financial planning, asset allocation and investment decision framework

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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