When an individual starts framing the picture in terms of investor profiling, it is paramount to take a sneak-peek into the past, current and future status. A simple three-step approach of estimating current expenses, adjustment of inflation and estimating a nest egg based on life expectancies can work in the individual's favour. While doing this one has to clearly define goals according to priority, potential trade offs, potential outcome of the decision, optimization of financial resources and course correction mechanism.
Do take note that an authentic profiling makes it easier to find solutions that exactly correspond to your needs. Some of the potential mistakes that can smack your plan must also be avoided during the course. These include, among many others, underestimating rising costs of medical healthcare, choosing a short-term ad hoc plan, delaying the plan, ignoring tax implications and not taking into account the company's retirement plan.
Portfolio construction & selecting investment options
Usually, retirement planning has three dimensions which span the phases of a life cycle.
The first phase refers to building a portfolio, followed by preparing for retirement and, lastly, living through retirement. Each of these phases has a strong linkage to the other and cannot be seen in isolation. In theory, all three phases should be initiated 25-30 years before retirement. However, things are different in practice and many investors start planning 10 -15 years before their actual retirement.
Portfolio construction is a task where "years to retirement" is the key element for formulating a long-drawn strategy . Here, we can set apart the "years to retirement" into five buckets to make it more rational. The first two buckets could be "1-5" years and "6 -10" years and would aim at protection and safety of income, while the next three buckets, i.e. "11-15" years, "16-20" years and "21-25" years, should eye wealth accumulation and nest creation.
Post this, you have to choose asset class investment options for each of the buckets to start on. Based on objectives, as stated above, the first two segments will require fixed assets (annuity) and income (bond and cash assets) as "years to retirement" is on the nearer side. One can fill the next three verticals, where "years to retirement" are far off, with income and growth assets. Here, growth assets play a significant role as the bulk of wealth-creation happens with this asset class.
Traditionally, growth assets include equities and they include large and mid-caps and even alternative assets like international equities small caps. These assets support long-term planning with their inherent advantages, like a route to participate in India's growth story, a hedge against inflation, a large universe to choose from, being light on wallet, getting periodical liquidity and returns potential.
Just to high light the return potential of equities — the sensex delivered 15.5% during 1991-2013 over 10.9% of gold, 8.8% of bank FDs and 9.7% of G-secs (IRR returns — source: CIANS Analytics).
Today, the market offers a host of choices in the name of retirement solutions, but one needs to be guided by theories of individual-profiling, bucketing approach and appropriate assets options based on suitability as a long-term investment avenue, performance behaviour, liquidity window and the tax-efficiency.
One would agree that in the absence of a formal social security system and insufficient retirement planning (by employers and individuals), there is a greater need on our part to assess in advance and follow an all-inclusive retirement planning for a better tomorrow. Since we all have a different financial status in terms of savings, income or life goals, it is always a good idea to consult an adviser or a retirement planner to make a definite choice.
The independent adviser will customize and recommend solutions in a holistic manner.
The key would be to follow a disciplined path within stated timelines towards building sufficient resources for sunset years. Do keep in mind it's no longer a "sit-at-home
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
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