Asset Allocation

Portfolio Management

What is Asset Allocation (AA)?

Asset allocation is the practice of diversifying the Asset allocation is the practice of diversifying the

portfolio between different asset classes and / or products.portfolio between different asset classes and / or products.

Each asset class reflects peculiar characteristics, risk-Each asset class reflects peculiar characteristics, risk-

return profile not being shared by others. return profile not being shared by others.

Asset allocation can be decided to …Asset allocation can be decided to … Achieve some objectiveAchieve some objective

Match investor’s profileMatch investor’s profile

Asset Allocation idea/ need –

The performance of assets may vary from year to year and is

not easily predictable.

Mixture of assets is more likely to meet the goals.

Fundamental idea: different asset classes offering non-

correlated returns (or inversely correlated) can be pooled

together in a portfolio for diversification …

Good Asset Allocation would reduce risks and variability of

expected returns.

Asset Allocation becomes ineffective if done within similar

or correlated asset classes.

How to decide Asset Allocation?

Asset Allocation depends upon the return that an

investor is looking at…. If your Investor is targeting a return of 10 % what you will

Suggest? I will suggest him an Asset Allocation –

7.5%

10%

2.5%

Return @ 15 %

Equity 50%

Return @ 5 %

Debt 50%

Asset Allocation – Benefits

Asset allocation is the primary/ main determinant of long-term portfolio performance rather than superior product selection or market timing

Asset allocation is a key factor in determining the success of an investment strategy. According to a widely recognized financial study by Brinson, Singer & Beebower, published in the Financial Analyst's Journal in 1995, asset allocation can account for up to 93.6% of portfolio performance.

Focus on Asset AllocationIm

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Probability of Success

Asset Allocation

Market Timing

Style Timing Stock Selection

Sector SelectionSize Timing

Asset Classes

Equities

Large Cap

Small Cap

Mid Cap

Growth

Blend

Value

Domestic

International

Market Cap Style Origin

Broad Classes

Equities

Real Estate

Bonds

FIS / Mortgages

Cash

Gold

Growth Income Preservation

Asset Allocation => Risk Profile

Asset Allocation as per Profile *

  Equity Debt Cash

Aggressive 75% 20% 5%

Moderate 55% 40% 5%

Cautious 35% 60% 5%

Conservative 20% 75% 5%

* For Illustrative purpose only.