Are You Saving For Retirement-Investing In Shares Stocks Bonds Real Estate & Making Money

Asset allocation is the process of spreading investible funds across different asset classes (eg shares, bonds) in order to optimise the risk-adjusted returns from an investment portfolio. Asset allocation is important for the achievement of financial goals because of two reasons. One, it can be structured specifically according to one’s situation and needs. Two, it is prudent to diversify, as different asset classes react differently to market conditions. Investors need to decide their asset allocation after a discussion with their investment advisors, taking into account their age, liquidity needs, existing portfolio, present and future earnings, risk profile, life goals, etc. The thumb rule for asset allocation is to have the equity allocation at 100 minus the current age. Normally, we tend to follow an extreme approach to investing ie we tend to go overboard in any one asset class, while totally ignoring the other, based on market trends. Ideally, the portfolio composition should be determined by one’s personal situation and financial goals, and not market conditions. While investing, volatility and inflation are key considerations to ensure a successful financial plan. Volatility It represents the ups and downs of investment values and is the tradeoff you make when you seek higher returns. The less volatility you can live with, the lower your returns are likely to be. Inflation Most people worry about volatility and overlook inflation, the biggest risk investors face. Because of inflation, a rupee doesn’t buy as much today as it did five years ago. The fact that you don’t see how inflation erodes the buying power of your money makes it all the more harder to deal with. For an individual in his 30s, tax and retirement planning have a certain distinction in terms of time frame as the former deals with the current situation, while the latter is undertaken to ensure that one’s retirement years are comfortable. Tax Planning The investor can choose from traditional tax saving instruments if their risk profile is conservative. However, our recommendation has always been that for investments with a lock-in and that have a medium to long term horizon, exposure to equities can provide them with the potential to earn relatively higher returns compared to pure fixed income tax saving avenues. The performance track record of well-managed ELSS products (equity oriented) and pension products with a balanced allocation (like Templeton India Pension Plan) can be considered here. The key point is that instead of waiting for the fiscal year end for finishing the tax investments, one should adopt the systematic way to gain exposure. Retirement Very often, people postpone planning for retirement till they are very close to it. But that can leave them severely under-prepared. If the retirement years are to be carefree, one needs to act now. The sooner they begin setting aside money for retirement investments, the better off they’ll be. The longer they wait, the more sacrifices they’ll have to make to catch up. That’s because of the power of compounding— investments earn income, and that income earns income, and that income earns income.As mentioned above, it is important to have a mix of asset classes. If one is thinking that putting money in a fixed-income instrument such as a bank deposit will be enough, they need to reconsider it. Usually, post-tax returns from fixed-income instruments will just about offset inflation. Inflation could force one to dig into their principal. Therefore, investment returns must not only match the withdrawal rate, but also exceed it. This is particularly important for people who expect to lead a long retired life. One of the most important things you can do is to figure out how much you’ll need to pay for your retirement. One useful rule of thumb says that retirees need to replace (from provident funds, corporate pension plans, investments, and other sources) at least 70% to 80% of the income they were receiving just before they retired.In that sense, an individual in his 30s can afford to have at least 60-70% exposure to equities. While fixed-income securities provide you with regular income at low levels of risk, equities and equity funds historically have provided a better cushion against inflation. Typically, when one is starting out, their investment strategy should be weighted in favour of growth. As they approach retirement, they can adjust the investment mix to reduce the overall volatility of the portfolio. Investors can also consider asset allocation Fund of Funds (FOF) products that offer steady asset allocation plans and maintain the same, making them convenient financial planning products. Summing up, trying to successfully ‘time’ the markets is next to impossible. Your investment decision should be based on the careful analysis of your situation rather than market conditions. It is important to remember that any short-term volatility you might face tends to smoothen out over the long term. Investing is not a 100-meter dash it’s a marathon!
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