Indian Financial Markets Project 1 (investment planning for different age groups)

Group members:
1. Kunal Gaikwad
2. Harshad Bhujbal
3. Prasad Kulkarni
4. Adesh Jadhav

Age Group 20-30 investment for 20 years

Security Type Initial Investment Addition every year Risk Level Allocation(%) Annual Return (%) Annual returns(decimal) Total principal Cumulative Return Over 20 Years Compound Interest
Stock 150000 150000 High 50% 16.0% 0.16 3000000 ₹ 1,73,06,961.99 ₹ 1,43,06,961.99
Option 75000 75000 Very High 25% 18.0% 0.18 1500000 ₹ 1,09,97,097.75 ₹ 94,97,097.75
Gold 30000 30000 Medium 10% 9.5% 0.095 600000 ₹ 16,23,666.98 ₹ 10,23,666.98
Fixed Deposit 21000 21000 Low 7% 6.0% 0.06 420000 ₹ 7,72,497.42 ₹ 3,52,497.42
Bonds 24000 24000 Low to Medium 8% 8.0% 0.08 480000 ₹ 10,98,287.14 ₹ 6,18,287.14
Total 300000 300000 100% 6000000 ₹ 3,17,98,511.28 ₹ 2,57,98,511.28

Age Group 40-60 investment for 20 years

Security Type Initial Investment Addition every year Risk Level Allocation(%) Annual Return (%) Annual returns(decimal) Total principal Cumulative Return Over 20 Years Compound Interest
Stock 105000 105000 High 35% 16.0% 0.16 2100000 ₹ 1,21,14,873.39 ₹ 1,00,14,873.39
Option 30000 30000 Very High 10% 18.0% 0.18 600000 ₹ 43,98,839.10 ₹ 37,98,839.10
Gold 90000 90000 Medium 30% 9.5% 0.095 1800000 ₹ 48,71,000.94 ₹ 30,71,000.94
Fixed Deposit 30000 30000 Low 10% 6.0% 0.06 600000 ₹ 11,03,567.74 ₹ 5,03,567.74
Bonds 45000 45000 Low to Medium 15% 8.0% 0.08 900000 ₹ 20,59,288.39 ₹ 11,59,288.39
Total 300000 300000 100% 6000000 ₹ 2,45,47,569.56 ₹ 1,85,47,569.56

Age Group 60+ investment for 20 years

Security Type Initial Investment Addition every year Risk Level Allocation(%) Annual Return (%) Annual returns(decimal) Total principal Cumulative Return Over 20 Years Compound Interest
Stock 60000 60000 High 20% 16.0% 0.16 1200000 ₹ 69,22,784.79 ₹ 57,22,784.79
Option 15000 15000 Very High 5% 18.0% 0.18 300000 ₹ 21,99,419.55 ₹ 18,99,419.55
Gold 90000 90000 Medium 30% 9.5% 0.095 1800000 ₹ 48,71,000.94 ₹ 30,71,000.94
Fixed Deposit 60000 60000 Low 20% 6.0% 0.06 1200000 ₹ 22,07,135.47 ₹ 10,07,135.47
Bonds 75000 75000 Low to Medium 25% 8.0% 0.08 1500000 ₹ 34,32,147.32 ₹ 19,32,147.32
Total 300000 300000 100% 6000000 ₹ 1,96,32,488.08 ₹ 1,36,32,488.08

1. Age Group 20-30 (High risk, seeking growth):

Financial Planning for 20 years (High Risk, Seeking Growth)

Risk Level: High

Investment Focus: The focus is on aggressive growth, with a large portion allocated to high-risk, high-return assets such as stocks and options. The goal is to achieve substantial capital appreciation by leveraging the
power of compounding over a long investment horizon.

Challenges:

High Volatility and Short-Term Losses: High-risk assets such as stocks and options are inherently volatile, which may result in significant short-term losses.
Market Fluctuations: Exposure to market risks, including economic downturns and sector-specific declines, can impact portfolio performance.
Emotional Discipline: Younger investors may face emotional challenges when dealing with market volatility and need to stay committed despite downturns.

Mitigating Factors:

Long Investment Horizon: Investors in this age range benefit from time, allowing for recovery from downturns and maximizing the compounding effects on investments.
Potential for Dollar-Cost Averaging: By consistently investing (e.g., monthly or quarterly), young investors can average out the cost of assets over time, reducing the impact of market volatility.

Primary Goal: Long-term wealth accumulation by achieving high returns that compound significantly over the 20-year period, setting the foundation for financial security and independence.

Financial Overview
Initial Investment: ₹300,000
Annual Addition: ₹300,000 (assumes disciplined savings each year to build portfolio over time)
Asset Allocation:
Stock: 50% allocation, high return (16%) – Primary growth driver with significant potential for appreciation.
Option: 25% allocation, very high return (18%) – Aggressive returns but with substantial risk; suitable for a smaller allocation to capture high gains.
Gold: 10% allocation, moderate return (9.5%) – Provides stability and an inflation hedge.
Fixed Deposit: 7% allocation, low return (6%) – Adds a secure, low-risk component to the portfolio.
Bonds: 8% allocation, low to medium return (8%) – Adds balance, offering moderate growth with lower volatility than stocks or options.
Total Principal Over 20 Years: ₹6,000,000 (assuming consistent additions each year).
Cumulative Return: ₹3,17,96,511.28 (total value after compounding).
Compound Interest Earned: ₹2,57,96,511.28 (net gain after subtracting principal).
Challenges

Market Volatility: The large allocation in stocks and options makes the portfolio highly sensitive to market fluctuations. Downturns may lead to temporary losses, which young investors must be prepared for.

Emotional Resilience: High-risk investments can cause stress due to sharp declines in portfolio value. Younger investors need to resist reacting emotionally and stay committed to the long-term goal.
Discipline in Consistent Investing: Maintaining regular contributions, even in challenging economic conditions, is essential to maximizing growth potential.

Solution: Regular investments (SIP) in diversified assets allow young investors to take advantage of market dips (dollar-cost averaging), and maintaining a small portion in low-risk assets provides some stability.

Rewards
Overall Percentage Return: 803.70%
Average Annual Return (CAGR): 11%
Significant Long-Term Growth Potential: With a high-risk, high-return approach, the potential for substantial wealth accumulation is achievable. Over a 20-year period, young investors may experience exponential
growth due to compounding.
Financial Independence: By building wealth early, investors can work toward financial independence, providing flexibility in career and lifestyle choices.
Maximization of Compounding: The extended investment horizon for young investors maximizes the effects of compounding, particularly in high-return assets, making a significant difference in accumulated wealth.
Ability to Recover from Downturns: The long-term outlook provides ample time to recover from market dips, making high-risk investments more manageable.
Summary: This SIP strategy is ideal for young investors (age 20-30) aiming for aggressive growth. It capitalizes on the power of time and compounding to maximize wealth accumulation, while maintaining a diversified
asset allocation. The focus on disciplined, consistent investment will support financial goals, enabling substantial returns and financial security for the future.

2. Age Group 40-60 (Moderate risk, balancing growth and security):

Financial Planning for 20 years (Moderate Risk, Balancing Growth and Security)

Risk Level: Moderate

Investment Focus: A balanced approach that combines growth and security. The portfolio includes a diversified mix of high-growth assets (stocks and options) and safer investments (bonds, fixed deposits), aiming to
achieve a steady growth while minimizing potential losses.

Challenges:

Market Volatility: Managing the impact of market fluctuations on growth-oriented investments, especially stocks and options.
Need for Stability: Balancing the need for stable, secure returns as investors approach retirement, where preserving capital becomes increasingly important.
Achieving the Right Mix: Ensuring that the asset allocation maintains a suitable balance between growth potential and risk minimization.

Mitigating Factors:

Diversification: A well-diversified portfolio reduces overall risk, combining higher-risk, higher-return assets with more stable, low-risk investments to provide a cushion during market downturns.
Balanced Allocation: A carefully constructed allocation distributes capital across multiple asset classes, ensuring both growth potential and security.

Primary Goal: To achieve steady returns while preparing for retirement, prioritizing financial security without sacrificing moderate growth.

Financial Overview

Initial Investment: ₹300,000

Annual Addition: ₹300,000 (consistent annual investment to build the portfolio gradually)

Asset Allocation:

Stock: 35% allocation, high return (16%) – Acts as the primary growth driver within the portfolio.
Option: 10% allocation, very high return (18%) – Provides additional growth potential with a small but high-risk component.
Gold: 20% allocation, moderate return (9.5%) – Provides portfolio stability and acts as a hedge against inflation.
Fixed Deposit: 20% allocation, low return (6%) – Adds security with stable, low-risk returns.
Bonds: 15% allocation, low to medium return (8%) – Balances the portfolio with moderate growth and low volatility.

Total Principal Over 20 Years: ₹6,000,000 (assuming disciplined, regular annual additions)

Cumulative Return Over 20 Years: ₹2,45,47,569.56 (total value including compounding)

Compound Interest Earned: ₹1,85,47,569.56 (net gain after deducting the total principal invested)

Challenges
Market Volatility: The portfolio's exposure to stocks and options introduces the potential for significant fluctuations, which can impact returns in the short term.
Risk Management: As retirement nears, these investors need to carefully manage risks associated with growth assets while preserving capital.
Balancing Growth and Security: Striking a balance between high-growth investments (stocks and options) and secure assets (bonds and fixed deposits) is crucial to safeguard financial security and maintain steady growth.

Solution: Regular rebalancing of the portfolio to maintain the desired asset allocation. As investors age, they may consider gradually increasing the allocation to more secure assets like bonds and fixed deposits, while
reducing exposure to volatile investments like options.
Rewards
Overall Percentage Return: 409.13%
Average Annual Return (CAGR): 7.50%
Steady Returns from a Balanced Portfolio: By combining growth assets with safer investments, this strategy supports wealth accumulation while offering some protection against market downturns.
Risk Management with Growth Potential: A balanced approach allows moderate growth without exposing the entire portfolio to high risk, which is ideal for individuals approaching retirement.
Preparation for Retirement: This strategy allows investors to build wealth steadily over time, ensuring a stable financial base that can support retirement needs.

Summary: For individuals aged 40-60, this investment strategy strikes an optimal balance between growth and security. By diversifying across high-risk, high-return assets and low-risk, stable investments, it aims to
provide both steady returns and protection against volatility. This approach is designed to build a robust financial foundation for retirement, supporting both long-term growth and capital preservation.

3. Age Group 60+ (Low risk, seeking capital protection and stable returns):
Financial Planning for 20 years (Low Risk, Seeking Capital Protection and Stable Returns)
Risk Level: Low

Investment Focus: The primary focus is on capital preservation and generating stable, low-risk returns. This is achieved through a conservative allocation that favors bonds, fixed deposits, and gold, with minimal exposure
to volatile, high-growth assets.

Challenges:

Limited Growth Potential: Due to the conservative approach, there is limited opportunity for significant capital growth, which may be needed to keep up with inflation.
Inflation Risk: Protecting the purchasing power of the investments is essential since inflation can erode returns, especially on low-yielding fixed-income investments.
Principal Protection: For this age group, safeguarding the principal is crucial, as the ability to recover from significant losses diminishes with age.

Mitigating Factors:

Low Exposure to Volatile Assets: By focusing on income-generating and stable investments, the portfolio minimizes the risk of losses due to market volatility.
Income Stability: Assets such as bonds and fixed deposits are selected for their predictable income, helping to maintain a steady cash flow for retirement.

Primary Goal: To maintain stability and generate a consistent income that can support retirement needs without exposing the principal to significant risk.

Financial Overview

Initial Investment: ₹300,000

Annual Addition: ₹300,000

Asset Allocation:

Stock: 20% allocation, high return (16%) – Limited stock allocation allows for some growth potential without excessive risk.
Option: 5% allocation, very high return (18%) – Minimal allocation to options for limited high-growth exposure.
Gold: 30% allocation, moderate return (9.5%) – Gold serves as a hedge against inflation, providing some stability.
Fixed Deposit: 20% allocation, low return (6%) – Provides low-risk, stable returns.
Bonds: 25% all. low to medium return (8%) – Bonds offer a steady income stream, balancing stability with moderate returns.

Total Principal Over 20 Years: ₹6,000,000 (assuming consistent annual contributions)

Cumulative Return Over 20 Years: ₹1,96,32,488.08 (total portfolio value after compounding)

Compound Interest Earned: ₹1,36,32,488.08 (net return from investments after deducting the principal)

Challenges

Low Growth Potential: This portfolio has limited exposure to high-growth assets, which can restrict the overall capital appreciation potential.
Inflation Impact: Managing inflation risk is essential, as inflation can erode the real returns of low-yield investments.
Capital Preservation Priority: For this age group, preserving capital is more important than seeking high returns, as the ability to recover from losses decreases with age.

Solution: To manage inflation risk, the portfolio includes a significant allocation to gold, which traditionally acts as a hedge. Additionally, a small allocation to stocks and options provides some growth potential without
compromising the overall stability of the portfolio.
Rewards
Overall Percentage Return: 327.21%
Average Annual Return (CAGR): 6.11%
Focus on Stability and Capital Preservation: The primary reward of this portfolio is its low risk of principal loss, making it ideal for individuals seeking security over aggressive growth.
Reliable Income: Bonds and fixed deposits provide predictable income streams, which support consistent cash flow during retirement.
Peace of Mind: This conservative approach offers peace of mind to retirees, ensuring their financial security through stable returns and reduced exposure to market volatility.

Summary: For individuals aged 60 and above, this investment strategy emphasizes capital preservation and stability, aligning with the reduced risk tolerance typical of this age group. By focusing on secure, income-
generating assets, the portfolio aims to provide consistent returns and protect against market downturns, supporting financial stability in retirement.

This analysis highlights the strategies and expected outcomes for each age group, taking into consideration their risk profiles, potential challenges, and rewards over a 20-year investment period.