Bharat Phatak
Financial Planning, Asset Allocation and Investment Decision Framework
2
Emergency Needs
What if water runs out while taking a shower?
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Medium Term Needs
What if Municipal Water Supply is not there for 3 days?
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Long Term Needs
What will be the requirement 20 years from now?
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Life Cycle Financial Planning
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Different strategies neededat Different Life Stages Early stage Income low, Wealth low, Family Responsibilities High
Use TERM INSURANCE to bridge the gap, Prudent Borrowing Accumulation StageIncome rising, Wealth low, Family Responsibilities High
Continue Insurance, Start Long Term Investments, Prudent Loans Maturity StageIncome High, Wealth High, Family Responsibilities low
Insurance less important, Wealth Building centre stage,Use of Trusts to ring fence wealth from Liabilities
Distribution StageIncome low, Wealth High, Family Responsibilities low
Withdraw for own expenses, Estate Planning important
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A Balanced Meal
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A Balanced Portfolio
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Debt Equity Mix Will Depend On
Personal / Family Situation Risk Appetite Risk Tolerance Expected Cash Out Flows in next 3Years
A Risk Profile and Asset Allocation Mix of each family needs to be determined
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It will also depend on EnvironmentMore Safe ? More Risk?
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Asset Allocation Framework
ASSET ALLOCATION
PORTFOLIO INVESTMENTS
DIVERSIFY REBALANCE
DEBTEQUITY
ABSOLUTE RETURN
COMMODITIES REAL ESTATE
CONTROL EXECUTION
RISK
CONTROL-TAX,FEES & EXPENSES
STRATEGIC
DIVERSIFIED FOR WEALTH PRESERVATION CONCENTRATED FOR WEALTH CREATION
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Wealth Creation
Wealth Creation does not happen in the markets, It happens in the Farms, On the Shop Floor, On Road,
In the Ports, In Services Markets only allow us to participate in the value
creation Markets also allow Companies to Raise Risk Capital Portfolios can benefit from this growth in the long
term For Wealth building, debt alone is not sufficient The Keys to success are:
Equity Bias Value Orientation Diversification, and Rebalancing
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Debt Market Returns
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.00
10.00
20.00
30.00
40.00
50.00
60.00
BSL Income Plus Calendar Year NAV
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Birla Sun Life Income Plus Returns
YearAbsolute Return End NAV (Rs) Year
Absolute Return End NAV (Rs)
1995 2.85 9.76 2004 (1.08) 27.591996 18.34 11.55 2005 4.27 28.771997 16.45 13.45 2006 5.48 30.351998 11.90 15.05 2007 12.57 34.161999 13.09 17.02 2008 23.60 42.222000 10.63 18.83 2009 (1.24) 41.702001 16.83 22.00 2010 3.18 43.032002 17.27 25.80 2011 8.34 46.622003 8.11 27.89 2012 10.70 51.60
CAGR 14.03 7.07
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Equity Market Fluctuations
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00Franklin Bluechip Calendar Year NAV
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Franklin Blue Chip Fund Returns
YearAbsolute Return
End NAV (Rs) Year
Absolute Return
End NAV (Rs)
1995 (23.07) 15.54 2004 24.60 128.141996 (22.84) 11.99 2005 41.22 180.961997 17.35 14.07 2006 45.52 263.341998 31.56 18.51 2007 47.41 388.181999 179.20 51.68 2008 (48.14) 201.302000 (13.20) 44.86 2009 84.49 371.382001 (16.14) 37.62 2010 22.96 456.662002 23.92 46.62 2011 (18.25) 373.332003 120.59 102.84 2012 26.79 473.33
CAGR 26.65 18.49
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Look what happened over 17 Years
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
20
50
100
150
200
250
300
350
1996 to 2012:NAV History
FBluechip BSL Income Plus
5x
30x
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But finally, Equity will track Earnings
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Earnings Drive Equity
YEAR EPS EPS CAGR SENSEXSENSEX CAGR
31-Mar-03 272
3,048
31-Mar-04 348 5,590
31-Mar-05 450 6,492
31-Mar-06 523 11,279
31-Mar-07 718 13,072
31-Mar-08 833 25.09%
15,644 38.70%
31-Mar-09 820 9,708
31-Mar-10 833 17,527
31-Mar-11 1,050 19,445
31-Mar-12 1,120 7.68%
17,404 2.70%
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The Magic of Compounding
“Compounding is the 8th Wonder” – Einstein
The Rule of 72 Divide 72 by
number of years of Doubling to get Rate of Return and vice versa
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“Doubling Time” At 6% per year inflation, expenses will double
in 72/6 = 12 years If rate of return is 9%, money will double in
72/9= 8 Years At 12%, 72/12= 6 Years At 18%, 72/18= 4 Years At 24%, 72/24 = 3 Years
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Equity Market Participation Low Risk
Index Funds Large Cap Diversified Funds
Medium Risk Sector Funds Midcap / Small Cap Funds Direct Stock Portfolio Investments
High Risk Delivery Based Trading ( Buying & Selling) Intraday Trading /Futures & Options
Highest Risk Writing Options
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Types of Equity Based on Market Cap
Large Cap Mid Cap Small Cap
Based on Style Growth Value
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