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Asset Allocation: 17 NOVEMBER, 2008. Prof. V.K. Agarawal
Asset Allocation: 17 NOVEMBER, 2008. Prof. V.K. Agarawal
Asset Allocation: 17 NOVEMBER, 2008. Prof. V.K. Agarawal
17TH NOVEMBER,2008.
PROF. V.K. AGARAWAL
INTRODUCTION
PORTFOLIO MANAGEMENT IS A LONG
TERM INVESTMENT BUT IN THE
TODAY’S MARKET CONDITIONS IN
WHICH THE INDIVIDUAL INVESTORS
HAVE LOST THE CONFIDENCE IN THE
MARKET DUE TO IT’S
UNPREDICTABLE BEHAVIOUR, ARE
CONFUSED DUE TO THE WORST LAST
WEEK IN OUR MARKET’S HISTORY,
MANY PEOPLE HAVE HAD LOST
ENOUGH AND CAN’T STAND TO LOSE
ANY MORE.
• THE SITUATION THAT HAS
UNFOLDED OVER THE PAST FEW
WEEKS ESPECIALY HAS HAD A
PROFOUND IMPACT ON HOW PEOPLE
VIEW THE MARKETS.
• PROCESS
WHY RESORT TO ASSET
ALLOCATION?
• TO DIVERSIFY THE RISK (AS DON’T
EXPECT EQUITY & BOND MARKET TO
FALL AT THE SAME TIME).
• SINCE ONE DOES NOT KNOW
BEFOREHAND WHAT ECONOMIC
SITUATION WOULD BE TOMORROW,
IT IS BUT LOGICAL TO INVEST IN
MORE THAN ONE ASSET CLASS.
• PROPER ASSET ALLOCATION IS MORE
IMPORTANT TO LONG TERM THAN
SPECIFICA INVESTMENT CHOICES.
• ASSET ALLOCATION IS MORE
IMPORTANT THAN SECURITY
SELECTION, ESPECIALLY FOR LONG
TERM INVESTMENT.
• BUT SINCE GUESSING EACH ASSET
CATEGORY WILL DO BEST AT A
CERTAIN TIME IS VERY DIFFICULT.
• IT CAN MAKE SENSE TO DIVIDE YOUR
INVESTMENTS AMONG ASSET
CATEGORIES.
• UNDERSTANDING THIS STRATEGY CAN
BE KEY TO INVESTMENT PROCESS.
• MOST INVESTMENTS TEND TO DO WELL
WITH NO APPARENT SCIENCE IN BULL
PHASES.
• SCIENCAE OF INVESTING COMES TO
THE FORE WHICH MANAGING
INVESTMENTS EITHER IN A BEAR PHASE
OR IN TIMES OF EXTREME VOLATILITY.
• DIFFERENT ASSET MAY PEAK AT
DIFFERENT TIMES MAY ALSO
UNDERPERFORM.
• NO ASSET CLASS HAS SINGULARLY
OUTPERFORMED OVER THE
LONGRUN, WHETHER IT WAS THE
BOND FUNDS THAT WERE AT THEIR
BEST IN 2000 AND 2001 OR MID-
CAPS IN 2002, 2003 OR 2004 OR THE
SENSEX IN 2005 AND 2006.
IN SHORT, DIVERSIFICATION IS THE
PRACTICE OF SPREADING MONEY
ACROSS VARIOUS INVESTMENT
SEGMENTS TO REDUCE RISK BY
PICKING THE RIGHT GROUP OF
INVESTMENT THAT MAY BE ABLE TO
LIMIT THE LOSSES.
RISK
LIQUIDITY
TRANSACTION COSTS
NOTE:
• BANK FD PROVIDES COMPLETE
PROTECTION AGAINST CAPITAL LOSS
4. RISK TOLERANCE
6. PERSONAL CIRCUMSTANCES
DEPENDING ON YOUR AGE, LIFE
STYLE AND FAMILY COMMITMENTS,
FINANCIAL GOALS
YOU NEED TO DEFINE YOUR
INVESTMENT OBJECTIVES AND
GOALS OF LONG TERM AND SHORT
TERM.
ASSET ALLOCATION
PROCESS:
FIRST APPROACH
FACTORS FOR ALLOCATION OF
ASSETS:
3.RISK TOLERANCE
5.INVESTMENT OBJECTIVE
7.TIME HORIZON
1. RISK TOLERANCE (INDIVIDUAL
INVESTOR)
• DETERMINE RISK TOLERANCE*
• LIABILITIES*
• NETWORTH*
IT VARIES INVESTOR TO
INVESTOR
THE INDIVIDUAL CAPACITY OF RISK
TOLERANCE IS THE STARTING
POINT WHICH HAS TO BGE
ANALYSED FOR ALLOCATING ASSETS
AS IT FOCUSES PSYCOLOGY OF
THE INDIVIDUAL INVESTOR*.
IF THE INVESTOR IS RISK TAKING IN
NATURE, ASSETS INHIS PORTFOLIO
WOULD BE OF A HIGHER RISK .
• TARGETED CAPITAL
• EMPHASIZES GROWTH
• STOCKS OR EQUITY FUNDS - 65%
• BONDS OF FIXED INCOME - 25%
• SHORT TERM MONEY MARKET
FUNDS OR
CASH
• EQUIVALENTS - 10%
• LONG INVESTMENT TIME FRAME
IT RECOMMENDS
• STOCKS – 50%
• BONDS – 30 %
• SHORT TERM – 20%
• REGULAR INCOME WITH MODERATE
PROTECTION AGAINST INFLATION.
NOTE:
DIVERSIFYING ASSETS IS THE KEY TO
SRAY WEALTHY.
THIS PROPORTIONAL COMBINATION OF ASSETS BASED ON
EXPECTED RATES OF RETURN FROM EACH ASSET CLASS.
EXAMPLE:
ANALYSIS OF RETURN
OR
OR
IN SUCH ANALYSIS
EACH ASSET MIX IS EXPRESSED IN
TERMS OF
TOTAL AMOUNT INVESTED IN EACH
ASSET CLASS.
LONG RUN CAPITAL
CONDITIONS
• ASSETSEXPECTED RETURNS RISK
AND CORRELATIONS REMAIN
CONSTANT THROUGH OUT THE
STIMULATION PROCESS.
40 60 60 40
50 50 50 50
60 40 40 60
70 30 20 70
ASSET ALLOCATION IS NOT A ONE –
TIME
AN ONGOING BASIS.
CHANGES IN MARKET
CONDITIONS:
IT ACTUALY REACTS TO THE
CHANGES IN THE PREDICTED
CAPTIAL MARKET CONDITIONS
RATHER THANT HE VARIATIONS
IN INVESTOR RISK TOLERANCE.
ASSET ALLOCATION
MANAGEMENT STYLE:
MULTIPLE FUNDS
NUMBER OF SECURITIES
• EXPOSURE OF EACH ASSET CLAS S
RELATES TO MOVEMENTS IN THEIR
RETURNS.