Basics of Asset Allocation
Paradigm for Wealth Creation
Creating Wealth:
Is not a function of income
Is not a function of investment expertise
Is really a matter of Regular Savings
August 26, 2
The mother of all equations
FV = PV (1 + r)n
FV = Future Value
PV = Present Value
r = Rate of Return/ Coupon Rate
n = No. of compounding periods
August 26, 2
Enhancing Future Value
n
n
FV = PV
(1
+
r)
PV
r
The more you
save, makes
a difference
The more
you earn,
makes a
differenc
e
The
sooner
you start,
makes a
difference
August 26, 2
The Power of Compounding
The more you save, makes a
difference
Growth Rate of 6% p.a.
Total Amount
Saved
Value after
20 years
5,000
1,200,000
2,278,225
3,000
720,000
1,366,935
2,000
480,000
911,290
1,000
240,000
455,645
Amount saved per month
Past performance may or may not be sustained in
future
August 26, 2 5
The Power of Compounding
The sooner you start, makes a
difference
Rs 1000 per month @ 6%
Starting Age
Total Amount Value at the
Saved
age of 60
25
420,000
1,380,290
30
360,000
979,250
35
300,000
679,580
40
240,000
455,645
Past performance may or may not be sustained in
future
August 26, 2 6
The Power of Compounding
The more you earn, makes a
difference
Rs 1000 p.m.
Value after
20 years
Value after
30 years
6%
455,645
979,255
8%
572,660
1,417,610
10%
723,990
2,079,290
12%
919,860
3,080,970
Growth Rate
Past performance may or may not be sustained in
future
August 26, 2 7
Savings Habits matter much more
than the markets!
If someone started saving at age 30, Rs 5000 per
month and got a return of 10% on their
investment the wealth at age 60 would be
Rs one crore three lacs.
If someone delayed savings and started at age
40 and saved Rs 3000 per month and got a return
of 8% on their investment the wealth at age 60
would be
Rs Seventeen lacs.
Is it not the difference between being
wealthy and not being wealthy?
August 26, 2
Comparison of performance of various
asset classes
INVESTMENT PERFORMANCE
(CAGR during 1980-98)
Source :
RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
August 26, 2
10
EQUITIES ARE THE BEST LONG TERM
BET
% OF STUDIED PERIOD IN WHICH
14%
Other investment
outperformed
44%
Stocks
outperformed
56%
1 year
37%
86%
63%
3 year
5 year
Source : RBI Report on Currency and Finance (1997-98)
BSE Sensitive Index of Equity Prices - BSE
August 26, 2
11
One simple truth about all investments
If we need high returns, we
must understand the higher
risk associated with such
investments
The risk reward equation
Everybody wants to go to
heaven (reward), but nobody
wants to die (risk).
But in order to go to heaven,
one must die
However, death does not
ensure an entry into heaven
August 26, 2
14
Asset Allocation
What is Asset Allocation?
Its about diversifying ones portfolio among
asset classes such as bonds, stocks, real estate,
or cash.
Its referred to in terms of the target percentages
for each asset class. For example, a portfolio
could have a mix of 60 percent stocks, 30
percent bonds and 10 percent cash.
Its the financial representation of an investors
personality: the ideal asset allocation is one that
best balances an investors profile and objectives
August 26, 2
16
Significance of Asset Allocation
Significance Relative to Risk
Markowitz: Portfolio
Selection, 1952:
Dividing a portfolio
over asset classes
that do not move
up/ down at the
same time helps
bring down the risk
of the portfolio.
August 26, 2
17
Significance of Asset Allocation
Significance Relative to Risk
Markowitz: Portfolio
Selection, 1952:
Dividing a portfolio
over asset classes
that do not move
up/ down at the
same time helps
bring down the risk
of the portfolio.
August 26, 2
18
Significance of Asset Allocation
Significance Relative to Risk
Markowitz: Portfolio
Selection, 1952:
Dividing a portfolio
over asset classes
that do not move
up/ down at the
same time helps
bring down the risk
of the portfolio.
August 26, 2
19
Significance of Asset Allocation
Significance Relative to Return
Brinson, Hood and
Beebower :
Determinants of
Portfolio
Performance, 1986,
1991: Asset
Allocation helps
explain over 93% of
a portfolios
performance.
August 26, 2
20
Suggesting the Right Allocation
Profile the client for ability and willingness to
take risk
Match with clients objectives
Iron out mismatches, if any
August 26, 2
21
Suggesting the Right Allocation
Mona & Joydeep Sengupta
Financial Goals
Planning to purchase a house
in the next ten years
Investment Strategy
Aggressive Growth Portfolio
Short-term
10%
Creating long-term wealth for
retirement / house
Stocks
75%
Bonds
15%
August 26, 2
22
Suggesting the Right Allocation
Sheela & Shekhar Mathur with Varun (13 years old)
Financial Goals
Investment Strategy
Balanced Portfolio
Providing for children's
education (5 - 8 years)
Planning for childs wedding
(15 - 20 years)
Stocks
50%
Short-term
20%
Planning for retirement
Bonds
30%
August 26, 2
23
Suggesting the Right Allocation
Meera & Akash Chaudary
Financial Goals
Planning for retirement
(5 - 10 years)
Investment Strategy
Conservative Portfolio
Stocks
20%
Bank
Deposits
40%
Bonds
40%
August 26, 2
24
Making Asset Allocation Work
Periodic Rebalancing
EXAMPLE
Equity
Funds
Income
Funds
Frozen Allocation
40%
60%
Bull Market skew
45%
55%
Switch from Growth Funds to
Income Funds to rebalance to
40%
60%
Rebalancing helps investors enter equities at
lows and exit at highs without having to
time the market
August 26, 2
25
Making Asset Allocation Work
Periodic Review
Review of objective - EXAMPLE
Years to goal
Equity Allocation %
TODAY
10
70%
After 5 yrs
60%
After 7 yrs
40%
After 9 yrs
10%
A periodic review of objectives can ensure an
investor is not left at the mercy of the equity
markets when he needs his money
August 26, 2
26
Summing Up
Asset Allocation helps:
1. Control Portfolio Risk
2. Increase the predictability of portfolio
returns
3. Steer the portfolio towards ones financial
goals
August 26, 2
27
Risk Factors
Scheme Classification and Objective: Franklin India Prima Plus (FIPP) is an open end growth scheme
with an objective to provide growth of capital plus regular dividend through a diversified portfolio of
equities, fixed income securities and money market instruments. Templeton India Growth Fund (TIGF) is
an open ended growth scheme whose investment objective is to provide long term capital growth.
Franklin India Bluechip Fund (FIBCF) is an open ended growth scheme with an objective to primarily
provide medium to long term capital appreciation. Risk Factors: All investments in mutual funds and
securities are subject to market risks and the NAV of the scheme may go up or down depending upon the
factors and forces affecting the securities market. There can be no assurance that the schemes'
investment objectives will be achieved. The past performance of the mutual funds managed by the
Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the
schemes. FIPP, TIGF, FIBCF are only the names of the scheme and does not in any manner indicate the
quality of the scheme, its future prospects or returns. The Mutual Fund is not guaranteeing or assuring
any dividend or returns under the scheme. The investments made by the schemes are subject to external
risks on transferring, pricing, trading volumes, settlement risk, currency risk, interest rate risk etc. of
securities and hence redemptions may be delayed inordinately. Please refer to the Offer Document before
investing. Statutory Details: Templeton Mutual Fund in India has been set up as a trust by Templeton
International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Templeton Trust Services Pvt. Ltd.
as the Trustee (Trustee under the Indian Trust Act 1882) and with Templeton Asset Management (India)
Pvt. Ltd. as the Investment Manager. The Fund offers NAVs, purchases and redemptions on all working
days.
August 26, 2
28
Thank You
