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March 2018
HSBC Global Asset Management, IndiaCreating Wealth through Asset Allocation
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Why invest?
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Changing social demographics
Increased income – but is it enough to cater to your post retirement needs?
Stress at work leading to early retirement
People are living longer – life expectancy has increased
Nuclear families – Reduction in social security
Rising health care cost - Old age is not covered
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Greater demand to spend
Birth and
Education
0 25 60Earning Life 75 +Retired
Life
Marriage
House
Children’s
Education
Children’s
Marriage
Retirement
Age
Do you want to compromise on
your living standard after your
retirement?
Emergencies?
Car
Children
Savings / Investing
Support old
parents
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If our expenses are real, our returns should also be real…
Savings is not enough; you also have to beat inflation!
Value of today’s INR 100,000 over
time
Real cost of today’s expense over
time
30000
42929
61430
87903
125786
0
20000
40000
60000
80000
100000
120000
140000
Today 5 10 15 20
At Inflation of 7.4%Years
100000
67975
46206
31409
21350
0
20000
40000
60000
80000
100000
120000
1 2 3 4 5
At Inflation of 7.4%
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High focus towards perceived “safe” investment avenues
Source : Reserve Bank of India, Currency - INR
Expected average savings for 12th Five Year Plan (2012-17)
Mutual fund investments are subject to market risks, read all scheme
related documents carefully. Past performance may or may not sustain and
doesn’t guarantee the future performance
Asset Class Performance*Asset Class Distribution : Individual Wealth
Period : 1-Jan-2002 to 31-Dec-2017, Source : Bloomberg, Ace MF, World Bank*Real Estate data not available, Average deposit rates, SBI Interest Rates on Termdeposits(1 year)
According to 12th Five Year Plan (2012-17)
Household savings expected ~24% of GDP
~41.6% of household savings is expected in physical assets (including Gold and Real
estate)
Shares and debentures (inclusive of Mutual Funds) form ~4.5% of household savings
Equity
Debt
Gold
Deposits
Rate
Inflation
26%
12%
14%
7%
6.9% %
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What worked yesterday, may not work tomorrow…
Period : 1-Jan-2002 to 31-Dec-2017, Source : Bloomberg, Ace MF, World Bank, CAGR Returns, Average deposit rates, Mutual fund investments are subject to market risks, read all scheme related
documents carefully. Past performance may or may not sustain and doesn’t guarantee the future performance
Equities and debt have outperformed other asset classes in above alternative periods
Pre inflation performance Post inflation performance
28%
7%
12%11%
26%
4% 9% 9% 13% 12%
14%
3%
-5%
-2%
14%
6% 7% 8% 8% 7%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1 Year 3 Years 5 Years 7 Years 15 Years
Equity Debt Gold Deposits rate
23%
2%
5%3%
19%
-1%
4% 3% 6% 5%
9%
-2%
-11%-9%
7%
1% 2% 1% 0% 0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1 Year 3 Years 5 Years 7 Years 15 Years
Equity Debt Gold Deposits rate
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Where to invest?
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Traditional fixed income instrument bias in India
Source: Reserve Bank of India (RBI), Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn’t guarantee the future
performance
Traditionally, Indians have been in favour of debt investments, primarily bank fixed deposits
Post office saving schemes and provident funds (public and employee) are close behind
The fixed instrument bias is reflected in India’s household savings data
– Of the total financial savings by Indians, deposits dominate with about 31%
Components of household savings 2016-17 (%)
Currency, 5.7%
Bank deposits, 30.3%
Non- banking deposits, 0.3%
Life insurance fund, 10.0%
Provident and pension fund, 6.0%Claims on
Government3.0%
Shares & debentures,
4.3%
Physical Savings, 40.3%
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Fixed income bias weighs heavily on investments
Most people are unaware that the fixed income bias erodes their investments significantly as inflation eats into
the portfolio
A hypothetical example of Mr A and Mr B reveals that if funds are kept idle in a debt instrument, the real return
is marginal. On the other hand, if the fund invests in a high-yielding asset class such as equities, it negates the
impact of inflation and grows better
Mr A Mr B
Amount Rs 1 lakh Rs 1 lakh
Nominal Return (a)
8%^
(invested in debt
instrument)
12%^
(invested in
equities)
Average Inflation* (b) 6% 6%
Real return (a)-(b) 2% 6%
Growth of amount
after 5 yrsRs 1.10 lakh Rs 1.34 lakh
Source – World Bank CY inflation
Debt Index - I-BEX (I-Sec Sovereign Bond Index)
As at December 2017
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Past performance may or may not sustain and doesn’t guarantee the future performance
*Average five years CPI – industrial worker inflation data assumed at 6%.
^Average return from debt and equities assumed at 8% and 12% for respectively a period
of five years.
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
CPI-IW Inflation* Debt
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Fixed income bias despite a young population
Higher preference for fixed income instruments persists despite India having one of the youngest populations in
the world
– Not only do we have a young population now, but will continue to do so in the foreseeable future
Why highlight a young population?
– Because young populace tends to have a long-term investment horizon and higher risk appetite; thus, the ability to invest in
risky asset classes
Population break up
Source: United Nations
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Does that mean equity investment is the way?
While equity is a good investment instrument for a young populace, the asset class is only beneficial in the long
term
– Equity is exposed to volatility in the short term
– As seen in the chart, while the linear trend of the asset class is positive in the long term, the short term shows volatility
– An example of this volatility is the subprime crisis in early 2008, which lopped nearly half of the market gains, while the
quantitative easing by global central banks subsequently pushed the markets higher
S&P Sensex – Anatomy of Corrections
Source: Ace MF, BSE, Bloomberg, As at December 2017, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn’t
guarantee the future performance
0
5000
10000
15000
20000
25000
30000
35000
40000
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
S&P Sensex – Anatomy of Corrections
Apr '00 - Sep '01 Tech Bubble
Sensex lost ~ - 32%
Apr '03 - Dec '07
Bull phase
Sensex rose ~ 49%
Jan '08 - Mar '09
Subprime crisis
Sensex fell ~ - 45%
Apr '09 - Dec '10
Bounce back post sub
prime crisis
Sensex rose ~52%
Jan '11 - Jan '12
European crisis
Sensex fell ~-
21.7%
Sep '13 - Feb '15
Post European
crisis
Sensex rose by
~62%
Nov '15 - Jun '16
Chinese slowdown
Sensex fell by ~ -
6%
Nov '16 - Dec '16
Demonetisation
Sensex fell by ~ -
8%
Jan '17 - Dec '17
Post
Demonetisation
Sensex rose by
~28%
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Equity – high potential in the long term
Equity gives the best results in the long term
It can be observed from the return distribution chart given below that as the investment horizon increases, the
percentage of positive returns increases
– The chances of an investor earning between 15% and 20% is 83%, if he is invested for 30 years, while it is 31% for 10 years
Similarly, it can be observed from the holding period returns chart that there are no negative returns for an
investment period above 15 years
– Minimum return over 30-year rolling period is 13%
Another benefit of long-term investing is that volatility decreases with an increase in the investment horizon
Daily annualised rolling returns since inception (1979) of S&P BSE Sensex considered across various holding periods
Source: BSE, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn’t guarantee the future performance
0%
2%
4%
6%
8%
10%
12%
14%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
5 YearHoldingperiod
10 YearHoldingperiod
15 YearHoldingperiod
20 YearHoldingperiod
25 YearHoldingperiod
30 YearHoldingperiod
Vo
lati
lity
(%
)
Retu
rns (
%)
Average Returns Maximum return
Minimum returns Volatility (RHS)
1%
9% 8%
20%
31%
17%
7% 6%
0% 0% 0%
17%
83%
0% 0% 0%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
< 0% 5% 10% 15% 20% 25% 30% > 30%
Pro
bab
ilit
y (
%)
Returns distribution (%)
10 Year Holding Period 30 Year Holding Period
Holding period returns Return distribution across horizons*
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What about gold, commodities and real estate?
Gold: Allocate in moderation
– While the asset class tends to have a positive growth trajectory in the long term, it is prone to fluctuations in the short term
– Investors should invest in the asset class in moderation and primarily use it for portfolio diversification
Real estate: Tough to call, comes with significant risks
– Project delays
– Title
– Illiquid
– Varied returns
Commodities: Regulations still evolving
Gold - Not so glittering returns
International gold prices as on last day of the calendar year as at December 2017, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance
may or may not sustain and doesn’t guarantee the future performance
-30%
-20%
-10%
0%
10%
20%
30%
40%
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
Gold Calendar Year Returns
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What should an investor do?
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Asset allocation: Key determinant of returns
Factors that explain variation between portfolio performances
Asset Allocation
Other Factors
Disproportionate focus on 6% viz. security selection, market timing
Source: Brinson et al, 1986
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Asset allocation: Key determinant of returns
Allocate funds across various investment classes optimally based on an individual’s risk-return profile
The basic premise of asset allocation is -
– To spread risk emanating from more risky asset to less risky asset class
– To earn efficient risk-adjusted returns as per the risk profile
In simple terms, asset allocation is an investment strategy to figure out how much of one’s portfolio is to be
invested in different asset classes depending on one’s risk-taking abilities and financial goals
The right asset allocation helps to counter market uncertainty as it diversifies investments not only within an
asset class but also across asset classes
Asset allocation can be a good medium for meeting financial goals and wealth maximisation
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Performance of asset classes varies across time periods
To reiterate, different asset classes tend to outperform each other across time periods
Allocating all funds to a single asset class is not a prudent investment approach as it may not garner efficient
inflation and risk-adjusted returns
Different levels of correlation among different asset classes provide an effective hedge to the portfolio
December, 2017, Source – Bloomberg, Ace MF, ICRA MFI Explorer
Equity, debt and gold represented by Sensex, I-BEX (I-Sec Sovereign Bond Index) and International Gold prices, Mutual fund investments are subject to market risks, read all scheme related
documents carefully. Past performance may or may not sustain and doesn’t guarantee the future performance
The best asset changes every year
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
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01
20
02
20
03
20
04
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05
20
06
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07
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08
20
09
20
10
20
11
20
12
20
13
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14
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15
20
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20
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Debt Equity Gold
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Different correlation of performance provides effective hedge
Low or non-correlation among asset classes ensures that movement of a particular asset class does not
influence the performance of other asset classes
– For instance, equity has very low correlation with debt and negative correlation with gold
Different correlation among different asset class provides an effective hedge to the portfolio emanating from any
one asset class
Correlation Matrix Debt Equity Gold
Debt 1.00 0.10 -0.04
Equity 0.10 1.00 -0.04
Gold -0.04 -0.04 1.00
Equity, debt and gold represented by Nifty 50, CRISIL Gilt Index and LBMA prices converted in to Rupees
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Goal-based asset allocation approach
The goal-based approach involves investing to achieve specific goals (small, medium and long term) by
allocating money to different asset classes in sync with one’s risk capacity and time horizon
For better understanding, let’s take the hypothetical case of a young professional
– His/ her priorities in different time horizons are captured in the table below
Based on that he/ she can allocate funds across asset classes
Pri
ori
ty
Wa
nt
Goal – Buying a car
Investment objective – Stability
Asset allocation – Moderately conservative
Goal – Buying a vacation home
Investment objective – Stability and growth
Asset allocation – Moderately aggressive
Goal – Foreign vacation, estate planning
Investment objective – Growth
Asset allocation – Aggressive
Ne
ed
Goal - Child care expenses, down-payment for
home
Investment objective – Stability
Asset allocation – Conservative
Goals – Children’s education, old-age parent
care
Investment objective – Stability and growth
Asset allocation – Moderate
Goals – Retirement, Children’s marriage
Investment objective – Growth
Asset allocation – Moderately aggressive
Short term Medium term Long term
Time horizon
For representation purpose only, it may differ on a case-to-case basis)
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Asset allocation should be as per risk profile
Risk profiling involves investors assessing themselves on various parameters to evaluate their risk-taking
capacity and accordingly allocate money to different asset classes
– Usually, risk profiling is undertaken through a formal questionnaire-based process where investors have to answer questions
that probe their goals, risk-taking capacity and suitability
For representation purpose only, it may differ on a case-to-case basis)
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Asset allocation approach aims for higher risk-adjusted returns
Prudently allocating assets across asset classes in sync with the risk profile can help generate efficient risk-
adjusted real returns
– The illustration shows a combined portfolio of debt and equity gave higher real (inflation-adjusted) returns vis-à-vis only debt
and also reduced the risk compared to an-only equity portfolio
8.56%
15.16%
11.86%
1.35%
7.95%
4.65%5.7%
29.9%
12.1%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Debt Equity Debt + Equity*
Nominal returns Real returns Risk
Returns – Average of 10 year CAGR on a daily rolling basis since 1997
Volatility – Standard deviation of a daily returns since 1997
Debt and equity represented by CRISIL Gilt index and Nifty 50
Average month-wise annualised CPI – IW inflation since 1997 is considered for calculating real returns
^ Assuming equal weighted asset allocation, Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not sustain and doesn’t
guarantee the future performance
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Asset allocation through mutual fund
Investors may not have the wherewithal to manage their money and allocate assets across asset
classes
Further, allocation is not just restricted among asset classes but also, within the asset class
– Equity sub-asset allocation based on market cap (large, mid and small) and sector or theme-based
– Debt sub-asset allocation based on maturity (short and long term)
Professional management is an option for consideration
Investments can be routed through mutual funds
Benefits of mutual fund
– Professional management – A dedicated team helps better analyse investment opportunities in the market
– Research and credit function – An independent research and credit function aids investment
– Focused risk management – Imperative to manage inherent risks in the asset classes
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Mutual funds available as per investor’s risk-return profile
Mutual funds offer variety of funds in each asset class and investors can choose funds based on their risk-return
objectives and time horizon
Potential Returns
Po
ten
tial
Investm
en
t /
Mark
et
Ris
k
Liquid and
Ultra Liquid
Short term
bond
Long term
& flexi bond
Flexi cap
equity
Mid cap
equity
Investment horizon:
less than 6 months
Investment horizon:
1 year - 3 year
Investment horizon:
5 years & above
Active Asset Allocation : Across horizons Investment horizon:
5 years & above
Investment horizon:
6 months - 3 years
Large cap
equity
Investment horizon:
5 years & above
Note: For debt funds potential risk involved indicates interest rate risk and is not an indicator of credit risk.
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Takeaways
Impact of asset allocation
Lowers volatility
Encourages stable investor behaviour
…and therefore, could achieve better results
Rebalancing - a key supporting factor
Asset allocation is an excellent tool for addressing the volatility of investment markets
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Thank You
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Disclaimer
This document has been prepared by HSBC Asset Management (India) Private Limited (HSBC) for informationpurposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds ofHSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtainedfrom sources HSBC, the third party believes to be reliable but which it has not independently verified and HSBC, thethird party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracyor completeness of such information. The information and opinions contained within the document are based uponpublicly available information and rates of taxation applicable at the time of publication, which are subject to changefrom time to time. Expressions of opinion are those of HSBC only and are subject to change without notice. It doesnot have regard to specific investment objectives, financial situation and the particular needs of any specific personwho may receive this document. Investors should seek financial advice regarding the appropriateness of investing inany securities or investment strategies that may have been discussed or recommended in this report and shouldunderstand that the views regarding future prospects may or may not be realized. Neither this document nor the unitsof HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certainjurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of thisdocument are required to inform themselves about, and to observe, any such restrictions.© Copyright. HSBC Asset Management (India) Private Limited 2018, ALL RIGHTS RESERVED.
HSBC Asset Management (India) Private Limited, 16, V.N. Road, Fort, Mumbai-400001Email: [email protected]
Mutual fund investments are subject to market risks, read all scheme related documentscarefully.
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