Planning investment option for old age
A lot of people will tell you a lot of things about how
investments can work in your favour. Some will advocate the importance of low
risk investments that give poor returns over a period of time while others will
tell you about high risk investments that can bring handsome returns in a
shorter duration
Having worked for over 35 years, Mr Ajay Malik has chosen to
retire. With just a month away from his retirement day, he is going through the
motions if this decision is financially a good one. He still has a lot to
contribute but given his preference for working for himself in an environment
where there is no pressure to deliver, he has chosen to go easy for a while. He
is apprehensive about protecting his corpus; the corpus should not only create
income for him but should also grow to meet rising expenses in years to come,
technically beating inflation. He has consulted several people but has not
arrived at a conclusion yet.
A lot of people will tell you a lot of things about how investments can work in your favour. Some will advocate the importance of low risk investments that give poor returns over a period of time while others will tell you about high risk investments that can bring handsome returns in a shorter duration. You could be someone who often requires income from investible surplus to manage monthly expenses; or someone who already has a pension to support and whose purpose of investments is to grow the investible surplus in a tax efficient way beating inflation. What should a retired individual bear in mind while planning to protect and optimally grow his investible surplus?
Determine your asset-mix: A diversified portfolio has stood the test of time. We have seen repeatedly that not all asset classes perform well concurrently. Understanding the right mix for you that works to give you a periodic return to meet your expenses throughout retirement phase and also grows in capital value to beat inflation is the key to planning your finance. Figure out the right asset mix of fixed income assets, equity assets, real estate, gold and cash. Diversification does not mean that you buy 10 different assets of the same type. It means buying different asset types with an objective that is determined by understanding your Cashflow requirements and financial goals. Break down your list of assets into assets for income and assets for growth. Choose various asset types and put them into these two categories. Create your Cashflow based on what you need to support your expenses and determine the list of ‘assets for income’. The rest will go to ‘assets for growth’ category.
Keep a tab on your lifestyle expense: Some retired individuals become conservative in their investment approach, attributed to their life changes. While others who could go reckless given the defined benefits they are entitled to. Although, there’s nothing right or wrong with taking a conservative or a risky approach in investments, but depending on facts-based expense data adjusted for inflation should help the individuals to arrive at ‘assets for income’ and ‘assets for growth’ that form the core of their portfolio. With the cost of living increasing every year, inflation adjusted income will only reassure them of a peaceful retirement they have been hoping for.
Put a plan in place for new income(s) & windfall: Once you are clear how your new income sources and lump sum receipts are scheduled, you can put an investment plan in place. You can earmark your income and lump sum receipts back to your ‘assets for income’ and ‘assets for growth’ strategy. A systematic investment plan is one of the most effective ways of investing in equity through mutual funds . Lump sums can be invested in ultra-short term and/or liquid funds. Using systematic transfer plans or systematic investment plans creates cost averaging, instils discipline in an investor and can also limit the amount of loss that he may encounter otherwise.
Be detached & objective: Anybody who’s had some experience with investing would understand that things are not as good as they sometimes seem. A number of inexperienced investors get swayed by their own emotions and end up making the investment blunders. The decision to exit or continue to hold or make a new investment must be objective, determined by the facts and not emotions. To check one’s behaviour one can always engage a professional to arrive at a decision.
Don’t time the market: Some individuals try to time the market. We have seen retired individuals who have time at hand getting into day trading with stocks and in an attempt to be a pro, they feel they have learned the art to time the market. Let’s get this clear - timing the market is not just tough but nearly impossible. Going by broad economic indicators in consultation with a professional can help you determine the right asset allocation, however don’t go beyond that. Identify the list of triggers that would lead you to take portfolio re-balancing actions. Instead of attempting to time the market, an investor should focus primarily on his portfolio by choosing the right investment and asset-mix strategy, setting achievable investment goals and by diversifying his investments.
It’s not just the way you do investments that can be a problem, but also the way you think of them. Have a clear investment plan to protect your assets that you have built with your hard-earned money and take calculated risks to grow them to beat the rising cost of living, thus not compromising on your standard of living.
A lot of people will tell you a lot of things about how investments can work in your favour. Some will advocate the importance of low risk investments that give poor returns over a period of time while others will tell you about high risk investments that can bring handsome returns in a shorter duration. You could be someone who often requires income from investible surplus to manage monthly expenses; or someone who already has a pension to support and whose purpose of investments is to grow the investible surplus in a tax efficient way beating inflation. What should a retired individual bear in mind while planning to protect and optimally grow his investible surplus?
Determine your asset-mix: A diversified portfolio has stood the test of time. We have seen repeatedly that not all asset classes perform well concurrently. Understanding the right mix for you that works to give you a periodic return to meet your expenses throughout retirement phase and also grows in capital value to beat inflation is the key to planning your finance. Figure out the right asset mix of fixed income assets, equity assets, real estate, gold and cash. Diversification does not mean that you buy 10 different assets of the same type. It means buying different asset types with an objective that is determined by understanding your Cashflow requirements and financial goals. Break down your list of assets into assets for income and assets for growth. Choose various asset types and put them into these two categories. Create your Cashflow based on what you need to support your expenses and determine the list of ‘assets for income’. The rest will go to ‘assets for growth’ category.
Keep a tab on your lifestyle expense: Some retired individuals become conservative in their investment approach, attributed to their life changes. While others who could go reckless given the defined benefits they are entitled to. Although, there’s nothing right or wrong with taking a conservative or a risky approach in investments, but depending on facts-based expense data adjusted for inflation should help the individuals to arrive at ‘assets for income’ and ‘assets for growth’ that form the core of their portfolio. With the cost of living increasing every year, inflation adjusted income will only reassure them of a peaceful retirement they have been hoping for.
Put a plan in place for new income(s) & windfall: Once you are clear how your new income sources and lump sum receipts are scheduled, you can put an investment plan in place. You can earmark your income and lump sum receipts back to your ‘assets for income’ and ‘assets for growth’ strategy. A systematic investment plan is one of the most effective ways of investing in equity through mutual funds . Lump sums can be invested in ultra-short term and/or liquid funds. Using systematic transfer plans or systematic investment plans creates cost averaging, instils discipline in an investor and can also limit the amount of loss that he may encounter otherwise.
Be detached & objective: Anybody who’s had some experience with investing would understand that things are not as good as they sometimes seem. A number of inexperienced investors get swayed by their own emotions and end up making the investment blunders. The decision to exit or continue to hold or make a new investment must be objective, determined by the facts and not emotions. To check one’s behaviour one can always engage a professional to arrive at a decision.
Don’t time the market: Some individuals try to time the market. We have seen retired individuals who have time at hand getting into day trading with stocks and in an attempt to be a pro, they feel they have learned the art to time the market. Let’s get this clear - timing the market is not just tough but nearly impossible. Going by broad economic indicators in consultation with a professional can help you determine the right asset allocation, however don’t go beyond that. Identify the list of triggers that would lead you to take portfolio re-balancing actions. Instead of attempting to time the market, an investor should focus primarily on his portfolio by choosing the right investment and asset-mix strategy, setting achievable investment goals and by diversifying his investments.
It’s not just the way you do investments that can be a problem, but also the way you think of them. Have a clear investment plan to protect your assets that you have built with your hard-earned money and take calculated risks to grow them to beat the rising cost of living, thus not compromising on your standard of living.
Moneycontrol.com
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