15. Human Life Cycle – Disciplined Planning Income Age Birth & Education Earning Years Retirement Phase I Phase II Phase III 22 yrs 60 yrs Marriage Child birth Child’s Education Child’s Marriage Housing 22 yrs 38 yrs Over 25 - 30 yrs Having a Financial Goal is primary to starting a Investment Plan.
32. Investment Avenues High Low Don’t Invest here RETURN Equity Index Funds Growth Funds RISK Balance Funds Optimal Aggressive Stance ## the size of the circle denotes the level of liquidity Low RBI Comp FD P.O. Income Funds GOI Sec Liquid Fund Gilt Funds Sedate Zone Bank FD High
35. Asset Allocation An asset allocation is a strategy of dividing the portfolio among various asset classes so as to obtain the desired portfolio characteristics to suit distinct investor profiles. Bonds, Stocks and Cash equivalents are the most commonly used asset classes in any asset allocation. It is an organized and effective method of diversification Stocks Bonds Cash The asset allocation for an investor depends on the investors expectations of returns and the risk the investor is willing to take.
51. Let us now create a portfolio of a stock A and a bond B. Stock A is expected to deliver a return of 20% per annum with a volatility of 25% and bond B is expected to deliver a return 6% per annum with a volatility of 5%. In case if we allocate the assets in equal proportion 50% in A and 50% in B than the resultant portfolio is expected to deliver a return of (0.5)*20% + (0.5)*6% = 13.0% with an approximate volatility of 15% Creating a Portfolio
52. Now if we change the allocation to 25% in A and 75% in B than the resultant portfolio is expected to deliver a return of (0.25)*20% + (0.75)*6% = 9.5% with an approximate volatility of 10% It can be observed from the above that as one changes the asset allocation the returns as well as the risk profile of the portfolio changes considerably. Hence asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, debt and equity based on the risk profile and financial needs of the investor Creating a Portfolio
56. Asset class characteristics Security Class Maturity of security Form of return Risk Cash Equivalents Short Interest Low Fixed Deposits Long Interest Medium Govt Securities Long Interest Medium Corporate Bonds Long Interest Medium Preference Shares Perpetual Dividend Moderately high Equity Shares Perpetual Dividend and capital gains High
60. Investment returns The rate of return on an investment can be calculated as follows: (Amount received – Amount invested) Return = _________________________________ Amount invested For example, if Rs.1,000 is invested and Rs.1,100 is returned after one year, the rate of return for this investment is: (Rs.1,100 – Rs.1,000) / Rs.1,000 = 10%. In case if we adjust the return obtained from above for inflation we arrive at the real return in the investment
61. Return Variability A B C Investment A: no return variation, no risk Investment B: some return variation, some risk Investment C: wide return variation, much risk 4.0% 2.5% 6.00% 15% -8%
66. Comparing Standard Deviations Mean = 15.5 s = 3.338 11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21 Data B Data A Mean = 15.5 s = .9258 11 12 13 14 15 16 17 18 19 20 21 Mean = 15.5 s = 4.57 Data C It can be seen from above that data sets with same means could have widely different standard deviations depending on the variance from the mean
68. Risk and Return are related Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook Average Annual Return (1926 – 97) Risk Index Small company common stocks 12.7% 33.9% Common stocks in general 11.0% 20.3% Long Term bonds 5.7% 8.7% Treasury bills 3.8% 3.2% Inflation Rate 3.1%
71. Market Timing is Dangerous… The opportunity loss incurred when attempting to time the market could be exceptionally high Patience and discipline are required to avoid a wrong move Annual Return of Sensex over last 24 years 15.90% 5.54% 0.65% -16.93% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% Always Invested Missed 10 best Missed 20 best Missed 72 best
72. Rupee Cost Averaging can reduce the risks of investing-buy less when price is high & more when price is low. Period Investment amount Price per Share Qty of Shares Purchased 1 Rs.150 Rs. 75 2 2 Rs.150 Rs.25 6 3 Rs.150 Rs.50 3 Total Cost Rs.450 Average Price Rs.50 Total Shares owned 11 Weighted Average Cost: Rs. 40.91 ( 450 / 11)
91. OPT 4 MORE OPT 4 More is a tool to identify the risk return profile of an individual and suggests investments in a basket of Short term & Hybrid MF Income Plans, Equity MF and sacred assets like Bank FD and GOI bonds to suit each profile.
102. Rupee Cost Averaging An investor would have lost 26% if he made a one time investment in March’00 as compared to the SIP loss of 7.6% Average cost – INR 56.60 In a falling market, SIP results in a better downside Protection
103. Rupee Cost Averaging… In the backdrop of a sharp rally , a SIP may under- perform a single entry strategy for a short period of time. Average cost – INR 78.22
104. Systematic Investment Planning (SIP) The value of INR 1000 invested every month for the last 2 year period in a systematic investments plan in the following equity funds would be….