that gold has survived through the ages. Even in these modern times with various

financial derivatives available and in the age of e-commerce, gold's importance as an insurance asset

cannot be ignored. In the short term, the downside risk is limited and in the longer term, gold's position

as a security asset is assured.

Gold Bond Scheme:

The objective of the gold deposit scheme was to utilize the gold lying with the Indian consumers for

recycling to reduce import and enable the owners of the gold an opportunity to earn interest on their

gold holding over and above capital appreciation. According to recent reports, since its launch in

October 1999, the gold bond scheme has garnered approximately 4.5 tons of gold worth around INR.

233 crores.

While this is way below the target of collecting gold worth INR. 1,200 crores, one must realize that this

is a process changing mindsets which is always slow. The Scheme should be given a few years before

its effectiveness can be accurately measured. Moreover the Reserve Bank now needs to introduce other

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gold related consumer products such as gold accumulation plan, gold accounts etc to

begin the gold consumerbanking industry interface which has been lacking as of now. This will create

a mutual relationship of the gold consumer with his banker

WGC has for long been advocating introduction of newer gold products

which would help monetize gold.

The World Gold Council is very keen to play an integral role in the introduction of gold bullion trading,

gold banking and derivatives and gold hedging. However, to initiate these programs, it is extremely

important that the necessary infrastructure is in place. At present, such infrastructure is still being set-up

and the necessary legislations need to be in place.

Some of the products that can be introduced include gold accumulation plans, gold accounts gold bonds

etc.

Between India and China, 60% of the world gold demand is generated. No major change is

anticipated and there could be more than 5% Year on Year demand increase in the coming 2-3

years.

There are 3 aspects to the gold trade in India, namely:

i. Supply

ii. Demand, Design, Technology, Hallmarking, Retailing

iii. Gold market

i.Supply

With the advent of liberalization in 1991 and the abolishment of the Gold Control Act, 1962,

restrictions on import of gold have been eased slowly over the years. Premiums on gold over theinternational price have come down from 60% during the gold control regime to around 10% currently.

Today, gold can be officially imported through 3 channels, namely

1. By Non Resident Indians (NRI) returning from abroad upto 10 kg every 6 months

2. Under the Special Import License entitlement scheme (SIL), and

3. By authorized banks and other trading agencies who have been given the license to import gold

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under the open general license

Import of gold from all these channels attracts an import duty of INR. 400/- for every 10 gms imported

(approximately 10% of the value). Currently, almost 85% of the gold imported into India is through

these official channels.

The WGC has played a very active role in the introduction of the OGL route through representations

and seminars organized to discuss the modalities of permitting import of gold under this route. The

Council is also actively pursuing the cause for the reduction of import duty on gold to bring the Indian

gold price closer to the world gold price and reduce the dependence on the unofficial channels for

import.

ii a) Design

The Council is actively involved in both the sides of the design aspect of gold; training and promotion

of designers. The Council also conceptualized and has been conducting 'Swarnanjali' the biggest gold

jewelry designing competition since 1996. The objective in the promotion of the design aspect of gold

jewelry is to ensure availability of newer and innovative designs, which cater to both the traditional and

the contemporary tastes.

ii b) Technology

The Council regularly organizes training programs conducted by renowned international consultants for

manufacturers and karigars to acquaint them with improved soldering techniques, new methods to

control gold losses in production, finishing etc. The interactive symposium provides attendees a

platform to discuss and find solutions for specific shop floor problems. This is another area where the

Council hopes to make a difference by creating better working conditions and making available better

technology to the fabricators.

ii - c) Hallmarking

The Council continuously strives to highlight the benefits of hallmarking for the consumer and the

retailer and hopes to ensure that most of the retailers adopt hallmarking with the next 3 years. As of

today, more than 90 retailers have applied for the hallmarking license out of which at least 50 have

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already started selling hallmarked jewelry.

ii d) Retailing

Over the years, the retail gold market has changed dramatically. The new economy has enlarged the

horizon the consumer who is now demanding better designs and shopping environment. Besides, the

growing affluence and influence of the west have caused a sea change in the consumer's preferences.

Today, gold jewelry is marketed through aggressive advertising and PR initiatives, something that was

unheard of 3 years back. We also have seen the emergence of branded players who have created a

separate niche for themselves.

iii) Gold Market

Introduction of bullion trading, setting up of a gold exchange, gold banking and derivatives and gold

hedging are some of the next steps on the Council's agenda. However, necessary infrastructure has to be

set-up and policies have to be framed, for these to become a reality. Gold as an Investment: on

parameters of risk, return and liquidity-when compared to other investment avenues like fixed

deposits, equity, real estate

2. New Era Products

a) Equity

i) Basics of Equity Market Equity Investments - Investments in which the investor is considered an

"owner" in the asset. Usually considered higher risk than cash or debt instruments, the rate of return on

an equity investment is never guaranteed.

There are two ways in which you can invest in equities-

1. Through the secondary market (by buying shares that are listed on the stock exchanges)

2. Through the primary market (by applying for shares that are offered to the public)

Over the long term, equity shares have offered the maximum return to investors. As an investment

option, investing in equity shares is also perceived to carry a high level of risk.

Your Present Value is about INR. 200 Crores + And,

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The Company is WiproOther Such examples are

Cipla: Investment of INR. 10,000 in 1979 will fetch INR. 95 cr.+

Infosys: Investment of INR. 10,000 in 1992 will fetch INR. 1.5 cr.+

Ranbaxy: Investment of INR. 1000 in 1980 will fetch INR. 1.9 cr.+

iv) Some important points

Start off on the right track

You need to accept the process of investing in equities as one long journey that will constantly

enlighten and enrich. Surely you will make mistakes on the way, but credit these to experience. In fact,

the earlier you make the mistakes, the more valuable and less expensive will be the experience.

Diversify your investments

Remember the proverb about `putting all your eggs in one basket'. Well, it applies just as much to

investing in stocks. As a thumb rule, you should not have more than 10% of your net worth in any one

stock, even if it is the absolute winner of an idea. At the same time, do not hold too many different

stocks in your portfolio. It is difficult to monitor them.

Be Disciplined

You don't have to be a genius to be a successful investor but discipline is a must. To be disciplined you

need to follow some rather simple rules and follow them well -

1. Do all your research before you buy a stock and write down the reasons for buying it.

2. Analyze your company's performance through quarterly results, annual reports and news articles.

The idea of analyzing is to make sure that the reasons for which you bought the company's stock remain

valid.

3. If important variables i.e. the reasons for buying and holding the stock have changed, then revisit

your investment decision.

4. Be unafraid to act (i.e. BUY or SELL) if your "revisit" tells you to do so.

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Set the administrative issues in order

1. Get yourself a good broker. Get access to a broker on atleast one of the two major stock

exchanges, i.e. the Bombay Stock Exchange and the National Stock Exchange.

2. Open a depository account. Dematerialize all your stock holdings that can be dematerialized.

3. Understand the settlement systems. When do your payments need to be made or received?

Similarly, understand when shares transacted are receivable or need to be delivered to the broker.

4. Always update your portfolio worksheet, detailing all your equity investments held as on date.

Business model

Undoubtedly, the very first thing that any investor must look at is the business/sector that the company

is operating in. The sustainability of the business model, scalability and robustness are factors that

every investor must consider before studying the stock any further. To give a simple example, the top-

tier software companies' business models are focused on the 'Global Delivery Model', a totally new

paradigm that has changed the face of the global software industry. The key to the strength of this

model is seamless co-ordination between centres across the globe and excellence in execution.

Management

The management is another extremely important factor to consider before investing in any company. Atthe end of the day, it is the management that will be the driving force behind the future direction and

success (or failure) of the company.

Competition in the industry

Undoubtedly, the company's competition is a major factor that you as an investor should look at before

deciding to buy (or not to buy) that company's stock. It should be understood that most industries are

highly competitive in today's free market environment, unless that industry is highly regulated (such as

energy) or is characterized by artificial entry barriers. Therefore, not just the competition, but also the

company's place in the industry (market leadership) should be assessed before taking the plunge.

Financial analysis

This, of course, is one of the major factors that most investors look at. It includes doing a detailed study

about the company's financial position and performance over a reasonably long period of time.

Studying its sales growth, trends in EBITDA margins, net profit growth, return ratios and other such

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number crunching is pertinent in order to understand as to whether potential is being

transformed into performance. Such a study is commonly known as 'Fundamental analysis'.

Dividend yield

This is another factor that is often considered by investors. Dividend yield is basically the trailing 12-

months dividend per share divided by the current market price. The dividends are a form of income

from shares and regular dividend-paying companies do provide some comfort that their profits and cash

flows are stable enough to enable them to keep on paying dividends each year. High dividend-yielding

stocks could provide some cushion against any potential downside.

Value

And finally, the last step in deciding whether or not to buy a stock - the valuation phase. While the

business model, management, fundamentals and market positioning of the company may be the best, if

the stock is trading at valuations that are not warranted, then it is not worth buying the stock.

In the short run the market (equity market) is a voting machine. In the long run it is a weighing

machine

- Benjamin Graham

For those who are not adept at understanding the stock market, the task of generating superior returns at

similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture butbefore moving on to Mutual Funds; lets understand Portfolio Management Services.

b) Portfolio Management Services (PMS)

i) What is PMS?

The process of investment of funds in Equity, Debt, Derivatives and related instruments through a

professional manager; who customizes the portfolio as per the needs of the investor, is normally

referred to as Portfolio Management. In Mutual Funds a person makes an investment in a fund and

becomes a proportionate beneficiary in the fund. He has no control over the process or direction of

the investment. Also, the disclosure and reporting is much poorer compared to PMS. In Portfolio

Management, the investment remains in the name of the investor and he is the actual owner of the

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securities all the time. He avails of the personalized services of an expert who

invests based on the authority and specifications given by the investor.

c) Mutual funds:

i) What is Mutual Fund?

Mutual Funds are essentially investment vehicles where people with similar investment objective come

together to pool their money and then invest accordingly. Each unit of any scheme represents the

proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of

investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the

fund from time to time. Mutual fund schemes are managed by respective Asset Management

Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these

AMCs, either alone or in collaboration with reputed international firms. Several international funds like

Alliance and Templeton are also operating independently in India. Many more international Mutual

Fund giants are expected to come into Indian markets in the near future e.g., Lotus (who have already

set up shop in India though yet to launch schemes)

A vehicle for investing in stocks and bonds

A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of

several investors and invests this in stocks, bonds, money market instruments and other types of

securities.Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund

unit gets a proportional share of the funds gains, losses, income and expenses.

Some popular objectives of a mutual fund are:

Fund Objective What the fund will invest in

Equity (Growth) Only in stocksDebt (Income) Only in fixed-income securitiesMoney Market (including In short-term money market instruments (including government

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Gilt) securities)Balanced Partly in stocks and partly in fixed-income securities,

in order to maintain a 'balance' in returns and risk

ii) Different types of Mutual Funds:

Equity Funds: This is a scheme that invests only in equity. This type of funds main objective is to

provide long-term growth through Equity/stock investments.

Every Equity fund scheme has a set Fund Philosophy. The choices available today are; Diversified

funds, Sectoral funds, actively managed funds, thematic fund, index funds etc. Sectoral fund is the most

risky.

Debt Funds: These funds hold major investments in bonds of different categories and the downward

change in interest rates has seen the returns from these funds soar high in recent timesThis section is

essentially meant for the people who wish to know more about the basics about them. I have just tried

to explain what are bond funds and the factors that affect them.

iii) Benefits of Investing through Mutual Funds

The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that

we normally associate with them. Some of the other major benefits of investing in Mutual Funds are:

Professional Money Management: Fund managers are responsible for implementing a consistent

investment strategy that reflects the goals of the fund. Fund managers monitor market and economic

trends and analyze securities in order to make informed investment decisions.

Diversification: Diversification is one of the best ways to reduce risk (to understand why, read The

need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on

their investment needs.

Liquidity: Investors can sell their mutual fund units on any business day and receive the current

market value on their investments within a short time period (normally three- to five-days).

Affordability: The minimum initial investment for a mutual fund is fairly low for most funds (as low

as INR 5000 as Lump sum and INR 500 through Systematic Investment Plan for most of the schemes)

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Convenience: Most private sector funds provide you the convenience of periodic

purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.

Mutual funds also provide you with detailed reports and statements that make record-keeping simple.

You can easily monitor the performance of your mutual funds simply by reviewing the business pages

of most newspapers or by using ourMutual Funds section in Investors Mall.

Flexibility and variety: You can pick from conservative, blue-chip stock funds, Sectoral funds,

funds that aim to provide income with modest growth or those that take big risks in the search for

returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.

d) Real Estate

Indian real estate market on a high growth curve and growing at the rate of 30% per annum.

Services sector continues to be the major real estate driver

Approximately 30 mn.sq.ft. of office space supply to enter the market per annum for the next three

years

Proactive policy changes for the sector have led to increased foreign interest

Close to US$ 5 billion waiting to enter the Indian real estate market through the real estate venture

capital investment route

Recently permitted Real Estate Mutual Funds (REMFs) foreseen to increase liquidity for the sector

The Indian real estate landscape has undergone a paradigm shift over the past few years. With

economic liberalization, increased globalization and the consequent increase in business s

opportunities, India's real estate sector is on a high growth curve. A booming economy, depicted by

the soaring levels achieved at the stock market, increasing demand across sectors and favorable

demographics have given rise to corporate optimism and has provided the necessary impetus for the

office space demand to reach greater heights.

A number of knowledge and technology intensive sectors have emerged as the sunrise segments,

causing the demand for commercial space to go into an overdrive. India's strong economic

performance and its established position as an off-shoring destination has translated into a more

robust real estate environment.

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The Indian real estate market is going through a boom phase and has

metamorphosed into one of the world's most attractive investment avenues. It will continue to derive

its growth from the thriving offshoring industry. Facilitative government measures and reforms like

allowing Real Estate Venture Capital

Funds and the recent announcement by Securities and Exchange Board of India (SEBI) to permit

Real Estate Mutual Funds (REMF) will provide increased liquidity and help in increased

transparency and legitimized funding for the industry. This, coupled with a multitude of Initial Public

Offers (IPOs) being planned by major real estate developers of the country, will result in greater

capital supply to the real estate market and ensure larger scale of development.

Outlook of Real Estate Market in Mumbai

In Mumbai, the trend for surbanisation is likely to continue with locations like Andheri and Malad

capturing significant demand for large format spaces from the tech sector. Factors like scalability,

human resource availability, proximity to residential locations, robust telecom connectivity and new

developments in these locations that offer quality physical infrastructure at competitive prices are

increasingly making these locations attractive for the IT & ITES companies. In future, Navi Mumbai

and Thane will also draw considerable demand from the technology sector.

Various industrial plots along the L.B.S. Marg stretch in central suburbs as well those in Navi

Mumbai have the potential of being converted into commercial space. Together with this, it is

expected that the positive final judgment in favor of mill owners would contribute to medium term

stability in the supply situation.

Heightened interest from corporates, increased leasing on account of consolidations, relocations and

scaling up of operations due to growth and expansion of business environment across all sectors

including IT/ITES, banking, finance and insurance, pharmaceuticals and services sector will continueto fuel demand for office space in Mumbai. Of late, there has been an increasing preference by

corporates to occupy signature or standalone buildings.

A major infrastructure initiative to reduce congestion and improve connectivity, the Mumbai Metro

Rail Project, is expected to have a positive impact on the real estate values along its route.

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e) Art

i) Background of Art in India

Many invest in art simply to possess the best and few see it as an investment to be traded.

The Indian art market has undergone a palette change since the 1960s and 1970s, when artists often led

a hand-to-mouth existence, teaching art or joining advertising to survive. Today, with professional

galleries handling art as commerce, with the art auctions of the 1980s revamping price structures, with

overseas collectors like Chester Horowitz, Charles Saatchi and Masanori Fukuoka acquiring Indian art,

the picture is shaded differently.

Bangalore may not be quite the investor's hub as Mumbai is, but it does reflect the ups-and-downs of

the contemporary art market just as accurately. Naozar Daruwala of Crimson the Art Resource,

explains, "True art investors, as I understand the term, can be counted on your two hands. The resale

value of paintings varies dramatically from artist to artist, from painting to painting, as there is still no

real secondary market in India. Returns would depend on when investors bought the work. Was the

artist already well known? Is the painting considered one of his good ones? Returns within a three-year

period are not great. However, between three to five years, they could double. New websites like

SaffronArt.com offer a good opportunity for resale."

"We don't have clients who buy a work they don't like just because it is a good investment," expands

Sunitha Kumar of Sakshi gallery. "Our younger patrons in their 30s and 40s like buying younger artists.

They are willing to take risks and are not confining themselves to a canvas or a sculpture"

She has never viewed art as an investment and has never tried selling it. "But as far as I know it isn't

easy to sell from your collection. So, it's not exactly a liquid investment!"

How has the current lack of buoyancy in the financial markets affected art investmentsAnd artists have

not reduced rates, though they may do so privately," confesses Naozar. "The Indian art investment

market has been steadily rising. It still has potential that one can explore. If one has a good gallery or

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consultant, instances of the work depreciating are quiet rare," stresses Sunitha. "But

at the end of the day, you should buy what moves you."

ii) Art as an Investment

Art investment in India appears to have dimensions beyond mere lucre. The human face throbs at the

heart of art transactions here, no matter what business sense dictates.

It's the art world's best-kept secret; ask any Indian art dealer of repute and he, or most often, she, will

tell you that they've known it all along: Indian artists are the best in the world. It wasn't often that a

painting by an Indian artist was auctioned for 1.5 crore rupees or is even seen to be 'worth' that kind of

money. But over the years, contemporary Indian art, like Tyeb Mehta's 'Celebration' triptych, has

commanded such a price. Indian art is increasingly becoming more that just a pretty picture to hang on

your walls. Some canvases command serious money and this makes them as valuable as stock market

blue chips.

"The investment value of a piece of art first begins with the hype and popularity levels of an artist,"

explains Ashvin Rajagopalan, a young Chennai collector and gallery owner. "Initially, a first-time art

show's success is based on how popular the art is, who collects it, and how much is paid for the art.

After that, it depends on how the artist sustains himself. But most often, artists get better and the prices

of the paintings usually go up."

Since 2000 Indian art has appreciated a staggering 10 per cent faster annually than the stock market.

Your art investment would have doubled its value in two-thirds the time taken by your equity shares.

And we thought the stock market was on fire. Their bids were driven by hopelessly over-leveraged

assets, and ended in tears when many winning bidders couldnt even take delivery of their prizesIndian

contemporary art has arrived as a credible capital asset. Financial institutions are ready to invest in art

as part of a diversified portfolio. Tax authorities are conducting surveys to gauge the scale and nature

of this wealth.

"Art is a fine asset to hold as part of ones portfolio. But it is essential to know the subject well, to

do ones homework, and buy an artist who has a clear resale brand value."

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Today most of my savings are in contemporary art...but to buy what one likes isnt

enough. The aesthetic eye needs to be trained and that takes time."

In the past India has not given any respect to the financial, because she was unable to systematically

link the historical to the financial. History is the key to pricing art. Once public perception clarifies on

this issue the momentum is irreversible."

India head of investment banking for Citigroup, Pramit Jhaveri, reaffirms the bright future and is

optimistic on the investment prospects for art: "Handled right, art is an asset class with great potential.

It has the interest of the high net worth community across the world."

Today, it isnt only the very wealthy whove noticed the remarkable appreciation in Indian art. Good art

doesnt necessarily cost lakhs or crores. It can be had for as little as several thousands of rupees. A

dedicated art fund (see box) could lower the entry price even further.

But whatever the price, are you getting value? Today the public is aware that art compares favorably

with other financial investments. Once the environment to love and invest in art becomes more

transparent and information moves with greater ease the growth in the art market will receive its next

major impetus. Simplification of the tax and duties structure will further add momentum to the growth.

The amounts of money today are very serious, comparable to middle ground European art at many

levels. Indian buyer. As a result they lacked energy and any serious international credibility. "Unless

your domestic economy drives the market no international boom is possible," says Tuli.

He helped develop the local market with a seminal publication on Indian contemporary paintingThe

Flamed-Mosaicalong with organizing the first major festival of Indian contemporary painting along

with the HEART, NGMA, Bharat Bhavan and the key galleries of Mumbai, and then culminating it

with Indias first professional auction: The Intuitive-Logic II. Ravi Varmas Begum Bath fetched INR

32 lakh in November 1997, becoming the most expensive Indian modern painting.

Liquidity and the short, sharp craze of fashion typically dont last as long. And any market that has

outperformed one of the most attractive equities markets in the world cannot retain its performance

edge forever. Yet a healthy art market will eventually help keep a smile on the face of anyone who

ponders the long-term trend for the value of Indianart.

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If art is viewed as a monetary investment, where does that leave the discerning

collector who has an emotional stake in a work of art?

HOW MUCH?

Today, M.F. Hussains works are known more for the crores and controversies they generate than their

artistic content"Many people are now contemplating the idea of investing in art, and in Indian art in

particular," declares The Handbook of Indian Art Investment - 2006-07compiled by Raw Umber India.

"However, a large number of people who plan to invest know very little about art, the art market, or

how to invest."

The purpose of the handbook as well as the event `Art as an Investment: Keeping up with the Indian Art

Market', organized recently as part of the Taj Business Celebration Series, was ostensibly to provide aperspective on the Indian art market and guidelines that would prove useful in identifying meaningful

investments in art.

iii) 5 Reasons to Invest in Contemporary Indian Art

1. All works of art are unique pieces. No two pieces of the same kind exist and therefore, good works

become all the more valuable.

2. The return on investment in art could go up to 20 per cent per annum.

3. Art never gets cheaper.

4. If one were to buy good work by an older artist, the art appreciates by leaps and bounds and there is

good re-sale value for it.

5. Art is as much of an investment as buying shares or buying gold. To some degree, it is a gamble as

much as investing in shares, gold, property or bonds is. But then, is anything 100 per cent foolproof?

iv) An Investors' Guide to Buying Contemporary Indian Art

You must really like what you are buying. Avoid buying purely for the name of the artist. You might

get stuck with works of art you cannot stand.

Visit as many exhibitions as you can to look at different works by a number of artists. Read up as

much as you can on the art you are planning to buy and on the artist. It pays to do your homework.

Know the artist. Talk to the artist and find out what they are about and what their art is about. Some

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works can look fantastic, but they could be by gimmicky artists who are copying

something. Most serious art collectors will always personally know the artist behind the artwork they

collect.

Try and catch the artist when he or she is young. The work will be affordable.

Be prepared to wait for the art to appreciate. If you buy any senior artist, it will appreciate in 10 years.

The value of art usually goes up if the artist is older or if he or she passes away.

Artists tend to paint in series. A successful series by any artist is always worth buying; good gallery

owner will guide you on this. Buy art from a good series.

Check the age of the painting to see if the painting you are buying is a new piece or van old one. An

older piece is usually a better investment, because it has stood the test of time. A new art experiment

may or may not be worth the price.

Scout about for a reputed art dealer whom you can trust. Ask around and get a good reference for the

dealer. When you want to sell your art, always go to a reputed gallery which will be able to evaluate the

work properly and advise you well. The art world is notorious for frauds and fakes, so be warned.

Never be compelled to buy art as soon as you enter an exhibition. The biggest collectors seldom turn

up at openings and at exhibitions.

Look after your art purchases as you would look after jewellery

v) Art Fund

Yes, an Art Fund has been launched by Osian. The fund will reach out to around 1500 of the Worlds

Top buyers. This fund is specially for Indian Residents.

Excerpts from the CNBC-TV18s Exclusive Interview with Neville Tuli, the Chairman of Osian:

Q: Could you explain to us what this product is all about and how it will

work?

A: Basically it is an art fund. We have an intention that over the next 3-4 years, we will be able to

create a mutual fund industry, bring in the middle classes, 300 - 400 million Indians to take a stake in

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the cultural heritage of our country. Given the legal framework today, the fund under

the Indian Trust Act is the most efficient institutional platform we can create. It is a private placed fund

and we reach out to around 1500 of the top buyers around the world. This fund is specifically for Indian

residents. Hopefully it will show the country that art is not just an aesthetic and historical object, but it

also has a financial and developmental role. It is one of the greatest sustainable, credible assets of every

country across time and now this institutionalization process has taken it a step forward.

Q: Where do you find art prices now?

A: People have been talking about bubbles for 100 years. When the price was INR 1 lakh it was a

bubble, when it is INR 10 lakh it is still a bubble. That simply shows the ignorance and lack of

historical perspective. Indian art is still at ground level one. Its infrastructure is at a very nascent stage.

If one compares the basic knowledge, institutional framework, legal framework and the knowledge-

nurturing framework with the west, we are around 20-30 years behind. We have a long way to go

before we could actually turn and stabilize at that 12-15% per annum rate, which the west is achieving.

It is just because most of the learning curve for most of the audience is still at ground zero, and 100

years of neglect has been focused into about 8-10 years of selling, and of course the media hype that

people feel everything has moved very quickly.

But the infrastructure and the knowledge base, which supports any great market, is still at ground zero.

For instance, take the number of leading artists, the kind of museum archival library infrastructure, the

legal framework, and a host of other factors.

In my perspective there is a long way to go and there is great wealth to be created not just for the

individual and the institution but also for the public. For that we have to change certain framework and

that is a 3-5-year journey, atleast.

Q: What has been the experience from abroad for a fund like this, both

in terms of interest and performance?

A: International funds by and large have failed because they broke the cardinal rule about art funds; that

it should not be a financial institution that starts an art fund but an arts institution. Finance institution

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will never understand aesthetics and history. It is aesthetics and history, which gives

value to art. Finance - wealth is a by-product.

People in the west are happy achieving that return because of its stability, because of its ability to ride

the crisis, the depression, all kinds of downturns and as a result also having a low correlation between

equity markets and the art market.

So by and large the west is now much happier with art funds, pension funds and railway funds. They

still have very little understanding of what a great art fund is capable of doing. Hopefully India will

show them the way.

Q: What might be the benefits of investing in a fund like this?

A: If an individual goes out to buy a piece of art, he has to pay 15-20 % commission. If there is no VAT

registration, he will lose 12. 5% VAT when dealing with a registered dealer. When it is sold another 15-

20% commission must be paid. Then if it is sold in less than three years, 33.8% short- term capital

gains must be paid. If it is sold after three years 20% capital gains must be paid. That means one has to

make 65-70% before making the first 1%.

Yes, there is capital appreciation on paper but when it comes to actually transforming that into cash

returns, its just a myth. Now with the whole market reaching a certain maturity you need an

institutional platform, which can exploit the economic gain for the individual investors and slowly for

the public at large.

Q: What would be a rational expectation from such a fund over a three-year period since that is the lock-in and people have been a little taken

away by the kind of returns some of these artists might have provided in

the last 12-18 months?

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A: Price appreciation is totally different from the rate of return you could expect

from your investment but art is a new asset, it is an asset in the making. It has to show a certain

performance to the financial world before it can be taken seriously and if we cannot outperform all

existing asset basis, there would be something fundamentally wrong with the whole concept.

So if ones opportunity cost in the market today would be 20-25%, obviously one cannot guarantee

anything. That is not in anyway the intention, but I would be disappointed if any art fund that knows its

subject well, earns less that 30-35% per annum tax free for its clients.

Q: You said that there is very low co-relation between equities and art,

has there been any fall out in the art market because of the correction in

the stock market in India?

A: No, not at all. Although obviously there is a linkage as a countrys confidence and economic growth

changes but those are long-term macro factors and the India story is still a very positive one across the

world. The volatility and corrections we have seen in the stock market do not really affect art prices.

Art is determined by very long-term aesthetic and historical factors and those are the things in which,

greater the knowledge base and dissemination of information, deeper and stronger the market,

especially in times of downturns.

Q: The fund has already opened, what sort of response have you seen?

A: It has had a great response and we will easily raise what we had targeted. The responsibility of our

fund is to go into the middle of the public accountability, get yourself scrutinized, educate the public,

excite them, ask questions and open up a whole process by which you raise and create wealth.

Many people who call themselves fund raisers, raise money and then quietly go away and no one

knows what is happening. That is not the purpose of our fund. Obviously, we have to carry a whole host

of institutions; individuals and it will succeed in a positive manner.

f) Derivatives and Commodities

i) Derivatives Market In India

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Derivative markets can broadly be classified as commodity derivative market and

financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts for

which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans,

rapeseed, cotton, etc or precious metals like gold, silver, etc. Financial derivatives markets trade

contracts that have a financial asset or variable as the underlying. Financial derivatives are used to

hedge the exposure to market risk. The commodity derivatives differ from the financial derivatives

mainly in the following two aspects: Some of the major market players in commodities market are: -

Hedgers, Speculators, Investors, Arbitragers

Producers - Farmers

Consumers - refiners, food processing companies, jewelers, textile mills, exporters & importers

ii) Commodities Market In India

India has a long history of futures trading in commodities. In India, trading in commodity futures has

been in existence from the nineteenth century with organized trading in cotton, through the

establishment of Bombay Cotton Trade Association Ltd. in 1875. Over a period of time, other

commodities were permitted to be traded in futures exchanges. Spot trading in India occurs mostly in

regional mandis and unorganized markets, which are fragmented and isolated.

There were booming activities in this market and at one time as many as 110 exchanges were

conducting forward trade in various commodities in the country. The securities market was a poor

cousin of this market as there were not many papers to be traded at that time.

The era of widespread shortages in many essential commodities resulting in inflationary pressures and

the tilt towards socialist policy, in which the role of market forces for resource allocation got

diminished, saw the decline of this market since the mid-1960s. This coupled with the regulatory

constraints in 1960s, resulted in virtual dismantling of the commodities future markets. It is only in thelast decade that commodity future exchanges have been actively encouraged. However, the markets

have been thin with poor liquidity and have not grown to any significant level.

Indian Policy makers have traditionally coped with the uncertainty and risks associated with price

volatility by resorting to policy instruments which attempted to minimize or eliminate price volatility -

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a virtually closed external trade regime, price control, pervasive government

controls on private sector activities extensive market interventions and crop insurance.

Liberalization of Indian economy since 1991 recognized the role of market and private initiative for the

development of the economy. The much maligned market instruments such as the futures trading were

also given due recognition. After some halting efforts since 1994 when Prof. Kabra Committee

submitted its report, the late 1990s spilling into the new millennium, saw some bold initiatives in the

commodity market.

A three-pronged approach has been adopted to revive and revitalize this market. Firstly, on policy front

many legal and administrative hurdles in the functioning of the market have been removed. A statement

in the first ever National Agriculture Policy, issued in July, 2000 by the government that futures trading

will be encouraged in increasing number of agricultural commodities was indicative of welcome

change in the government policy towards forward trading. Secondly, strengthening of infrastructure and

institutional capabilities of the regulator and the existing exchanges received priority. Thirdly, as the

existing exchanges are slow to adopt reforms due to legacy or lack of resources, new promoters with

resources and professional approach were being attracted with a clear mandate to set up demutualised,

technology driven exchanges with nationwide reach and adopting best international practices.

The year 2003 marked the real turning point in the policy framework for commodity market when thegovernment issued notifications for withdrawing all prohibitions and opening up forward trading in all

the commodities. This period also witnessed other reforms, such as, amendments to the Essential

Commodities Act, Securities (Contract) Rules, which have reduced bottlenecks in the development and

growth of commodity markets. Of the country's total GDP, commodities related (and dependent)

industries constitute about roughly 50-60 %, which itself cannot be ignored.

Most of the existing Indian commodity exchanges are single commodity platforms; are regional in

nature, run mainly by entities which trade on them resulting in substantial conflict of interests, opaque

in their functioning and have not used technology to scale up their operations and reach to bring down

their costs. But with the strong emergence of: National Multi-commodity Exchange Ltd., Ahmedabad

(NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX), National Commodities and Derivatives

Exchange, Mumbai (NCDEX), and National Board of Trade, Indore (NBOT), all these shortcomings

will be addressed rapidly. These exchanges are expected to be role model to other exchanges and are

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likely to compete for trade not only among themselves but also with the existing

exchanges.

The recent policy changes and upbeat sentiments about the economy, particularly agriculture, have

created lot of interest and euphoria about the commodity markets. Even though a large number of the

traditional exchanges are showing flat volume, this has not weakened excitement among new

participants. Many of these exchanges have been permitted with a view to extend the culture and

tradition of forward trading to new areas and commodities and also to introduce new technology and

practices.

The current mindset of the people in India is that the Commodity exchanges are speculative (due to non

delivery) and are not meant for actual users. One major reason being that the awareness is lacking

amongst actual users. In India, Interest rate risks, exchange rate risks are actively managed, but the

same does not hold true for the commodity risks. Some additional impediments are centered around the

safety, transparency and taxation issues.

Which Commodities are suitable for Future Trading?

The following are some of the key factors, which decide the suitability of the commodities for future

trading: -

The commodity should be competitive, i.e., there should be large demand for and supply of the

commodity - no individual or group of persons acting in concert should be in a position to influence the

demand or supply, and consequently the price substantially.

There should be fluctuations in price.

The market for the commodity should be free from substantial government control.

The commodity should have long shelf life and be capable of standardization and gradation.

Need For Futures Trading In Commodities

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Commodity Futures, which forms an essential component of Commodity Exchange,

can be broadly classified into precious metals, agriculture, energy and other metals. Current futures

volumes are miniscule compared to underlying spot market volumes and thus have a tremendous

potential in the near future.

Futures trading in commodities results in transparent and fair price discovery on account of large-scale

participations of entities associated with different value chains. It reflects views and expectations of a

wider section of people related to a particular commodity. It also provides effective platform for price

risk management for all segments of players ranging from producers, traders and processors to

exporters/importers and end-users of a commodity.

It also helps in improving the cropping pattern for the farmers, thus minimizing the losses to the

farmers. It acts as a smart investment choice by providing hedging, trading and arbitrage opportunities

to market players. Historically, pricing in commodities futures has been less volatile compared with

equity and bonds, thus providing an efficient portfolio diversification option.

Raw materials form the most key element of most of the industries. The significance of raw materials

can further be strengthened by the fact that the "increase in raw material cost means reduction in share

prices". In other words "Share prices mimic the commodity price movements".

Regulatory Body

The Forward Markets Commission (FMC) is the regulatory body for commodity futures/forward trade

in India. The commission was set up under the Forward Contracts (Regulation) Act of 1952. It is

responsible for regulating and promoting futures/forward trade in commodities. The FMC is

headquartered in Mumbai while its regional office is located in Kolkata. Curbing the illegal activities of

the diehard traders who continued to trade illegally is the major role of the Forward Markets

Commission.

iii) Why Commodities Market?

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India has very large agriculture production in number of agri-commodities, which

needs use of futures and derivatives as price-risk management system.

Fundamentally price you pay for goods and services depend greatly on how well business handle risk.

By using effectively futures and derivatives, businesses can minimize risks, thus lowering cost of doing

business.

Commodity players use it as a hedge mechanism as well as a means of making money. For e.g. in the

bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations and the international

prices affecting it.

For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the issues in

price dissemination, standards, certification and warehousing are bound to occur. Commodity Market

will serve as a suitable alternative to tackle all these problems efficiently.

iv)Problems faced by Commodities Markets in India

Institutional issues have resulted in very few deliveries so far. Currently, there are a lot of hassles such

as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkata, transportation costs,

octroi duty, logistical problems prevent trading to take place. Exchanges are used only to hedge price

risk on spot transactions carried out in the local markets. Also multiple restrictions exist on inter-state

movement and warehousing of commodities.

v) Risks associated with Commodities Markets

No risk can be eliminated, but the same can be transferred to someone who can handle it better or to

someone who has the appetite for risk. Commodity enterprises primarily face the following classes of

risks, namely: the price risk, the quantity risk, the yield/output risk and the political risk. Talking about

the nationwide commodity exchanges, the risk of the counter party (trading member, client, vendors

etc) not fulfilling his obligations on due date or at any time thereafter is the most common risk.

This risk is mitigated by collection of the following margins: -

Initial Margins

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Exposure margins

Market to market of positions on a daily basis

Position Limits and Intra day price limits

Surveillance

Commodity price risks include: -

Increase in purchase cost vis--vis commitment on sales price

Change in value of inventory

Counter party risk translating into commodity price risk

vi) Key Factors for Success of Commodities Market

The following are some of the key factors for the success of the commodities markets: -

How one can make the business grow?

How many products are covered?

How many people participate on the platform?

vii) Key Factors For Success of Commodities Exchanges

The following are some of the key factors for the success of the commodities exchanges: -

Strategy, method of execution, background of promoters, credibility of the institution, transparency of

platforms, scaleable technology, robustness of settlement structures, wider participation of Hedgers,

Speculators and Arbitrageurs, acceptable clearing mechanism, financial soundness and capability,

covering a wide range of commodities, size of the trade guarantee fund, reach of the organization and

adding value on the ground. In addition to this, if the Indian Commodity Exchange needs to be

competitive in the Global Market, then it should be backed with proper "Capital AccountConvertibility".

The interests of Indian consumers, households and producers is most important, as these are the people

who are exposed to risk and price fluctuations.

viii) Key Expectations Of Commodities Exchanges

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The following are some of the key expectations of the investor's w.r.t. any

commodity exchange: -

To get in place the right regulatory structure to even out the differences that may exist in various

fields.

Proper Product Conceptualization and Design.

Fair and Transparent Price Discovery & Dissemination.

Robust Trading & Settlement systems.

Effective Management of Counter party Credit Risk.

Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of Members,

Enforcement of Exchange rules.

ix) Future Prospects

With the gradual withdrawal of the government from various sectors in the post-liberalization era, the

need has been felt that various operators in the commodities market be provided with a mechanism to

hedge and transfer their risks. India's obligation under WTO to open agriculture sector to world trade

would require futures trade in a wide variety of primary commodities and their products to enable

diverse market functionaries to cope with the price volatility prevailing in the world markets.

Government subsidy may go down as a result of WTO. The farmer will have to look at ways of beingin a position to trade on commodity exchanges in future. Indian markets have recently thrown open a

new avenue for retail investors and traders to participate: commodity derivatives. For those who want to

diversify their portfolios beyond shares, bonds and real estate, commodities is the best option.

Following are some of the applications, which can utilize the power of the commodity markets and

create a win-win situation for all the involved parties: -

Regulatory Approval / Permission to FII's for trading in the Commodity Markets

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FII's are currently not allowed nor disallowed under any law. As, they have added

depth to the equity markets; they will add depth to the commodities markets, since they globally know

the commodities.

Active Involvement of Mutual Fund Industry in India

Currently Mutual Funds are prohibited from not using derivatives apart from hedging. Mutual Funds as

investors can invest in gold and get returns as they get from debt instruments, equity markets. AMFI &

SEBI need to collectively work towards the same. Launch of the "Commodity Funds", by the Mutual

Funds in India, can serve as a newer investment avenue for investors.

Permission to Banks for acting as Aggregators and Traders

If institutions join this market, confidence of the investor increases. If a bank like SBI decides to invest

in the market, the confidence of investors in the markets goes up. Banks can on behalf of the farmer's

hedge their risks, and get a fee income. Banks can have limits, which can be set up by the RBI. This

requires a change in the Banking Regulation Act, which will take a long time. This way it can be a win-

win-win situation for the market, the banks, and the farmers.

Active Involvement of Small Regional Stock Exchanges

The existing regional stock exchanges (RSE), which have good trading infrastructure in place but are

having tough time due to tiny volumes, should be used for trading commodities. The skills and

infrastructure of these RSE's will be very useful to get a jump ahead in terms of market development at

low cost.

Newer Avenues for trading in Foreign Derivatives Exchanges

Millions of people in India use gold as a financial asset and are constantly exposed to fluctuations in theprice of gold. Hence from the viewpoint of India's securities industry, it would be great to trade gold

futures globally on foreign derivative exchanges - it would yield higher revenues as well as raise

sophistication.

Steady Transition towards Electronic Warehouse Receipts

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Commodity Exchanges in India are expected to contribute significantly in

strengthening Indian Economy to face the challenges of globalization.

Indian markets are poised to witness further development in the areas of "Electronic Warehouse

Receipts" (similar to Demat Shares), which would facilitate seamless nationwide spot market for

commodities.

x) Impact of WTO Regime

India being a signatory to WTO may open up the agricultural and other commodity markets more to the

global competition. India's uniqueness as a major consumption market is an invitation to the world to

explore the Indian market. Indian producers and traders too would have the opportunity to explore the

global markets.Price risk managementand quality consciousness are two important factors to succeed

in the global competition. Indian companies are allowed to participate in the international commodity

exchanges to hedge their price risk, resultant from export and import activities of such companies. But

due to the compliance issues and international exchange rules, 90 % of the commodity traders and

producers are not in a position to participate in the international exchanges.

Convergence of Various Markets

In the near future the integration of the international equity, commodities, forex and debt would

enhance the business opportunities. It will also create specialized treasuries and fund houses that would

offer a gamut of services, thus providing comprehensive risk management solutions to India's corporate

and trade community.

Amendments in the Commodities Act and Implementation of VAT

Amendments to Essential Commodities Act and implementation of Value-Added-tax would enable

movement of across states and more unified tax regime, which would facilitate easier trading in

commodities.

Introduction of Options Contract

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Options contracts in commodities are being considered and this would again boost

the commodity risk management markets in the country.

Thus, Commodity derivatives as an industry is poised to take-off, which may provide the numerous

investors in this country with another opportunity to invest and diversify their portfolio.

Strong Emergence of the Yellow Metal - GOLD

Interestingly, gold turned out to be the strongest major currency last fiscal (2002-03) as it outperformed

the other major currencies by between 9 and 25 % over the year. The yellow metal outperformed the

major stock indices too. Over the course of the year, gold outperformed the dollar by 25 %, the yen by

14 % and the pound sterling by 13 %, the euro by 9 %and the Swiss franc by 7 %.

India being the largest buyer of Gold in International market can be the market leader in respect of Price

discovery and Price formation in International market, if a transparent Gold Exchange at national level

is set up with widespread participation.

Structured Commodity Financing: (Asset-backed Financing)

In Structured Finance, collateral is assigned and an automatic reimbursement procedure is devised. It

can be made available as receivable-backed financing and inventory financing. The clients retain theeconomic benefits and risks of ownership by transacting a swap. For successful implementation of

Structured financing in India, the rural banking infrastructure should be made strong, the government

should come across with strong policies and lastly there should be increased awareness and training

amongst common masses.

Launch of "Weather Derivatives", through the commodity exchanges in the near future. Globally, it is

done on a temperature basis, whereas in India it could be done on rainfall basis.

xi) The Road Ahead

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The following 4-step action plan sums up the road ahead for commodity markets in

India: -

1. Seeking changes in Banking Regulation

Banking Regulation Act to be modified.

Accreditation of warehouses and quality of products furthers bank lending against commodities.

Change in Priority sector norms.

Lending against commodities to be considered priority sector lending.

Banks to lend against bullion.

Need for hallmarking.

2. Changing the face of Warehousing

Electronic warehouse receipt (EWR) to be legally recognized.

EWR to be a negotiable instrument.

Depositories Act to be amended to cover commodities.

SEBI to notify that FMC is regulatory body for Demat commodities.

3. Inducing Policy changes

Introduction of options.

Will ably substitute the MSP programme of government.

Permit weather derivatives.

Redefining commodities.

Goods not covered under 'securities'.

Products not covered under SCRA.

Physical delivery not to be mandatory.

4. Budget proposals relating to Commodities

Integration of commodity market with securities market.

Service tax on forward contracts to affect commodity brokers.

Significant omissions in light of other announcements.

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Weather derivatives.

Bank investment in commodities.

xii) Action Plan: (As suggested by Dr. Kewal Ram - Chairman FMC)The following steps need to

be taken by the exchanges, regulator and the government in order that this market develops in a robust

manner and the benefits flow to the ultimate beneficiaries like the consumers, processors, exporters and

farmers etc. -

To mount a massive awareness programme among the potential beneficiaries about the benefits

and risks of futures trading.

Disseminate futures prices widely so that stakeholders can take informed decisions.

Develop other allied activities such as warehousing, standardization and gradation; collateral

financing linked to futures markets.

Reforms in physical market to develop efficient and integrated national market.

Make necessary amendments in the FC(R) Act for permitting futures in intangible commodities

and options trading, which are at present prohibited.

Allow participation of mutual funds and financial institutions in the commodity market.

Coordination with other segments of the financial market such as banking, debt and capital

market. Above all, to upgrade and empower regulator to provide effective and efficient leadership for the

development and regulation of the market.

xiii) Comparative Analysis of Commodity and Equity Markets

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Factors Commodity Markets Equity Markets

Percentage

Returns

Gold gives 10-15 % returns on

the conservative basis.

Returns in the range of 15-20 %

on annual basis.Initial Margins Lower in the range of 4-5-6% Higher in the range of 25-40%Arbitrage

Opportunities

Exists on 1-2 month contracts.

There is a small difference in

prices, but in case of

commodities, which is in large

tonnage it makes a huge

difference.

Significant Arbitrage

Opportunities exists.

Price

Movements

Price movements are purely

based on the supply and demand.

Prices movements based on the

expectation of future

performance.Price Changes Price changes are due to policy

changes, changes in tariff and

duties.

Price changes can also be due to

Corporate actions, Dividend

announcements, Bonus shares /

Stock splits.Future

Predictability

Predictability of future prices is

not in the control due to factors

like Failure of Monsoon and

Formation of El-ninos at Pacific.

Predictability of futures

performance is reasonably high,

which is supplemented by the

History of managementperformance.

Volatility Lower Volatility Higher VolatilitySecurities

Transaction Act

Application

Securities Transaction Act is not

applicable to commodity futures

trading.

Securities Transaction Act is

applicable to equity markets

trading.

ixv) Some Interesting Facts

Commodities in which future contracts are successful are commodities those are not protected

through government policies; (Example: Gold/ Silver/ Cotton/ Jute) and trade constituents of these

commodities are not complaining too. This should act as an eye-opener to the policy makers to leave

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pricing and price risk management to the market forces rather than to administered

mechanisms alone. Any economy grows when the constituents willingly accept the risk for better

returns; if risks are not compensated with adequate or more returns, economic activity will come into a

standstill.

Worldwide, Derivatives volumes of non-US exchanges in the last decade, has been increasing as

compared to the US Exchanges.

Commodities are less volatile compared to equity market, but more volatile as compared to G-

Sec's.

The basic idea of Commodity markets is to encourage farmers to choose cropping pattern based

on future and not past prices.

Industry in India runs the raw material price risk, going forward they can hedge this risk.

Commodities Exchanges are working with banks to provide liquidity to retail investors against

holdings such as bullion, cotton or any edible oil, much like loan against shares.

xv) Conclusion

The commodity market is poised to play an important role of price discovery and risk management for

the development of agriculture and other sectors in the supply chain. New issues and problems will

surface as the market evolves. The government, regulator and other stakeholders will need to be

proactive and quick in their responses to new developments. The globalization of markets under the

WTO regime makes it all the more urgent to develop these markets to enable our economy, especially

agriculture, to meet the challenges of new regime and benefit from the opportunities unfolding before

us.

With risks not being absorbed any more, the idea is to transfer it. As the focus is shifting to "Manage

price change rather than change prices", the commodity markets will play a key role for the same.

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Key Elements of Wealth Management

1) Knowledge

As they say Knowledge is Power, it is very critical to be abreast of the current financial market,

Economic Conditions in and around the Country, Taxation Policies, Rules and Regulations of the

regulatory authorities like Securities and Exchange Board of India (SEBI), Foreign Exchange

Management Act (FEMA), Insurance Regulatory Authority of India (IRDA) and impact of the new

policies/announcements on the market and on the Portfolios of the clients being served by the

Wealth Manager(s).

2) Understanding the Customer and Customer Requirements

Historically, financial organizations have organized along traditional corporate boundaries. Today, it

is important for organizations to step back and look at the range of products, services and delivery

options available; match these with customer needs and desires; determine where various required

skill sets reside in the organization; and then organize so as to optimally deliver what the customer

needs. The starting point of the entire process is, Understanding the Customers needs, his future

financial requirements, expected returns and his risk appetite, (though returns and risk appetite

would be directly related to each other) also it is very important to know and understand his current

Investment Portfolio (if any). If the Wealth Manager makes a mistake here, the product offering may

change, eventually it may lead to a bigger problem for the investor and the Advisor, therefore, this is

the most important step is the Process of Wealth Management.

To understand the in-depth requirement of the customer it is advisable to note down all the possible

needs envisaged by the Investor, including Retirement Planning etc., in ascending order, estimated

amount required by him at different point in time in future and when would he require that amount?

Then his expected returns, more importantly his Risk Appetite, his preferred asset class. And his

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current Portfolio (if any). The entire process of understanding the customer needs,

his risk appetite, expected returns etc., should be recorded before advising/selling any Product. The

entire process of understanding and recording the above mentioned information, can be termed as

Investor Profiling. The same is discussed with a Sample Investor Profile in the next chapter.

3. Investors Profile

A Sample of an Investors Profile is appended below:

INVESTOR PROFILE

Name : ______________________________________

What is your current Wealth and Asset Allocation? Give rough break up

in % Terms.

o Total Value INR __________

Savings account & Fixed Deposit with banks ________

Bonds & Debt Mutual Funds ________

Equity & Equity Funds ________

Real Estate ________

Insurance ________

Gold ________

Art ________

Others (Commodities, Overseas investments etc.) ________

Please give us the details of all holdings with acquisition details and acquisition dates, if possible.

o What are your existing Insurance Policies?

Cover (Value) Annual Premium INR

Endowments ______________ ______________

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Pure Risk ______________ ______________

Money Backs ______________ ______________

Health Insurance ______________ ______________

Pension Plan ______________ ______________

o What would your annual net cash flows be?

Net Annual Cash flows INR ______________

INVESTMENT OBJECTIVE

o What is the ultimate purpose of your investable assets?

_____ Preservation of capital (No appetite for risk)

_____ Regular cash inflows (Funds needed periodically for expenses)

_____ Liquidity (Money possibly required for other purposes, to be invested in very liquid or short term

assets)

_____ Growth (May need money in 2-3 years)

_____ Retirement (Long term investments)

o What are the specific needs that you envisage at this time? (Needs could

be education, marriage of children/family member(s), an asset purchase etc.)

Need Details of Need Amount Needed When

1

2

3

A qualitative view on other needs

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o What is the average time frame that you normally

envisage for your investments?

Less than six months

Six months to one year

One year to three years

More than three years

EQUITY RETURN EXPECTATIONS

o Specifically with regard to equities, what is the return you are

expecting from your investments in equities, over the long-term?

0-8% growth - Safe, relatively low risk equities or debt as a alternative

8 - 18% growth - Medium risk, medium returns

>18% growth - High risk of returns, and principal erosion

o Alternatively, what is the level of risk you are willing to take on your

wealth?

I do not want to risk interest or principal

I will only be comfortable with small degree of risk (i.e. to income, but not to capital.)

I am comfortable accepting the risk that the value of my investment could decline from time to time

I am willing to tolerate putting my principal at risk by investing in volatile investments

o How would you rate your ability to stick with a given investment as its value fluctuates during a

market cycle?

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Low Medium High

EQUITY PREFERENCES

(If the client opts out for pure debt advice, skip this section)

o While designing your portfolio, it is important to understand any specific preferences for or

aversions towards any particular scrip that you may have. Is there anything that we need to keep in

mind while designing your portfolio? (E.g. do you specifically want low priced shares, or all

Documents

Wealth Management...{w.....Co.}