IOB MANIPAL SCHOOL OF

BANKING

Unit 2
Asset Allocation

Asset Allocation
Asset allocation is the process of
spreading your investments among
different asset classes such as
Stocks, Bonds, Real Estate, Precious
Metals, and Cash/Short Term
Investments according the investors
risk tolerance, goals and investment
time frame.

How to do?
Divide the investment into high and low risk
Keep it in mind long & short term goal
Before making investment make sure level
of return, risk, liquidity, transaction cost
A predominant debt portfolio for near term
goals
A balanced portfolio for medium term goals
and
A predominant equity portfolio for long to very
long-term goals
3

Evaluation of various
investment avenues
Return
Current
return

Risk

Capital return

Government
Securities

Low

Nil

Nil

Post office
Instruments

Moderate

Nil

Nil

Provident/Pen
sion funds

Nil

Moderate

Nil

Bank Products

Moderate

Nil

Negligible

Debentures

High

Negligible

Low

Shares

Low

High

High

Mutual Fund

Low

Moderate

High/low

Nil

Average

Average

Low

High

Gold
Real Estate

Negligible

Life Cycle & Financial

Goals
Status/Ag Below 30
e

31-45

46-56

56-60

Single

Building
Wealth

Adding
wealth

Retirement
Planning

Carefree

Married, no Top priority Building

kids
is property Wealth

Retirement Retirement
Planning
Planning

Married,
two kids

Planning
for childs
higher
education
&
Retirement
Planning

Top priority Building

is property wealth &
Planning
for childs
education

Planning
for childs
future &
Retirement
Planning

Asset Allocation based on Classification of

Investors
Aggressive
Aggressive

Balanced
Balanced

Conservative
Conservative

Risk:
Risk:High
High

Risk:
Risk:Medium
Medium

Risk:
Risk:Low
Low

Objective:
Objective:Generate
Generate
capital
appreciation
capital appreciationwith
with
aalong-term
long-termoutlook
outlook

Objective:
Objective:Capital
Capital
management
managementensuring
ensuringlow
low
risk
exposure
risk exposure

Objective:
Objective:Protection
Protectionof
of
capital
capitalfrom
frominflation
inflation
and
ensuring
liquidity
and ensuring liquidity

Dominant
DominantAsset:
Asset:Equity,
Equity,
Sector
MFs
Sector MFs

Dominant
DominantAsset:
Asset:
Diversified
DiversifiedMFs,
MFs,Income
Income
Funds
Fundsetc.
etc.

Dominant
DominantAsset:
Asset:Gilt
Gilt
Funds,
Funds,Income
IncomeFunds
Funds
etc.
etc.

Aggressive Asset Allocation

Balanced Asset Allocation

Cash
5%

Money Market
Funds
5% Insurance
10%
Property
15%

Cash
5%

Money
Market

Bonds/
Debt
5% 5%

Conservative Asset Allocation

Balanced
Funds

Equity shares

20%

25%

Cash
5%
Equity shares
25%

Equity shares

40%

Equity Funds
25%

Equity Funds
20%

Property
15%

Insurance
5%

Equity Funds
15%

Money
Market
Funds
10%

Bonds/ Debt
10%

Balanced
Funds
15%

Property Insurance
5%
15%

Asset Allocation based on Life

Cycle

What is net worth?

Assets
Cash and cash equivalents
Short-term investments
Long-term investments

Liabilities

Home loans
Auto loan / car loan
Personal loans
Credit loans
Educational loans
Loans against securities

Understanding Net worth

Why Is Determining Net Worth Important?
Determining your net worth is the first step in financial
planning and assessing your financial wealth. Net
worth is a tool for comparing the changes in financial
position over a period of time. An increase in net
worth over a period of time is a positive trend, and a
decrease in net worth is a reduction in wealth.
There are a number of ways to increase net worth.
Increasing Assets, such as through salary and wage
increases as well as growth in investment income and
Reducing liabilities.
The importance of increasing net worth is obvious.

Income and Expenditure Statement

An Income and Expenditure statement shows the

incomes and expenses for a particular time
period say a month or year. It highlights whether
the person has positive or negative cash flows.
Various Sources of Income
1. Salary income
2. Business/Professional
Income
3. Rental Income
4. Interest/dividend Income
Types of Expenditures
1. Household expenses
2. Lifestyle expenses
3. Insurance Premium.
4. Loan EMIs
5. Others( non recurring)

Income and Expenditure

Statement

Step 1:List All Sources of

Income(Inflows)
List all sources of income for the period of
the income statement.
The main source of income for most
people comes in the form of salaries,
wages, self-employment income, and
commissions. Other sources of income
include bonuses, interest, dividends,
rent, gain on the sale of assets, and
gifts and inheritances. All sources of
income should be included in order to

Income and Expenditure

Statement
Step 2: List All Expenditures(Outflows)
Expenditures show where cash flows have been spent.
Major categories of expenditures should be listed. It is
not necessary to account for every penny spent.
By reviewing bank and credit card statements and
recording the cash payments, you can easily develop
categories of expenditure. By adding the payments
made in each category, you will have a fairly accurate
account of where your money has gone.
Certain expenditures are fixed, that is, they remain the
same each month or year. Examples of such
expenses are rent, loan payments, life insurance
premiums, and equated monthly instalments of
loans. These are called Fixed expenditures.

Income and Expenditure

Statement

Certain expenses change from month to

month, such as food, clothing, medical
expenses; telephone . These are called
Variable expenditure.
Both Fixed and Variable expenses can be
either Discretionary or NonDiscretionary Expenses.
Discretionary Expenses: Eating outside,
Spending on clothes, Changing models of
mobile etc.
Non Discretionary Expenses: House
Maintenance Charges, Grocery Expenses,
Medical Expenses, Electricity /water

Income and Expenditure

Statement
Step 3: Determine whether there
is a Surplus or Deficit
When income exceeds expenditures,
there is a surplus. When
expenditures exceed income, there is
deficit.

Income and Expenditure

Statement
What can the Income and Expenditure
Statement/Cash flow Statement tell you?
The income and expenditure statement is an
important tool which helps in understanding
current spending patterns and formulating a
budget.
If your expenses exceed your income, you have a
negative bottom line or a "net loss." That is, you
are reducing your net worth, a situation that
sometimes requires prompt attention. If you have
a substantial surplus, it means that your net
worth is growing.

Prepare a net worth

statement
Self occupied house
50,00,000
Jewellery 10,00,000
Direct Equity 40,00,000
Equity Mutual Funds
60,00,000
Liquid Assets 5,00,000
Savings Bank 2,00,000
Cash in Hand 50,000
Home Loan 20,00,000
Fixed Deposits 5,00,000
PPF 4,00,000

EPF 6,00,000
Insurance Policy
Surrender Value
45,00,000
Bonds/Debentures/CDs
20,00,000
Gold 0
Real Estate investments
1,00,00,000
Personal Loan 14,00,000
Educational loan
15,00,000
Other Loans 0

IOB MANIPAL SCHOOL OF

BANKING

Unit 2
Asset Allocation Models

Asset Allocation Strategies

Strategic Asset Allocation
Asset allocation according to the position of the
client as per the life cycle & wealth cycle.
As the younger clients can take more risk, he is
advised a portfolio with 80-100 % equity and a
senior citizen with 20-30 % equity and balance in
debt instruments/ Fixed & Savings etc.
Those
customers
with
wind
fall
gains
recommended to invest in debt instruments with
STP facility for systematic transfer to equity
investments according to market conditions.

Tactical Asset Allocation

Investors who are oriented to take risk do take
asset allocation calls based on their views of the
market. When they feel the market is
undervalued they increase their exposure to
equity.
They exit their equity investment when the view is
that the market is overheated. Such an asset
allocation is tactical asset allocation.
Tactical asset allocation is clearly a risky style of
investing. Wrong market calls can cause serious
losses to the investor. Therefore, this approach is
suitable only for wealthy investors who are in a
position to take risk.

Fixed Asset Allocation

Fixed Asset Allocation is maintaining the same ratio of
asset classes irrespective of the market movement.
Suppose an investors portfolio is structured with equity
to debt mix of 30:70. In a short period, if the equity
market were to go up by 70%, 30 will become 51 where
debt may be at 73 and the ratio changes to 51: 73. He
immediately rebalances the portfolio to 30:70 by selling
equities.
Portfolio re-balancing carry costs such as brokerage and
stock exchange charges. Profits booked may also become
liable for short term capital gains. Hence advisable to
shuffle portfolio only on yearly basis.
Mutual Funds frequently shuffles portfolio as Fund houses
do not have short term capital gain tax.

Flexible Asset Allocation

An investor who adopts flexible asset
allocation will allow the equity : debt ratio to
increase.
There will be no re-balancing in line with the
market.
Risky as notional profits may disappear on
sudden market crash.
However Flexible asset allocation schemes
can help investors benefit from swings in the
returns in different asset classes. Some
mutual funds adopt this method.

Asset Allocation Model

Capital Preservation Model
Asset allocation models designed for preservation of
capital
for those who expect to use their cash within the next twelve
months
do not wish to risk losing even a small percentage of
principal value for the possibility of capital gains.

Investors that plan

paying for college admission, purchasing a house or
acquiring a business are examples of those that would seek
this type of allocation model.

Cash and cash equivalents

Fixed Deposits, money markets, treasuries and commercial
paper often compose upwards of eighty-percent of these
portfolios.

Income Protection Model

Portfolios that are designed to generate income for
their owners often consist of investment-grade, fixed
income obligations of large, profitable corporations,
treasury notes, and, to a lesser extent, shares of blue
chip companies with long histories of continuous
dividend payments.
The typical income-oriented investor is one that
is nearing retirement.
Another example would be a young widow with
small children receiving a lump-sum settlement
from her husbands life insurance policy and cannot
risk losing the principal; although growth would be
nice, the need for cash in hand for living expenses is
of primary importance.

Growth Model
The growth asset allocation model is designed for
those that are just beginning their careers and
are interested in building long-term wealth.
The assets are not required to generate current
income because the owner is actively employed,
living off his or her salary for required expenses.
Unlike an income portfolio, the investor is likely to
increase his or her position each year by
depositing additional funds.
In bull markets, growth portfolios tend to
significantly outperform their counterparts; in bear
markets, they are the hardest hit.

Balanced Model
Halfway between the income and growth asset allocation
models is a compromise known as the balanced portfolio.
For most people, the balanced portfolio is the best option
not for financial reasons, but for emotional.
Portfolios based on this model attempt to strike a
compromise between long-term growth and current
income. The ideal result is a mix of assets that generates
cash as well as appreciates over time with smaller
fluctuations in quoted principal value than the all-growth
portfolio.
Balanced portfolios tend to divide assets between
medium-term investment-grade fixed income obligations
and shares of common stocks in leading corporations
where there are reasonable return expectation at low risk.

Diversification of Assets
Equity Investments---Large Cap/ Mid Cap/ Small
Cap/ Sector funds etc. Direct or through MF?
Investment in F& O market for highly risk
appetite clients.
Debt investmentsBank FD/ Company FD/ Debt
funds/ Govt. Bonds etc
Gold---Gold Ornaments/ Coins/ Gold ETF etc
Real Estate Land/ Building in different cities
Investment in Real Estate Company shares etc
Overseas InvestmentsInvestment in real
estate/ shares / MF in overseas.