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Financial Planning, Asset Allocation and Investment Decision Framework. Bharat Phatak. Emergency Needs. What if water runs out while taking a shower?. Medium Term Needs. What if Municipal Water Supply is not there for 3 days?. Long Term Needs. What will be the requirement 20 years from now?.
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Financial Planning, Asset Allocation and Investment Decision Framework Bharat Phatak
Emergency Needs What if water runs out while taking a shower?
Medium Term Needs What if Municipal Water Supply is not there for 3 days?
Long Term Needs What will be the requirement 20 years from now?
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 Stage Income rising, Wealth low, Family Responsibilities High Continue Insurance, Start Long Term Investments, Prudent Loans • Maturity Stage Income High, Wealth High, Family Responsibilities low Insurance less important, Wealth Building centre stage, Use of Trusts to ring fence wealth from Liabilities • Distribution Stage Income low, Wealth High, Family Responsibilities low Withdraw for own expenses, Estate Planning important
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
Asset Allocation Framework DIVERSIFIED FOR WEALTH PRESERVATION CONCENTRATED FOR WEALTH CREATION
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
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
“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
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
Types of Equity • Based on Market Cap • Large Cap • Mid Cap • Small Cap • Based on Style • Growth • Value