Basics of Asset Allocation

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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

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FV = PV (1 + r)n

FV = Future ValuePV = Present Valuer = Rate of Return/ Coupon Raten = No. of compounding periods

The mother of all equations

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FV = PV (1 + r)n

Enhancing Future Value

The more you The more you save, makes save, makes a differencea difference

The The sooner sooner

you start, you start, makes a makes a

differencedifference

PV nr

The more The more you earn, you earn, makes a makes a differencdifferenc

ee

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The more you save, makes a

difference

Growth Rate of 6% p.a.

Amount saved per month

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

Total Amount Saved

Value after 20 years

The Power of Compounding

Past performance may or may not be sustained in future

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The sooner you start, makes a

difference

Rs 1000 per month @ 6%

Starting Age

25 420,000 1,380,290

30 360,000 979,250

35 300,000 679,580

40 240,000 455,645

Total Amount Saved

Value at the age of 60

The Power of Compounding

Past performance may or may not be sustained in future

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The more you earn, makes a

differenceRs 1000 p.m.

Growth Rate

6% 455,645 979,255

8% 572,660 1,417,610

10% 723,990 2,079,290

12% 919,860 3,080,970

Value after 20 years

Value after 30 years

The Power of Compounding

Past performance may or may not be sustained in future

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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 beRs Seventeen lacs.

Is it not the difference between being wealthy and not being wealthy?

Comparison of performance of various asset classes

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Source : RBI Report on Currency and Finance (1997-98)BSE Sensitive Index of Equity Prices - BSE

INVESTMENT PERFORMANCE(CAGR during 1980-98)

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56% 63% 86%

37%

14%

44%

1 year 3 year 5 year

Other investment outperformed

Stocks outperformed

Source : RBI Report on Currency and Finance (1997-98) BSE Sensitive Index of Equity Prices - BSE

EQUITIES ARE THE BEST LONG TERM BET% OF STUDIED PERIOD IN WHICH

One simple truth about all investments

If we need high returns, we must understand the higher

risk associated with such investments

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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

Asset Allocation

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What is Asset Allocation?

It’s about diversifying one’s portfolio among asset classes such as bonds, stocks, real estate, or cash.

It’s 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”.

It’s the financial representation of an investor’s personality: the ideal asset allocation is one that best balances an investor’s profile and objectives

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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.”

Significance Relative to RiskSignificance of Asset Allocation

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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.”

Significance Relative to RiskSignificance of Asset Allocation

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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.”

Significance Relative to RiskSignificance of Asset Allocation

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Brinson, Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: “Asset Allocation helps explain over 93% of a portfolio’s performance”.

Significance Relative to ReturnSignificance of Asset Allocation

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Suggesting the Right Allocation

•Profile the client for ability and willingness to take risk•Match with client’s objectives•Iron out mismatches, if any

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Aggressive Growth Portfolio

Bonds15%

Stocks75%

Short-term10%

Planning to purchase a house in the next ten years

Creating long-term wealth for retirement / house

Investment Strategy

Suggesting the Right Allocation

Mona & Joydeep Sengupta

Financial Goals

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Balanced PortfolioProviding for children's education (5 - 8 years)

Planning for child’s wedding (15 - 20 years)

Planning for retirement

Investment Strategy

Suggesting the Right Allocation

Sheela & Shekhar Mathur with Varun (13 years old)

Financial Goals

Short-term20%

Bonds30%

Stocks50%

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Conservative PortfolioPlanning for retirement (5 - 10 years)

Investment Strategy

Suggesting the Right Allocation

Meera & Akash Chaudary

Financial Goals

Bonds40%

Stocks20%

Bank Deposits

40%

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Periodic RebalancingMaking Asset Allocation Work

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

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Periodic ReviewMaking Asset Allocation Work

Review of objective - EXAMPLE

Years to goal Equity Allocation %

TODAY 10 70%

After 5 yrs 5 60%

After 7 yrs 3 40%

After 9 yrs 1 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

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Summing Up

Asset Allocation helps:1. Control Portfolio Risk2. Increase the predictability of portfolio

returns3. Steer the portfolio towards one’s financial

goals

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Risk FactorsScheme 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.

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