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Asset Allocation
Asset Allocation Idea / Need:

• The performance of the assets may vary from year to year and is not
easily predictable
• Mixture of assets becomes more like 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 …
• A good AA would reduces risks or variability of returns
• AA becomes ineffective if done within similar or correlated asset

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Asset Allocation
How to decide on the Asset Allocation
Asset Allocation depends upon the return that the investor is looking at.

• If your Investor is targeting a return of 10 % what you will Suggest?

• I will suggest him an asset Allocation

Equity 50%
Return @ 15 %

Debt 50%
Return @ 5 %

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Asset Allocation
• Rajesh & Amit two friends in 1980 both were aged 25

• Rajesh was a very smart investor while Amit was an

average investor both of them had an investible surplus
of 5 lacs

• Rajesh Decided to put 4.5 Lacs in PPF , Bank FDs and

other debt instruments and played with the balance 0.5
Lacs in the stock market

• While Amit thought he needs an asset allocation of 50%

in Equities (Amit invested in BSE Sensex stocks) & 50%
in Debt

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Asset Allocation
• Rajesh Equity investments outperformed market returns by
25% (or Amits’ Returns)

AT 50 , Rajesh –Equity outperforms by 25% 47.00 Lacs

Rajesh s- Debt grew @ 10% ca to 48.75 Lacs
Net Wealth 95.75 Lacs
While Amit an average investor
AT 50, Amits Equity grew @ 17% ca to 125.00 Lacs
Amits Debt grew @ 10% ca to 27.00 Lacs
Net Wealth 152 Lacs
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Benefits of AA
Asset allocation is the primary 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 your
investment strategy.
According to a widely
recognized financial study
by Brinson, Singer & Bee
bower published in the
Financial Analyst's Journal
in 1991, asset allocation
can account for up to
91.5% of portfolio

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Asset Allocation

Primary Focus …
Asset Allocation
Impact on Return in Long Term

Size Timing
Sector Selection
Stock Selection
Style Timing
Market Timing

Probability of Success

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Asset Classes
Broad Classes

Growth Income Preservation

Equities Bonds Cash

Real Estate FIS / Mortgages Gold


Market Cap Style Origin

Large Cap Growth Domestic

Mid Cap Value International
Small Cap Blend

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Asset Allocation & Returns

Return Derived from Asset


Return Derived from Asset


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Portfolio Management Strategies
Different approaches to management of Asset Allocation

• Original ‘base AA established’ – for goal / as per Profile

• Regular rebalancing to adjust back to the original AA
Asset Allocation • The original AA remains fixed during the entire life of investment

• Original ‘base AA established’

Flexible • No rebalancing of the portfolio is done
Asset Allocation • With Portfolio horizon, AA keeps changing

• Rebalancing of AA according to the valuation of the markets

Tactical • Forecasting / predicting returns from markets / sectors / assets
Asset Allocation • Creating value from market situations / trends
• Original AA is restored when ST targets are met

Strategic • Original ‘base AA established’ – for goal / as per Profile

Asset Allocation • Regular rebalancing to adjust back to the original AA
• May be changed to reflect change in Profile / Life stage

Refer to Sheet (AE Module – ‘AA PMS’)

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