Search
Friday 15 November 2019
  • :
  • :

What is Asset Allocation and How It Affects Your Retirement Plans

What is Asset Allocation and How It Affects Your Retirement Plans

For many people retirement means the end of a regular monthly income, and it can create financial woes along with added stresses and worries of old age. Our old age brings with it additional concerns such as health issues that can translate into hefty medical bills, along with other major obligations that you are responsible for, such as your son/daughter’s wedding, travel expenses and the likes. One also has the responsibility of a dependent spouse or other family members, and that can burn a hole in your hard-earned savings fund. It is important to have a comprehensive financial coverage so that we can sustain ourselves and our families post our retirement, and live a life of peace and independence. This is why when we think about our retirement, we must begin to plan early on. You should invest in a pension plan from the moment you start earning in order to generate a substantial retirement corpus later on. It is also crucial to consider factors such as future inflation rates, investment options and different pension plans that you can choose from; all these factors will directly affect your retirement life and the coverage you will receive to sustain your daily living. To gauge this you can use aretirement planning calculator.

Another very crucial factor in retirement planning is asset allocation for building your retirement corpus. You will receive your overall returns depending on the kind of investment option you choose for yourself. You might choose from among multiple investment choices such as equity-linked, debt-linked, or perhaps a mixture of both instruments. In equity options, you can invest in ownership stocks that are listed in different companies, or in dedicated sectors such as energy, or FMCG. In debt-linked options you can invest in instruments that have fixed-interest and offer safe, risk-free and stable returns. Moreover, if you choose to invest in the hybrid investment option, you can receive the combined features of both and avail a greater scope to build a balanced investment portfolio. It is always better to have done a thorough research before making a decision.

Asset allocation entails allocating your funds in different investment options. When you are allocating your assets towards investment options, you must keep these three major parameters in mind:

  • Equity allocation:In this parameter, you allot the majority of your funds towards high-risk plus high-return equity investment options. This is a great option if you are young and planning for retirement, and still building your financial portfolio. However, this must be avoided in case you are planning your retirement late in life.
  • Debt allocation: If you allocate funds towards debt instruments, you will receive low-risk returns over a period of time. However, you must maintain a balance; overtly safe options might not give you financial coverage when you require it post retirement.
  • Hybrid or mixed allocation: In this parameter, you allocate your funds towards a mix of both equity and debt instruments. This is actually a very balanced investment option, as it provides you the optimum benefits without unnecessary risks. Mixed investment portfolio will allow you to have a stable rate of growth, and is the most viable option available.

There are many retirement investment options out there that can help you generate a substantial corpus in the long run – PPF, EPF, NPS, SCSS etc. However, most of these investment plans generate low returns. What you need is a market-linked instrument that offers the benefits of protection as well as investment, such as a ULIP. Unit-Linked Insurance Plans help you generate wealth in the long run that can help you achieve your retirement life goals. It is a goal-based investment plan that helps you inculcate a savings habit, provides you with life cover and investment opportunities in multiple fund options, provides you with comprehensive tax benefits and helps you get your life goals done.