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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

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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%

20

01

20

02

20

03

20

04

20

05

20

06

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07

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08

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09

20

10

20

11

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12

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14

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15

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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: hsbcmf@camsonline.com

Mutual fund investments are subject to market risks, read all scheme related documentscarefully.