Expected Return Range Framework

Before proceeding, please

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Asset Allocation

Debt: %

Equity: %

Expected Return Range

In One year, at 95% confidence level:

Lower limit Upper limit
-14.1% 35.6%

In Five years, at 95% confidence level:

Lower limit Upper limit
2.54% 18.96%

Current / Desired Asset Allocation

It is the proportion of different asset classes in your portfolio. For the purpose of this exercise, we are restricting the asset classes to equity & debt only and ignoring others like gold & real estate. Your asset allocation has a very high bearing on the eventual return you get and hence you need to decide on it after careful consideration of your financial status, goals & personality. Please include all forms of equity (shares, mutual funds, PMS, AIF, NPS etc.) and all forms of debt (bonds, mutual funds, saving schemes, NPS etc).

Range of expected returns

The default number for expected return for Equity & for Debt, mentioned in the Asset Allocation table, is just an estimate. For equity, we have taken the average of the 5 year rolling returns of Nifty-50 & for debt, we have considered the current 5-year AAA corporate bond yield. You can modify this number, as you please.

The range of expected returns, mentioned on Expected Return Range table, has been computed using the concept of Normal Distribution*. For this purpose, we have taken data of over 20 years (January 2000 till December 2022, to be precise) and assumed that you invest as per the same asset allocation, every day for a period of one year and five years. We have taken Nifty 50 Total-Return-Index as a proxy for equity and a debt fund# as a proxy for debt. We have then applied the Normal Distribution formula at 95% confidence level**, to arrive at the range of one-year & five-year expected returns.

*Normal Distribution Theory

** 95% confidence level implies, that there is a 95% probability of the expected returns falling in this range.

# we took Aditya Birla Corporate Bond Regular plan as proxy for debt as it is one of the few schemes which was in existence during the period under consideration. We took the regular plan, as direct plans were introduced only in 2013.

What is the relevance of this exercise? Why should you know this?

When you invest to earn a certain return which can help you achieve your financial goals, you take on additional risk. Besides the instrument specific risk, which you can reduce through diversification, you also take on the market risk and the accompanied volatility. While none have a crystal ball, we can draw certain learnings from the past and apply them to the future. The past suggests that markets have been highly volatile, which can lead to panic as your hard-earned money erodes in value.

Neither you nor us, have any control on the markets. However, you do have control on how you respond. One way to prepare is to factor in the worse-case scenarios and allocate to risky assets accordingly.

What next?

At the outset of this exercise, we asked you for current/desired asset allocation. How did you arrive at it? What process did you follow?

Given that asset allocation has a very high bearing on your eventual returns, it is a decision of strategic importance. To do it well, it needs a lot of rigour and detailing. We therefore give it a lot of importance. If you wish to reach out to us, to understand our investment philosophy & approach, please feel free to get in touch.