A guide to personal finance and investment management

1. PERSONAL FINANCE &
INVESTMENT MANAGEMENT
An Overview
By Aditi Gupta

2. Why Study Finance?
• Good careers in financial consulting,
banking and investment management
• Investment Management has potential for
you to make tons of money
• We have a great example right here at
ASB – Prof Jay Misra, who earlier worked
as MD for Soros Fund USA
• Soros Fund Management - multi billion $
fund founded by Billionaire George Soros
• Studying finance can also help you
manage your personal finances
Jay Misra
George Soros

3. PERSONAL FINANCE

4. Personal Finance Basics
Let’s take a look at India’s most
successful cricket captain, MS
Dhoni, in the ‘Dhani’ Ad
• https://www.youtube.com/watch?
v=DupvBh05RIs
• In this ad he talks of how a
personal loan works

5. Buying a new Bike (1/2)
Loans are repayable to bank along with interest
Gift from parents, of course, does not have to be repaid J
Cost of grand New Harley
Davidson Street 750 Bike
Rs 5 Lakhs
How will you pay for it?
Loan from Bank Gift from parents
(Equity)
Accum Savings
(Equity)

6. Buying a new Bike (2/2)
Suppose I use a combination of
loans and savings to pay for bike
70% Loan
30% Savings
Source of Funds Amount
Loan 3.5 Lakhs
Savings 1.5 Lakhs
Total 5 Lakhs
Loan at interest rate of 12%
Repayable in 5 years
Principal: 70,000/yr or 5,800/mth
Interest: 1,400/month
EMI: 7,200/month
EMI or Equated Monthly Installment is the monthly
payment you have to make to the bank to pay both
principal and interest on loan

7. Salary from Your First Job
Initial Salary of Rs 6 Lakhs in First Year as Fresh MBA Graduate
Salary grows each year to cover increase in cost of living (inflation)
Assumed inflation rate of 6% in this example
Year 1 Year 2 Year 3
Rs 6 Lakh Rs 6 Lakh *1.06 = Rs 6.4 Lakh Rs 6.4 Lakh *1.06 = Rs 6.7 Lakh

8. Rental Income
Rent per square foot per month
Rental Income per month
Rs 30/Sq Foot/Month
Size of room for renting out to a
paying guest
300 Square Feet
Rs 9,000 per month
Rs 1.08 Lakhs in Yr 1;
growing with inflation
Rental Income per year

9. Interest Income on Savings in Bank
Year 1 Year 2 Year 3
Opening balance: 1 Lakhs
Interest: 6000 (1L*0.06)
Closing balance: 1.06 Lakhs
Opening Balance: 1.06 Lakhs
Interest: 6360 (1.06L*0.06)
Closing Balance: 1.12Lakhs
Opening Balance: 1.12 Lakh
Interest: 6742 (1.12L*0.06)
Closing Balance: 1.19 Lakhs
Example: If you invest Rs 1 Lakh in a savings account (fixed deposit) for 3
years that pays 6% interest per year, how much interest will you earn?
An initial investment of Rs 1 Lakhs grows to Rs 1.19 Lakhs as you earn
interest every year on your deposit in the bank

10. Personal Expenses
• Rent - If you move out to Bangalore for first job, you may have to rent a place
• Utilities – Electricity and Water
• Food
• Transport – Fuel cost of your bike
• Recreation – Movies, Shopping for girls, eating out
• Medical – Hopefully this can be avoided since you are still young
• Clothing and other accessories
• Education of kids (if you decide to marry and have kids)
• Interest expense on loan for new bike
Above expenses increase every year. This is known as inflation and can vary from year
to Year (5-7% is a rough estimate)

11. Personal Income Tax
If your gross salary is Rs 6 Lakhs in year 1, your actual take home is 4.8 Lakhs.
Tax applies not only to salary but other income sources – interest income, etc
Gross Income
Tax Rate
(% of gross income)
Less than Rs 2.5 Lakhs 0%
Rs 2.5-5 Lakhs 5%
Rs 5-10 Lakhs 20%
Above Rs 10 Lakhs 30%
Year 1 Year 2 Year 3
Gross Income: Rs 6 Lakh
Tax: 0.2* 6 Lakh = 1.2 Lakh
Net Income: Rs 4.8 Lakh
Gross Income: Rs 6.4 Lakh
Tax: 0.2* 6.4 Lakh = 1.3 Lakh
Net Income: Rs 5.1 Lakh
Gross Income: Rs 6.7 Lakh
Tax: 0.2* 6.7 Lakh = 1.3 Lakh
Net Income: Rs 5.4 Lakh

12. Net Savings
Net Income After Tax – ExpenditureNet Savings
Personal Income Statement –
Single Individual 2018 2019
Salary 6.0 6.4
Interest Income on Fixed Deposits - 0.1
Gross Income 6.0 6.5
Income Tax 1.2 1.3
Net Income after Tax 4.8 5..2
Expenses
Rent 1.1 1.1
Food 0.5 0.6
Transport (Fuel) 0.7 0.8
Recreation 0.1 0.1
Utilities (Electricity & Water) 0.2 0.3
Repair & Maintenance of Bike / Home 0.2 0.3
Interest Expense on Car Loan 0.2 0.3
Total Expenditure 3.2 3.5
Net Savings 1.7 1.7
Net Savings (% of gross income) 27% 26%

13. EXTENDING PERSONAL
FINANCE TO A BUSINESS

14. Extending personal finance to a business (1/2)
You will learn in more detail how an Income Statement or Profit
& Loss Account works in finance class
Business Finance
• Sales or Revenue
• Production Costs
ü Raw Material
ü Labor
ü Interest
ü Tax
• Profit After Tax
Personal Finance
• Gross Income
• Personal Expenses
ü Food
ü Rent
ü Interest
ü Tax
• Net Savings

15. Extending personal finance to a business (2/2)
Personal Finance
• Assets
ü Home
ü Bike/Car
ü Savings Account /FD
ü Cash
• Liabilities
ü Loans
• Equity
ü Funds from parents
ü Accumulated Savings
Business Finance
• Assets
ü Plant & Machinery
ü Vehicles, Buildings
ü Investments (deposits, etc)
ü Cash
ü Other assets
• Liabilities
ü Loans
ü Other liabilities
• Equity
ü Funds from individuals and
institutions
ü Accumulated Profit
You will learn in more detail how a Balance Sheet works in finance class
You will also learn what drives cash, which is one of the most important items

16. INVESTMENT
MANAGEMENT

17. What is a share?
Please note: shares can also be referred to as stocks
Have you invested in shares of a company?
What is a share?
ü Share is one unit of ownership in a company
ü It gives the owner (shareholder) the right to earn dividends (portion of profits
of a company)
ü You can also sell share for a higher price and make a gain
What is a portfolio?
ü Portfolio consists of investment in shares of several different companies.

18. What is return on investment?
Example: I buy a share in Tata Power for Rs 100 today, what is my return after 1 year ?
Year 0 Year 1
Value Rs 130Value Rs 100
130-100
100
Return = = 30%
Year 0 Year 1
Value Rs 70Value Rs 100
70-100
100
Return = = -30%
Return is the gain or loss incurred on investing in a security
Risk is the fluctuation in the return of a security

19. Historical Stock Trends
TCS: Return of 50% in last 1 year Adani Power: Return of -30%
Cipla: Return of 2% in last 1 year Bajaj Auto: Return of 3%

20. Risk vs. Return
-30%
Risk
Return
0%
30%
60%
1% 2% 3% 4% 5%
Tata Power
Dr Reddy
TechM
Demo: Let’s take a look at how this works on Alphabeta App

21. How do you decide to invest in a stock ?
Historical Performance – How has stock performed in last 1 year
Buying stocks (Taking a long position in stocks) that have performed well
in past, based on the assumption that they will continue to do well in future
Momentum
Selling stocks (Taking short position in stocks) that have performed poorly
in past, based on assumption that they will continue to do poorly in future
Momentum is a simple strategy – Buy stocks that have performed well in the past

22. Demo Time
Let’s take a look at the Alphabeta App

23. SUMMARY

24. Summary
Investment Management Summary
• There are different strategies to maximize return on investment
• Underlying principle: Buy Low, Sell High to maximize returns
Personal Finance Summary
• There are different sources of Income and Expenditure
• This drives your net savings
• Concepts of personal finance can be extended to a business
• You will learn more about this in class

25. APPENDIX

26. Personal Income Statement
• Calculations for family of 4; assumed that family stays in family home and saves on rent
• Assumed 5% of income invested in FDs per year; another 5% per yr invested in shares
Personal Income Statement 2018 2019 2020 2021 2022 2023
Family Salary 12.0 12.7 13.5 14.3 15.1 16.1
Rental Income on Leasing Room 1.1 1.1 1.2 1.3 1.4 1.4
Interest Income on 5 Year FDs 0.0 0.1 0.2 0.3 0.5 0.8
Dividend Income on Shares 0.1 0.1 0.2 0.3 0.3 0.4
Total Income 13.2 14.1 15.1 16.2 17.4 18.8
Income Tax 3.5 3.8 4.1 4.4 4.8 5.2
Net Income after Tax 9.7 10.3 11.0 11.8 12.6 13.6
Expenses
Food (Family of 4) 2.2 2.3 2.5 2.6 2.8 2.9
Education (School fee for two kids) 1.2 1.3 1.3 1.4 1.5 1.6
Transport (Fuel Cost of Car) 0.7 0.8 0.8 0.9 0.9 1.0
Repair & Maintenance of Home 0.5 0.5 0.5 0.5 0.5 0.5
Recreation (Family of 4) 0.1 0.1 0.1 0.1 0.2 0.2
Utilities 0.2 0.3 0.3 0.3 0.3 0.3
Medical (Family of 4) 0.1 0.1 0.1 0.1 0.2 0.2
Clothing & Misc (Family of 4) 0.1 0.1 0.1 0.1 0.1 0.1
Depreciation on Car 0.2 0.3 0.3 0.3 0.3 0.3
Interest Expense on Car Loan 0.2 0.3 0.2 0.1 0.0 -
Total Expenditure 5.6 6.0 6.2 6.5 6.7 7.0
Net Savings 4.1 4.3 4.8 5.3 5.9 6.5
Net Savings (% of total income) 31% 30% 32% 33% 34% 35%

27. Personal Balance Sheet
Personal B/S (Rs Lakhs) 2017 2018 2019 2020 2021 2022 2023
Assets
Net Fixed Assets* 20.0 24.8 24.5 24.3 24.0 23.8 23.5
Investment in FD - 0.6 1.9 4.0 7.0 11.1 16.5
Investment in Shares - 0.6 1.2 1.9 2.6 3.4 4.2
Cash 6.0 6.9 8.8 10.3 11.4 12.0 12.6
Total Assets 26.0 32.9 36.4 40.5 45.1 50.3 56.8
Liabilities
Car Loan 2.8 2.1 1.4 0.7 - -
Total Liabilities - 2.8 2.1 1.4 0.7 - -
Equity
Equity (gift from grandma) 13.0 13.0 13.0 13.0 13.0 13.0 13.0
Accumulated Family Saving 13.0 17.1 21.3 26.1 31.4 37.3 43.8
Total Equity 26.0 30.1 34.3 39.1 44.4 50.3 56.8
Total Liabilities & Equity 26.0 32.9 36.4 40.5 45.1 50.3 56.8
Assets = Liabilities + Equity
Use of Funds = Source of Funds
*fixed assets include family home as well as car

28. Personal Cash Flows
Personal Cash Flows
(Rs Lakhs) 2018 2019 2020 2021 2022 2023
Net Savings 4.1 4.3 4.8 5.3 5.9 6.5
Plus Depreciation 0.23 0.25 0.25 0.25 0.25 0.25
Cash flow from operations 4.3 4.5 5.0 5.5 6.2 6.8
Minus Increase in fixed assets (5.0) - - - - -
Minus increase in other assets (1.2) (1.9) (2.8) (3.7) (4.9) (6.2)
Cash flow from Investing (6.2) (1.9) (2.8) (3.7) (4.9) (6.2)
Cash flow from financing
Plus net increase in car loan 2.8 (0.7) (0.7) (0.7) (0.7) -
Cash flow from financing 2.8 (0.7) (0.7) (0.7) (0.7) -
Net increase in cash 0.9 1.9 1.5 1.1 0.6 0.6
Opening Cash balance 6.0 6.9 8.8 10.3 11.4 12.0
Closing Cash Balance 6.9 8.8 10.3 11.4 12.0 12.6
Cash is King -> Don’t Run Out of Cash

29. Pairs Trading
Asian Paint
Risk
Return
0%
16%
48%
1% 2% 3% 4%
SBI
INDUSIND
32%
Ambuja Cement
• Create pairs of stocks within the same industry
• Stocks from same industry likely to behave the same way - both may move up/down
• Take long position in one pair (good performer) and short position in the other pair
(poor performer) based on past performance
• Take positions when pairs deviate by 2 sigma; close positions at zero sigma

30. F Score
Criteria Score
Profitability 0-4
Liquidity and Debt 0-3
Operating Efficiency 0-2
Total 0-9
• Historical analysis of a company’s financial performance using the
criteria listed above.
• Rate performance on a scale of 0 to 9
• Stocks with scores of 8 or 9 (winners); score of 0-2 (losers)
Long position in winners (companies with strong financial position) and
short position in losers to maximize returns

31. Value Investing - Simplified
• Invest in stocks that appeared to be undervalued today but whose
financial performance is expected to improve
• One metric used to assess value is the earnings/price ratio (E/P) ratio
• If I buy a share for Rs 1 today and it generates Rs 20 in earnings
(profits) then my E/P ratio is 20
• Stocks with high E/P ratio are considered good value for money and
are expected to perform better than stocks with lower E/P ratio
Stocks with high earnings/price ratio (higher profit per rupee invested) are
known as value stocks and are likely to perform well

32. Value Investing – Deep Dive
Stocks with high book/market and high earnings/price likely to perform better
Coal India
30%
Earnings/Price
Book/Market
0%
60%
120%
8% 16% 24% 32%
BPCL
Hindalco
90%
Tata Power
Tata Steel
-8%

33. Accrual Investing
Earnings/Price
Accrued Earnings/Total Assets
0%
8%
24%
8% 16%
BPCL
Bajaj Auto
BHEL
16%
-8%
-16%
-8%
Tata Steel
Stocks with low accrued earnings/total assets and high earnings/price perform better
Accrued earnings are
non-cash earnings and
firms with low accruals
are preferred