To directly read the summary ,
Master Turtle
Hi There! Let me introduce myself! I am Master Turtle; an AI & ML based bot that helps investors, like yourself,
make better informed investment decisions. Let me tell you exactly how I do that. So, let’s dive right in!
Mansi
Mansi is a novice investor who wishes to know how Master Turtle can help him achieve his financial targets.
Hello and thank you, Master Turtle! So, my first question to you is, “How are your suggestions different from those in the market?”
Master Turtle
Great question! My suggestions are very client centric and based on quantamental research models. Every investor is different and the investment strategy should be directed towards the fulfilment of his targets keeping in mind his risk character and aspirations.
Mansi
Okay. How do you check the investor’s risk character?
Master Turtle
We use the risk analyser to assess the risk character of the investor. It has been constructed using Behavioural Finance concepts. Characteristics such as income sources, dependents, insurance coverage, existing investments, disposable income, etc. are considered.
Mansi
What happens next?
Master Turtle
The investor’s targets are assessed using various financial calculators. Every target is given a customized portfolio while considering the risk character and time left to reach that target.
Mansi
Does every target require a portfolio? And can you give me examples of a target?
Master Turtle
Ok! One example of a target is ‘corpus for retirement within 20 years’. So the time frame for this target is 20 years and the target is ‘money for retirement.’ Here’s a second example – ‘corpus for kids’ education within 5 years.’ Since every target is different and has a different time frame and journey, it makes sense to have a different portfolio for each.
Mansi
Hmm. I agree. So what happens next?
Master Turtle
The investor’s risk character and targets have already been defined in the first step. The next step is asset allocation which is fundamental to investing. It has been proven that 95% of returns are because of multidimensional diversification of assets which also lowers risk. I have classified assets into 3 major categories, namely –
- Asset classes – Equity| Debt| Commodities
- Geographically - Indian market | US market |Others
- Market capitalizations – Nifty | Large Cap | Mid Cap | Small Cap
Mansi
I understand. Would you show me how multidimensional diversification of assets provides better returns and lowers risk?
Master Turtle
Certainly! As shown in the following representation, individual assets have yielded lower returns with higher risk whereas multidimensional diversification of assets has provided better returns with lower risk.
Mansi
So how does your asset allocation model work?
Master Turtle
My research engine uses 10 years’ of daily price movement of the assets under consideration. Currently, 7 assets are under consideration, a total of 17500 price points are used – 2500 points per asset.
Mansi
Why are the price points considered?
Master Turtle
The essence of considering price points is to understand asset behaviour across economic cycles and the correlation between assets. Historical data of price movement captures ups and downs of assets and the reaction of the assets to various events.
Mansi
Okay! So I understood how your asset allocation model works. How are assets allocated for the investor, let’s say me?
Master Turtle
I already have the risk profile of the investor, in this case you. Monte Carlo Simulation is used to simulate millions of combinations of asset allocation to determine the optimum asset allocation to generate the best returns for the risk considered (as per the investor’s profile). My planning engine is used to determine the investment required according to the asset allocation. The next step is to identify the right investment vehicle based on the asset allocation.
Mansi
Why do you use Monte Carlo Simulation?
Master Turtle
Monte Carlo Simulation is used by the best of the investment bankers across the globe and is a very efficient method to determine the optimum asset allocation.
Mansi
Okay! Which investment vehicles do you recommend and how should I invest?
Master Turtle
Since Mutual Funds are managed by professionals, they are good investment vehicles to choose. Let’s say Gold is one of the assets that looks favourable for your risk character and the amount to be invested is INR 6000. It makes more sense to invest the same amount in a Gold mutual fund rather than buy INR 6000 worth of Gold physically. Also, Mutual Funds are liquid in nature and can be redeemed at any point; the amount will be credited within 2 working days.
Mansi
Right! But there are thousands of funds available for every asset category! How to choose?
Master Turtle
Many investors often choose the funds based on just the returns it has given in the recent years, or at the most the risk (standard deviation). My research engine however considers 100+ parameters for each fund to analyse Fund Valuation, Fund Style, Financial Strength, Concentration Risk, Return and Risk Criteria, etc.
Mansi
I got it! So risk profile, targets of the investor, asset allocation, choosing the right fund based on the asset allocation, all together give the customized portfolio for the investor!
Master Turtle
Exactly! What’s more is that I continuously work on real time data of assets and funds and provide suggestions to investors to rebalance the portfolio. Monitoring is done automatically and the investor doesn’t need to recheck if the funds he or she has invested in are performing or not.
Mansi
Sounds awesome! But how do you know that this investment strategy works?
Master Turtle
Investment strategies are backtested to determine the efficacy of the model which means that the historical performance of the investment strategy is analyzed.
Mansi
That’s great, but my investment is for the future, so how do we know the investment strategy is going to perform?
Master Turtle
I provide Scenarios Analysis to project the best case, worst case and most likely case of fulfilment of the target. This will help in understanding the performance of the investment strategy in future.
Mansi
That sounds awesome! But I already have existing investments, so how can you help with that?
Master Turtle
You can check the Health of the Existing Portfolio here.
Mansi
Awesome! I am excited to start investing!
Master Turtle
Glad to hear! Open an account here! See you on the other side! Adieus!
Summary
In the above conversation, the following process has been explained to Mansi by Master Turtle.
Step 1 – Risk character and financial targets of the investor are determined
Step 2 – Asset allocation based on the results of Step 1
Step 3 – Customized portfolio from a simulation of a million portfolios
Step 4 – Scenario Analysis for the fulfilment of the target is provided
Step 5 – Continuous monitoring and rebalancing of the portfolio
Master Turtle’s Asset Allocation Model:
10 years of daily price points of assets under consideration
Methods Used:
Modern Portfolio Theory & Mean Variance Analysis; Monte Carlo Simulation
What makes Master Turtle different?
- Risk analyser – Analyzes investor profile using Behavioral Finance concepts
- Asset allocation model – Investor receives a customized portfolio from a simulation of a million portfolios based on his risk profile, targets and time left to fulfil the target
- Mutual Funds are rated and ranked using 100 + parameters
- All investment strategies are backtested
- Scenarios Analysis for fulfilment of the target is provided