Monday, October 09, 2006

Asset Allocation

Asset allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks etc.
I am presenting a simple asset allocation stratergy. Here it goes

Singular Allocation:

Rs 1 Lakh is invested in a 8% yield fixed deposit for 30 years. This gives us INR 10,06,265.69 after 30 years.

Diversified Allocation:
Here we divide 1 Lakh available with us into 5 parts each of 20k each.
  • 20,000 is lost                                                                  = INR 0
  • 20,000 in saving account yielding @ 3.5%                 = INR 56135.87
  • 20,000 in fixed deposit yielding @ 8%                       = INR 201,253.14
  • 20,000 in a decent MF giving a yield of 10%             = INR 348,988.05
  • 20,000 in an aggressive MF giving a yield of 12%    = INR 599,198.44
                                                                          Total           = INR 12,05,575.50
Differential AllocationSingular Allocation
Return on Invst.1105.58%906.27%
Total Amt investedINR 80,000INR 1,00,000
Real return on Invst1406.97%906.27%

This is 1Lakh invested for 30 years. I have created an excel sheet wherein you invest Rs1Lakh each year till 30 years and then you can compare the returns.
Download the Asset Allocation.xls from here

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