Financial Planning

UNIT-2
Guidelines for assets Allocation
• What is Asset Allocation?
• Asset allocation refers to an investment
strategy in which individuals divide their
investment portfolios between different
diverse asset classes to minimize
investment risks. The asset classes fall into
three broad categories: equities, fixed-
income, and cash and equivalents. Anything
outside these three categories (e.g., real
estate, commodities, art) is often referred
to as alternative assets.
 Factors Affecting Asset Allocation Decision
• 1. Goal factors
• Goal factors are individual aspirations to achieve a given level of return or
saving for a particular reason or desire. Therefore, different goals affect how
a person invests and risks.
• 2. Risk tolerance
• Risk tolerance refers to how much an individual is willing and able to lose a
given amount of their original investment in anticipation of getting a higher
return in the future. For example, risk-averse investors withhold their
portfolio in favor of more secure assets. In contrast, more aggressive
investors risk most of their investments in anticipation of higher returns. 
• 3. Time horizon
• The time horizon factor depends on the duration an investor is going to
invest. Most of the time, it depends on the goal of the investment. Similarly,
different time horizons entail different risk tolerance.
• For example, a long-term investment strategy may prompt an investor to
invest in a more volatile or higher risk portfolio since the dynamics of the
economy are uncertain and may change in favor of the investor. However,
investors with short-term goals may not invest in riskier portfolios.
•
Example of assets allocation
• Let’s say Joe is in the process of creating a financial plan for his
retirement. Therefore, he wants to invest his $10,000 saving for a
time horizon of five years. So, his financial advisor may advise Joe
to diversify his portfolio across the three major categories at a mix
of 50/40/10 among stocks, bonds, and cash. His portfolio may look
like below:
• Stocks
– Small-Cap Growth Stocks – 25%
– Large-Cap Value Stocks – 15%
– International stocks – 10%
• Bonds
– Government bonds – 15%
– High yield bonds – 25%
• Cash
– Money market – 10%
• The distribution of his investment across the three broad categories,
therefore, may look like this: $5,000/$4,000/$1,000.
•
 Guidelines for assets allocation
• As an investor, you can invest your money in
various assets such as equity, debt, gold, real
estate, among others. The allocation of money
into one or more of such assets is called asset
allocation. The actual mix of assets that you
hold in your investment portfolio depends on the
number of years you wish to allocate to achieve
your goals and your risk appetite.
• Having an asset allocation plan in place helps
avoid making ad-hoc decisions while investing.
Here’s all you should know about it.
• 1. Set Your Goals Before Investing
• Your asset-allocation should not change as per the
expectation of returns from various assets.  Rather, your
asset allocation should be based on your investment
objective, risk-appetite and the years left to achieve the
financial goals. However, based on the actual
performance, you may have to rebalance your portfolio
to stick to the original asset allocation plan to meet your
long-term goals.
• At the start of any calendar or financial year, get clarity
on your financial goals before allocating funds towards
equity funds, debt and gold-backed investments. 
• Remember, the key to generate a high risk-adjusted
return in one’s portfolio is the right asset-allocation. The
final return in your investment portfolio is a function of
the allocation across various asset classes such as
equity, debt, gold, real estate, etc.
•  
 Don’t Juggle Your Investments in
the Short-Term
• The temptation to move money from one asset to another based on
short-term performance should be avoided. If you have already
allocated funds towards assets based on your medium-to-long term
goals, the shorter events need not be given importance. Juggling
between assets and investments incurs cost and may prove futile
over the long term.
• While equity as an asset class has shown a growing momentum,
allocating funds towards it for goals to be met in the long-term
future is ideal. Within equities, equity-oriented mutual funds fit the
bill for a retail investor looking to save for long-term goals. 
• Only those who have goals to be achieved post at least 10 years of
investment should consider equity mutual funds either through
lump sum or the systematic investment plan (SIP) mode of
investment. 
• For goals that are at least three years away, the debt mutual fund
representing the debt asset class can help investors save taxes. 
 Time in the Market is More
Important Than Timing
• To invest in equities, those investors who continued with their SIP
investments even after the market crash last year stand to benefit
over those who tried to capture the lows of the market and
redeemed their investments. 
• New and existing SIP need to continue with their investment simply
because timing the market has not worked well for most retail
investors. 
• More than timing, the “time in the market” matters as SIP investing
brings the best out of volatility in equity backed investments such
as equity mutual funds.
• As an equity mutual fund investor, keeping track of short-term
events may be a futile exercise. Several studies done in the past
have shown that compared to other asset-classes, the equities
deliver high risk-adjusted real return over the long term. Therefore,
to maximize the potential of equities, it is better to link investments
to your long-term goals, with a de-risking strategy in place, to ride
 Consider Taxation To Evaluate Returns
• In 2020, the central banking authority the Reserve Bank
of India (RBI) had cut the repo rate by almost 115 basis
points, thus signalling lower interest rate. Debt funds
across various tenures generated almost 9-12 percent
returns in 2020. 
• This low interest rate may be hard to sustain in the long-
term and hence booking profits from debt funds and
deploying the gains into other assets can be considered
but only after factoring in taxation, especially if the short-
medium term goals are nearing. 
 Diversification of Assets Can Help
Make Better Returns
• Historically, it has been established that performance of major
asset classes is not in tandem over the long-term. The performance
of various asset classes depends on factors that are unique to them.
The economic and other factors that have a positive impact on one
asset-class often result in a downturn in another asset.
• Therefore, if your money is distributed across assets, the likelihood
of your portfolio maintaining its value is high. Diversifying across
assets will help manage risk inherent to specific asset classes. If
returns in one asset class falls, the balance may be maintained by
the better performing asset on your portfolio. Simply put, in the
asset allocation process you are not relying or banking upon any one
asset to perform rather spreading the risk-reward ratio across the
asset classes.
 Bottom Line

• Future is uncertain and it may throw some

surprises when it comes to finances. To
keep fear, uncertainty and doubt at bay, a
robust financial plan in place with a 360-
degree approach towards protection and
investments is important. With savings
earmarked across asset classes in the
right proportion, you can achieve your
long-term goals with ease. 
 Classification of assets
• Equities (stocks)
• Fixed income (bonds)
• Cash.
• Real Estate.
• Commodities.
• Cryptocurrencies.
• Alternative investments.
• Financial Derivatives.
• Stocks
• Also known as equities, buying a stock means that you
are buying a share of that company. In other words, when
you buy a stock you own a piece of a specific company,
which means that its value will rise or fall based on that
company’s performance—or more accurately, investors’
perception of that company, which is really what drives a
stock to go up or down. As an asset class, stocks are
considered to offer greater risk than some other ones,
like bonds, but also have the potential to offer a higher
return. Stocks typically are classified as “large cap”
(those with market capitalizations above $10 billion) or
“small cap,” with large cap considered the more stable.
• Bonds
• Also called fixed income products, bonds are a loan you
offer an issuer, basically an IOU. While most people think
of government bonds, such as treasuries issued by the U.
S. government, or municipal bonds from states and
cities, companies also issue their own corporate bonds.
Though bonds are typically considered a safer
investment, this asset class has variables as well, from
the lower risk U.S. bonds to corporate bonds which offer
greater risk (and thus, again, greater potential reward).
Remember, of course, that no investment is “safe,” per
se—there is always a level of risk.
• Cash equivalents or money market vehicles
• This isn’t just the cash you yourself have on hand. It
refers to short-term loans, typically less than a year,
which pay regular interest. This asset class usually takes
the form of money market instruments like certificates
of deposit (CDs) or promissory notes. These represent
the lowest-risk (and lowest-return) investment of any,
other than actual cash, and are liquid, meaning which
you can tap their value as needed. Their benefit as an
asset class is that they provide safety, such as for a very
short-term need like an emergency fund, while still
offering a better return than you’d get with your money
sitting in your bank account.
• Real estate
• The most common types of real estate are
residential, commercial, retail and industrial,
all of which can be their own investment
vehicles, but are all considered part of the
same asset class. If you don’t want to (or
can’t afford to) own an entire office building
or apartment complex, you can invest in
real-estate investment trusts (REITs), which
means you are buying shares of a
corporation that owns these properties.
• Commodities
• This asset class refers to raw materials that create other products.
Common commodity investments include metals, like gold and
silver; agricultural products, like grain or cattle; and energy, like
natural gas and oil.
• Cryptocurrency
• One of the newest and thus “emerging” asset classes,
cryptocurrency is still a bit of an unknown in the investing world.
While most people think specifically of “Bitcoin,” there are
thousands of other cryptocurrencies, both large and small. For
example, you may have heard of Ethereum or Litecoin, and even
Facebook has made an attempt to launch its own product.
Cryptocurrency is essentially a digital token, esteemed because it is
free of government regulation. When ranking asset classes, this
likely would be one of the riskier ones, since so little is yet known
about how cryptocurrency might react in a crisis.
• Derivatives-The term derivative refers to a type of
financial contract whose value is dependent on
an underlying asset, group of assets, or benchmark. A
derivative is set between two or more parties that can
trade on an exchange or over-the-counter (OTC).
• Derivatives are financial contracts, set between two or
more parties, that derive their value from an underlying
asset, group of assets, or benchmark.
• A derivative can trade on an exchange or over-the-
counter.
• Prices for derivatives derive from fluctuations in the
underlying asset.
• Derivatives are usually leveraged instruments, which
increases their potential risks and rewards.
• Common derivatives include futures contracts, forwards,
options, and swaps.
 Risk Return characteristics of assets
• Stocks (equities)
• Stocks (or equities) are among the oldest and
most widely regarded asset classes in the
investment market. They’re an integral part of
economies in developed and developing
countries and are responsible for a vast amount
of the world’s wealth creation1.
• Average stock return
Often traded via stock exchanges, stocks are low
maintenance and can generate returns much
higher than other traditional asset classes –
since 2007, the average annual stock return is
around 9%2.
• Other factors influencing stock prices
Stock returns depend on the success (or failure) of the businesses you’ve
invested in. A company’s success can depend on multiple things, such as
the strength of its sector, who its competitors are, and the relevancy of its
product or service. Although there are many business and sector-specific
factors that affect stock prices, there are some factors that influence all
stocks:
• Economic
Local or global events such as financial crises, political instability, or
pandemics often impact stock prices.
• Regulatory and legislative
Economic policy and regulatory requirements can quickly impact business
operations, affecting the profitability of companies and, subsequently, stock
prices.
• Inflationary and interest rates
Inflation and interest rates can weaken or strengthen an economy which
affects the profitability of companies and stock prices. Monetary policies
implemented by central banks such as quantitative easing can also drive
market activity, often causing stock prices to increase.
• Analyst ratings
Analyst ratings estimate a stock’s future performance and can significantly
• Real estate
• We need real estate to live and work, and because of
this, it’s an asset class that all investors are familiar with.
Real estate investments are illiquid (not easily converted
to cash) because the acquisition process is often
expensive and time-consuming. However, these
investments can produce rental income (returns) for
many years, generating long-term wealth for investors.
As well as this, a property’s value can grow significantly
over time (capital gains), which further increases the
attractiveness of this asset class for many.
•  
• Average direct real estate return
Since 2007, the average annual direct real estate return
is around 5.2%; however, over time, you can see
significant fluctuations year-on-year3.
• Factors influencing real estate returns
The volatility within this asset class is unique because of the market and
physical (property-specific) factors that influence returns. Due to the
added physical risks of real estate, it’s often considered a riskier asset
class.
• Market and regulatory factors4:
• Global markets
Global financial markets affect real estate returns. A prime example is
the 2009 Global Financial Crisis, when real estate values plummeted,
resulting in massive investment losses.
• Local markets
The supply and demand of properties in local markets change continually,
which influences rental and property valuations.
• Regulations
Regulatory changes such as building codes, zoning, or environmental
rules can make owning a property more expensive or less desirable. 
• Property-specific factors4:
• Physical
Physically, properties require maintenance, which can impact your
investment returns considerably.
• Operational
Managing a property investment can be time-consuming and
expensive but necessary for maintaining a property’s value.
Property values can be negatively affected if not appropriately
managed.
• Financial
Inflation and interest rates can make real estate less or more
expensive to own and quickly affect investment returns.
• Bonds
• Bonds form a part of many traditional
portfolios as they’re mostly low-risk and
provide an easy way for investors to earn
a passive income. In addition, adding
bonds to an investment portfolio can
decrease its overall volatility, especially if
your portfolio includes stocks
• Many factors can influence bond returns, depending on
the bond type; however, there are some factors that all
bonds have in common:
• Repayment risk
The bond issuer (borrower) can fail to make repayments
on time.
• Inflation rate risk
Rising inflation can chip away at bond returns over time.
• Interest rates
When interest rates are low, many investors prefer the
fixed interest rates of bonds, which drives up the prices of
bonds. However, if interest rates rise, the fixed rate offered
from bonds can be less attractive, and bond prices decline
as a consequence.
• Investor perception
Bond prices can decline when people negatively perceive
the bond issuer and its ability to make repayments
 Principles of Assets Allocation
• Cornerstone Principle 1: Market Efficiency
• Market efficiency is the golden principle of all asset allocation
cornerstone principles. Without some degree of market efficiency,
we would not employ asset allocation and would probably focus
instead on security selection. Fortunately, our financial markets are
highly efficient and are becoming even more so as information
technology gets better with time. Underlying asset allocation are
two highly influential and well-known investment concepts: modern
portfolio theory and the efficient market hypothesis. Modern
portfolio theory says that neither investors nor portfolio managers
should evaluate each investment on a stand-alone basis. They
should instead evaluate each investment based on its true ability to
enhance the overall risk-and-return trade-off profile of a portfolio.
Moreover, modern portfolio theory states that when an investor is
faced with two investments with identical expected returns, but
different levels of risk, that investor would be wise to select the
investment that has the lower risk.
• Cornerstone Principle 2: Investor Risk Profile
• Your optimal portfolio is designed based principally on your
willingness, ability, and need to tolerate risk. Consequently, once
your risk tolerance is determined, your optimal asset mix can then
be established in order to maximize your portfolio's return potential.
This concept is expressed as the risk-and-return trade-off profile.
Personal preferences toward risk assumption play a vital role in
determining your willingness to tolerate risk. For example, two
different investors with the same level of wealth and the same
specific goals and needs would each have a different preference for
assuming risk. Your ability to tolerate risk is highly contingent on
your investment time horizon and level of wealth. Generally, the
longer your investment time horizon and the greater your level of
wealth, the more risk you are able to tolerate because people with
longer time horizons and people with greater levels of wealth have
more room for error in achieving their specific goals and needs.
• Cornerstone Principle 3: Identifiable Financial Goals
• Asset allocation is the strategy of dividing the assets within a
portfolio among the different asset classes, seeking to achieve the
highest expected total rate of return for the level of risk you are
willing and able to accept. As a result, knowing why you are
investing and what you are attempting to accomplish is the vital
first step. You cannot hit a target you are not aiming for. When
identifying your specific goals and needs, focus on quantifying and
prioritizing them. Simply saying you need enough money to fund a
college education or support yourself in retirement is much too
ambiguous and not especially intelligent. Identifying that you need
$25,000 per year for four years in tomorrow's dollars or $75,000 per
year in retirement expressed in today's dollars is more appropriate.
Lastly, when identifying your specific goals and needs, ensure that
they are realistic, achievable, and measurable.
• Cornerstone Principle 4: Time Horizon
• Time horizon plays a significant role in estimating asset class returns,
risk levels, and price correlations. Accurate forecasts are essential to
building an optimal portfolio. The primary use of time horizon is to help
determine the portfolio balance between equity assets and fixed-
income assets and cash and equivalents. All else being equal, the
longer your investment time horizon, the more equity investments and
less current income-producing investments you may consider holding.
Conversely, the shorter your investment time horizon, the more current
income-producing investments and less equity investments you may
consider. One common risk that needs to be addressed over the long
term is purchasing power risk, or the loss of an asset's real value due to
inflation. Equity investments may provide the best hedge against this
risk. As a result, the longer your investment time horizon, the more you
may consider allocating to equity assets. In the short term, volatility is
often a concern. Fixed-income investments may provide the best
hedge against this type of risk and may be considered in your portfolio
as well.
• Cornerstone Principle 5: Expected Total Return
• Expected total return is simply your forecast of total return for each
asset class and asset subclass during the future holding period.
While past performance does not guarantee future results, using
historical rates of return in lieu of estimating expected rates is not
only quick and easy but also a prudent approach used by many
financial professionals. Once your risk tolerance has been identified,
you then design your portfolio to maximize your expected total rate
of return for the given level of risk you are willing, able, and need to
assume. This task cannot be accomplished without an estimate of
future returns. This is the essence of the risk-and-return trade-off
profile. Without a clear understanding of expected total rates of
return for each asset class, there is little hope of maximizing a
portfolio's potential performance and building your optimal portfolio.
• Cornerstone Principle 6: Risk-and-Return Trade-off
• Profile The trade-off between investment-specific risk and return is
central to the application of asset allocation theory to an investment
portfolio. Risk and return are unequivocally linked, and one simply
cannot earn an excessive return while assuming a corresponding low
risk. In basic asset allocation theory, the higher your risk tolerance,
the higher your potential returns. You should not assume higher risk
for the same potential return that a less risky asset may offer. The
message here is that you need to build a portfolio with the maximum
expected potential total rate of return given the level of risk you are
willing, able, and need to assume.
• Cornerstone Principle 7: Correlation
• The term correlation refers to how closely the market prices of two
investments, or, in the case of asset allocation, the prices of two
asset classes move in relation to each other. Although not always
the case, most securities within an asset class or asset subclass
tend to move together over time. Of course, there are always
exceptions. Your aim is to allocate investments to asset classes
and asset subclasses that do not move in perfect lockstep with
each other. The greater the difference or the lower the correlation
that two asset classes move together, the more attractive they are
for investment purposes. Since some asset classes experience
strength at one time whereas others experience strength at other
times, it may be appropriate, depending on your tolerance for risk, to
allocate among multiple asset classes at all times. Investing in
multiple asset classes may allow you to avoid serious market and
portfolio weakness. Lastly, by investing in multiple asset classes
with low correlations, you enhance the risk-and-return trade-off
profile for your portfolio.
 Retirement Planning
• Retirement planning is an essential part of
financial planning. An increase in average
life expectancy increases the need for
retirement planning. Planning  for
retirement not only ensures an additional
source of income but also helps in dealing
with medical emergencies, fulfil life
aspirations and be financially independent.
• Before you start planning for your retirement, here are 10
questions you must seek answers for:
• When will I Retire?
• How long will I live?
• What is my monthly basic expenditure?
• What will be the cost of my expenses in future?
• Do I have enough contingency corpus?
• How much should I provide for my health care and
medical needs?
• Do I have adequate Insurance cover?
• What do I own?
• Can I generate cash inflows during my retirement?
• What do I desire to do during my retirement?
 Why is retirement planning important?
• Retirement planning doesn’t mean one should only concentrate on
their finances. Retirement planning requires a combination of
financial and personal planning. Personal planning determines one’s
satisfaction during their retirement.
• Following are the reasons why retirement planning is essential:
• One cannot work forever.
• The average life expectancy is increasing.
• Higher complications, e.g., medical emergencies.
• Best time to fulfil life aspirations.
• Relying on one source of income is risky, e.g., pension.
• Do not depend on children.
• Contribute to the family even during retirement.
• Start planning early and diversify investments.
 Benefits of planning retirement
• Stress-free life
• This is the most significant outcome of retirement planning.
Retirement planning helps to lead a peaceful and stress-free life.
With having investments that earn regular income during
retirement leads to a worry-free life. Retirement is the age where
one has to relax and reap the benefits of all the hard work. 
• Money works for you
• In the younger days, everyone runs after their 9-5 jobs. Everyone
works to earn money and have a good living. However, retirement
days are the days where one cannot work any longer. Therefore, it is
the time when the money one earned should do all the work. To
achieve this, one has to start their investments towards retirement
at a very young age. Starting small also helps in generating
significant returns in the future. Hence a retirement fund should be
a well-diversified portfolio, that’ll have the capacity to generate
returns during retirement.
• Tax benefits
• Retirement planning also helps in tax saving. For example,
 investments in PPF and NSC qualify for tax exemption
under Section 80C of the Income Tax Act. These are long term
investments suitable for retirement. There are a variety of
investment options available for retirement planning at the same
time also qualify for tax saving.
• Cost-saving
• Planning for retirement at a young age will help in reducing the cost.
For example, in an insurance policy the premium amount to be paid
will be lesser when the policyholder is younger. While getting
insurance during retirement becomes costly.
• Inflation beating returns
• Investing in retirement will help in earning inflation-beating returns.
Holding money in a bank savings account will not generate high
returns. In other words, the interest earned will not be enough to
lead an uncompromised retirement. Therefore, proper investment
planning will help one to generate significant returns in the long
term. Also, it is important to start investing early. This helps in
averaging out the impact of market volatility.
 How to plan your retirement?
• One has to start planning for retirement right from the
time they start earning. Starting a retirement fund at
early stages of life will help accumulate a  sufficient
corpus. Moreover, it reduces the burden on individuals
as they are nearing their retirement age. People often
postpone planning for retirement as they think that it’s 30
years away. But investing towards retirement in the early
stages of life when the financial responsibilities are
minimal helps reduce the burden of investing for it later.
• Planning for retirement isn’t rocket science. All one has
to do is follow the steps below:
• Determine the investment horizon
• To determine their investment horizon, one has to decide the age at
which they want to retire. Then calculate the number of years left until
retirement. This is the investable age or the investment horizon for the
investor. Also, investors have to determine until what age they are
planning the expenses for. For example, an investor who is 25 years
old, wants to retire at 60 and wants to plan for expenses until he/she
turns 80 years old. The investment horizon for this investor is 35 years
old. And he/she has to ensure that their current investments should
help them meet their expenses until they turn 80 years old.
• Estimate the expenses
• The next step is to estimate the current expenses. They have to
determine what are the everyday expenses that the investor has to pay
regularly. This need not include child educational expenses or EMIs as
the investor might not incur this after retirement.
• Have a contingency fund for retirement
• Having a contingency fund for medical expenses is a must during
retirement. Medical expenses during the age of retirement can be
expensive. But estimating these can get difficult. Hence, it’s advised to
have an emergency fund for the same.
• Decide on the asset mix
• Investors can take the help of a financial advisor and
decide on the asset classes to invest in. It is suggested
that investors invest in assets that give inflation-beating
returns. Inflation is a significant threat to any investment.
Post inflation, the real return from an investment is lower
than the expected return. Hence investors have to invest in
assets that give returns higher than the inflation rate.
• Start investing early
• Investing in the early stages of life not only helps in
creating a huge corpus. But also reduces the financial
burden of investing a lump sum amount in creating a
retirement fund. By investing at an early age, one is buying
more time for their investments, thus increasing the effect
of compounding on their investments. Also, they can
invest small amounts regularly to reach their target
amount.
• Avoid using the funds kept aside for
retirement.
• One major mistake people make is to use
the money set aside for retirement.
Investors should refrain from using the
retirement fund for a child’s education or
marriage or any other purpose. Instead,
investors can plan out their life goals and
allocate some amount towards it every
month. This way, each financial goal will
have its corpus.
 Golden rules of retirement planning
• One of the most important questions to answer, when
planning our retirement, is how much do we need to
save or invest, to live comfortably in the retirement years.
 As per the National Health Profile published in 2019, life
expectancy in India is 68.7 years. However, it is now
normal to live up to 90 years and we must plan for this
eventuality. What this implies is that we need a steady
income plan for at least 30 years after our retirement. In
addition, we must factor in higher costs on healthcare,
care givers, lifestyle needs of the elderly, and increase in
the cost of living due to inflation. This may sound like a
daunting prospect but with intelligent and early planning,
we can secure our future.
• 1. Plan for more than you may need
• At the cusp of retirement, or earlier, we must have a general idea of our
income needs after retirement. As a rule it’s better to be cautious and
plan for more than we may need. It is important to start with an
estimate of all the expenses. Generally, people feel that they may only
need about 70% of their last drawn income. However, it is prudent to
assume that they may need more.
• 2. The 4 per cent rule
• It is important to know how much income we could draw down from our
investments. The 4 per cent rule was derived by financial planner
William Bengen. According to him, a retiree with an investment portfolio
of 50% equity and 50% bonds should be able to outlive the funds if they
draw down only 4% of the investment every year, adjusted for inflation.
In effect this rule also means that the investments must be long term
and last for 30 years. The 4% rule guides us but is not necessarily
perfect since it relies on past data and not on current market estimates
or future risks.
• 3. Start retirement planning early
• If we use the 4% rule as a guideline, and wish to drawdown Rs 1 lakh
per month after our retirement, it means that our investment corpus
must be at least Rs 3 crore. As with any investment, the earlier that we
start our investments, the better the yields. As a rule, we should
definitely start retirement planning and creating a retirement
investment portfolio as early as in our 20s. Compound interest on our
early investments add up to significant multiples. However, if we
haven’t started investing from an early age, we must invest significantly
more to achieve the Rs 3 crore target.
• 4. Invest in real estate
• One of the best ways to create a guaranteed income stream is to own
property and lease the property to earn a rental yield. In case of
multiple assets, the rental income is higher. In fact, many seniors lease
out their residences and move into a senior care community. Since
rents increase every year, this form of income also helps stay ahead of
inflation. So, it is prudent to invest in property when we are younger and
create a steady and guaranteed income stream. In addition, we can
also sell the real estate asset and create an addition corpus for
investment.
• 5. Reverse mortgage
• Another way of creating an income stream from property is
to opt for reverse mortgage. Reverse mortgage is not very
popular in India. However, it is a good solution for creating
an income stream.
• 6. Senior Citizens Saving Scheme
• Public sector banks such as SBI have an investment
scheme for senior citizens. This account is applicable for
seniors above the age of 60 years, with an investment of up
to Rs 15 lakh and offers an interest of 8.6%. The scheme
qualifies for tax benefits under section 80C of the Income
Tax Act. Though the interest earned is taxable, the scheme
offers one of the highest interest rates.
• 7. Monthly Income Scheme at Post Office
• This investment scheme offers a guaranteed return of
7.7% per annum, offers a monthly fixed income, keeps
the initial capital intact and yields better results than
other debt instruments. The scheme also provides for a
recurring deposit into which the income can be parked.
This accelerates savings. The maturity period is 5 years.
There is no TDS for this scheme but the interest earned
is taxable. The scheme does not qualify for tax benefits
under section 80C of the Income Tax Act.
• 8. Mutual funds
• It is also prudent to invest in mutual funds. These
investments have higher liquidity and allow the investor
to earn a steady income. They carry lesser risks than
investing in the primary market and yet offer good
returns on investment.
• 9. Pension Funds
• In addition, seniors should invest in pension funds and saving
schemes. Though these investment options are low risk and help
them preserve their capital, they also offer much lower returns.
• 10. Investing in a senior living community
• It is a known fact that costs of living increase as we get older,
especially after retirement. The increase in costs of living may
include hiring caregivers, higher healthcare costs, physiotherapy,
security and lifestyle services.
• It is, therefore, prudent to invest in a senior living community. At a
senior living community, the community is sharing the resources
and its costs. Therefore it is easier to live a better lifestyle, in
comparison to living alone. In addition, offering healthcare facilities,
quality housekeeping, chef prepared meals, curated wellness
programs, sports and recreation facilities would be difficult to
support financially by an individual. Also, higher security, trusted
employees and staff who are specially trained to look after seniors
are an added advantage. This would be expensive to replicate at a
standalone residence.
• It would be difficult to provide additional services such as senior
focused concierge services, legal and administrative planning, valet
 Why Do You Need Retirement Planning?
• It is easy to cover your expenses as long as you are
earning your monthly salary. But post retirement, you need
to have enough money set aside to live the rest of your
life and maintain a good lifestyle.
• To cover daily living expensesAll of us have to bear the
necessary living expenses even after retirement. Because
life moves on and the absence of our monthly income
could become a nightmare.
• Retirement planning is working towards avoiding this
nightmare from becoming a reality. Not many people get
pensions or gratuities post retirement and even for those
who do receive them; the amount is generally not big
enough to cover all of their expenses.
• By planning and building a sizeable retirement corpus, you
can ensure that your family's standard of living is not
compromised post retirement.
• To cover medical expenses As one's age progresses, the number of
health issues and emergencies also increase. And as you might be
aware, medical expenses bear the potential to create a huge hole in
your pocket. In fact, these days even dental treatments can cost you a
small fortune.
• Mediclaim or health insurance policies sometimes may not cover all
your medical expenses.
• Therefore, your retirement corpus must be large enough to cover your
and your family's medical expenditure to avoid a financial crunch in the
later years of life.
• To fight inflationInflation refers to the rise in the prices of goods and
services. It erodes the purchasing power or value of your hard-earned
money.
• You see, there has been constant rise in price of goods and services
and it will continue to be on a rise until you reach the retirement age.
• This means that you would have to pay more for everything in the future.
From grocery to travel to accommodation, it is all going to cost you
relatively more in the future.
• Without a sound retirement plan, that aims to establish an adequate
retirement corpus accounting for inflation, life expectancy, rate of
return, and so on; it would be impossible for you to achieve all your
retirement goals.
• To deal with uncertaintiesLife is quite unpredictable and uncertain.
It can sometimes throw us in adverse situations and circumstances
which we may not have expected.
• Some situations have the power to create a financial as well as
emotional turmoil in your life such as natural calamities, loss of
loved ones, financial difficulties in the life of family members, and
so on.
• Having a significant sized corpus to take care of such contingent
events can always come to your rescue.
• Thus, while you approach retirement, it is imperative that you have
a sufficient contingency fund, so that the intermediate period of
turbulence and turmoil can be managed better and not hinder your
long-term goal of retirement.
• To meet your retirement goals Retirement goals are the objectives
that you wish to achieve in your retirement years. These could be
travelling and exploring new places or taking up hobbies that you
have always wanted to pursue.
• However, if you do not plan and save for all these retirement goals
in your working life, they cannot become a reality in your post
retirement years.
• Hence, it is absolutely essential to have a strong Retirement Plan
 The Best Approach To Retirement Planning
• It is important to understand why many fail at retirement planning. And
one big reason is, they start late.
• At times, individuals are unable to set aside the requisite amount of
money needed for their retirement. They can contribute only a part of it,
not all. As a result, they end up postponing their plans.
• In our view, this is a wrong approach.
• Instead, the right course of action is to start off with what you have and
make up for the deficit at a later stage. On the other hand, if you decide
to simply wait for an ‘opportune’ time, it might be too late by the time
you start.
• Another reason for failing to start is that a significant amount of money
is often spent on providing for one’s present lifestyle, i.e. shopping and
entertainment binges, leaving very little for retirement.
• While the importance of satisfying present needs cannot be denied, it
does make sense to take care of your future as well. Ideally, one must
strive to strike a balance between the two.
• Finally, perhaps, drawing up a strong retirement plan and saving for the
eventuality – retirement. Maybe the thought of growing old and leading
a rather sedentary lifestyle brings with it a certain degree of discomfort
 Steps Of Retirement Planning
• Step 1: Decide Your Retirement Age
• The most common retirement age is 60 years, but it may vary from
person to person.
• Some may wish to work beyond 60 years of age, while a few even
wish to retire at 55 ––basically it's a matter of choice.
• Estimating your retirement age is an important step, because after
this age your regular income stream will stop or at least reduce
considerably (in case you are eligible for pension). You will have to
depend on your savings and investments to take care of your
retirement needs.
• This is also the timeframe you are left with to plan for retirement.
• For instance, if you are 25 years old and you wish to retire at the age
of 50 years, then years to retirement = 50-25=25years.
• One of the important factors while deciding your retirement age is
the life expectancy rate. In other words the estimated number of
years you are expected to live based on the age, medical condition,
family history and other demographic factors.
• Step 2: Start Early To Retire Peacefully
• Like any other goal, start planning your retirement as soon as
possible. With several years in hand, you have time and the power
of compounding in your favour.
• Never delay retirement planning or else you might have to
compromise your goal. Worst case you might have to be financially
dependent on your children or family. Hence, start early, start now.
• Most individuals who are in their 20s and having recently started
earning might think that retirement is a distant reality. For them,
planning for retirement at this early age may seem like being overly
cautious.
• However, it is imperative for you to recognise that being young
provides you a benefit that is not available to all, 'time'.  As it is said, "
the early bird gets a bigger pie".
• Beginning to invest early in life will enable you to accumulate the
necessary corpus required on without much stress. And it gives you
a peace of mind.
• And if you are in your 30s and haven't even started planning for
retirement, then it is still not very late. You still have many years to
work, earn and save for your golden years. But make sure you do it
• Step 3: Determine Your Retirement Corpus
• Retirement corpus is the amount you require post retirement to meet
your expenses and continue with the same lifestyle and maybe pursue
your other personal goals.
• For this, first ascertain your annual expenses at present.
• For that you need to first write down monthly expenses on various
categories such as household, medical, entertainment, travel, EMI, and
children's school/tuition fees, and so on.
• So, it is important that you make an accurate estimate of how much
amount you will require, to maintain your present lifestyle after you
retire.
• Then factor in inflation to calculate how much your present expenses
will amount to at the time of retirement. This is referred to as future
value of money.
• This is the amount you will need every year to meet your post-
retirement expenses.
• For instance, Mr. X is 35, wants to retire at 60, currently spends Rs. 75,
000 a month on household and other expenses and spends about Rs. 5
lakhs a year on travel and medical.
• He assumes household inflation is 7% per year both pre and post
• Step 4: Calculate The Future Value Of Your Current Savings
• How much you are able to save every year, after meeting all your
expenses, plays a crucial role in building your retirement corpus.
• Your saving is the surplus amount that is left after deducting your
annual expenses from your net salary.
• The ideal way is, to earmark a portion of your savings towards
retirement. This part of your saving should be treated as sacred and
should not be disturbed unless it is very urgent.
• After estimating how much amount you will be able to save
annually towards your retirement corpus, the next step is to find out
its future value.
• To determine this, you have to factor in the expected rate of return
on your investment. This is the value of your savings or investments
at the time of retirement.
• For instance, if you are able to save Rs 100,000 annually for your
retirement, and you invest this amount in an avenue, which earns
you 10% rate of return p.a., then after 25 years, you will have a
retirement corpus of approximately Rs 9,834,706.
• Step 5: Cut Down On Unnecessary Expenses
• If you are unable to save now to reach the target, cut
down on avoidable expenses. Some of the avoidable
expenses are your weekly entertainment, impulsive
purchases, dining out, foreign vacation, etc.
• Cutting down on such expenses can help you invest
more and reach closer to your targeted corpus.
• Step 6: Plan And Create An Ideal Portfolio Seeking Help Of A
Financial Planner
• Depending on your current age and the risk that you can afford to
take, you should define a standard allocation to each asset class.
• It is important to have a diversified investment portfolio across the
asset classes.
• Some assets like equities have the ability to offer you a better
inflation-adjusted return (also known as real rate of return) than
fixed income instrument can provide safety. Gold can be a store of
value and act as an insurance in your portfolio.
• If you see a swift rally in any of the asset class, and the deviation in
your asset allocation, you can timely rebalance by reaping the
benefits from the respective asset class and moving it to other
asset classes.
• Do not forget, every asset class may not be suitable for you. At the
same time, you should not be over exposed to a single asset class.
• As retirement planning is an exhaustive exercise, seeking help of
financial planner can go a long way. But take care to opt for an
independent, honest, unbiased, and a competent financial planner
who will handhold in every step to plan your retirement.
• Your financial planner should be able to come up with a relatively
• Step 8: Track And Review Your Plan
Regularly
• Your retirement plan needs to be
monitored at regular intervals (at least
once a year) to make sure you are on
target to meet your objectives. Any
changes in the income, expenses,
retirement age, etc. needs to be
incorporated in the retirement plan.
• Also, make sure the retirement plan meets
your investment objectives in the
changing market scenario.
 Best Investment Plan for Retirement
• The percentage of senior citizens in India is
proliferating, and it is expected to reach 20% of
the overall population in 2050. As the older
people population continues to increase, one of
the growing concerns for them is retirement
savings.
• It is paramount that you think of investment
options that could help you build a corpus for life,
and protect you against the imminent inflation
that comes with it. For retirees, they must make
the best use of a corpus that allows them to
save taxes and earn a regular stream of income.
 Best investment plans for retirement
• NPS - National Pension Scheme
• An initiative by the Central Government of India and the
Pension Fund Regulatory and Development Authority
(PFRDA), NPS is a long-term investment plan for
retirement. A subscriber can regularly invest during his/
her working life, withdraw a corpus in a lump sum and
use the rest of the corpus to invest in an annuity to
procure regular income for retirement. Any Indian citizen
in the age of 60 can subscribe to NPS.
SIP - Systematic Investment Plan
• SIP is one of the best ways to invest in mutual funds for
retirement planning. Private sector employees often plan
for their retirement with SIPs as it helps to accumulate
and compound wealth affordably. SIP is a systematic
approach to investing in mutual funds. There is no
minimum requirement for SIP investment.
• PPF - Public Provident Fund
• PPF is a long-term, government-backed investment plan that offers an
attractive interest rate and returns. You can open a PPF account at any
nationalised bank or post office. It has a minimum tenure of 15 years,
and you can start investing as low as Rs.500. PPF offers risk-free
returns. Any Indian citizen can invest in PPF, except for HUF (Hindu
Undivided Family) and NRIs (Non-Resident Indians).
• FD - Bank Fixed Deposits
• This is a trusted investment plan that has existed for a long time in
India. The long-term account allows you to deposit lump sum money
for a fixed period and offers assured returns. The interest rate is fixed
at the time of opening the account, and it remains the same throughout
the tenure. The account offers guaranteed returns. As compared to
standard FD schemes, senior citizens are eligible for higher interest
rates that range from 3.50% to 8.50%.
• Tax-free Bonds
• These are long-tenure bonds wherein the maturity period ranges from
10 to 20 years. It is an ideal retirement investment plan that fares well
as against the debt funds and fixed deposits. These bonds are
recommended for those looking for regular income during the
retirement phase.
• SCSS - Senior Citizens’ Saving Scheme
• Banks and Post Offices offer SCSS, which has a 5-year
investment plan. However, you can also extend it for an
additional three years. As compared to all other fixed
income tax products, SCSS offers the highest post-tax
returns. This scheme is available only for senior citizens
and to early retirees.
• Post office monthly income scheme
• POMIS is a highly reliable investment product under the
purview of the Finance Ministry. It is a low-risk plan that
guarantees steady income generation. The plan has a
maturity period of 5 years, and you can start investing in it
with an initial investment of Rs.1500. You can visit the
nearest post office to initiate POMIS. Any Indian citizen
can open a POMIS account. All the investment plans,
except for POMIS & Tax-free bonds, are subject to tax-
benefits.
 What is Estate Planning?
• Estate planning is a type of agreement where a person
decides who will own and manage their assets once the
person is deceased or incapacitated. Estate planning is
important, as it eliminates the burden of legal heirs having
to bear the taxes of transferring the assets had the estate
not been planned. In case the beneficiary is a minor, a
guardian is assigned until the minor becomes 18 years old.
• Estate planning helps an individual to plan on who will
own or manage their assets when they are alive or after
their death.
• The beneficiaries have their burden reduced as the
transfer and other taxes are reduced, which reduces the
amount of money being taken away from the estate.
• Without estate planning, it is possible that immediate
family members will be the last in the segregation of
assets.
 Parties Involved in Estate Planning
• 1. Settlor/Grantor
• A settlor is an individual who creates the estate and is the owner of
the assets in the estate planning. They create a trust to hold the
assets on behalf of the beneficiary or legal heirs. The beneficiary
can be an individual or a group of individuals.
• 2. Trustee
• A trustee is appointed by the grantor to look after the assets in the
trust. They are paid for their time and service out of the trust funds.
The trusts are run like a business, where the trustee can make any
revenue-generating decisions in growing the trust.
• 3. Beneficiaries/Heirs
• Beneficiaries are the ones for whom the assets are planned for. It is
stated in the agreement, which is managed by the trustee. If they
find the trustee to be unfit to manage the assets, they have the
legal right to replace them.
• Importance of Estate Planning
• 1. Plan how the assets are to be segregated
• In the absence of an estate trust, governments may
decide on the allocation of assets. It could mean that a
friend or a non-family member could get the assets
ahead of the immediate family members. Hence, it is
important to plan the allocation of assets so that the
right people who the grantor of the estate planning
deems to be the beneficiaries are allocated the assets.
• 2. Proficient and faster transfer of assets
• Without a plan, many estates take a long time to settle,
as disputes may arise among the family members on the
allocation of the assets. Hence, it is important to have a
plan in advance so that the estate can be transferred
proficiently to the beneficiaries.
• 3. Plan how assets are managed during their lifetime
• Estate planning can also help an individual in deciding
who will manage and own the assets when the grantor is
alive but is not in a position to manage the assets due to
an accident or illness.
• 4. Reduce fees and taxes
• As mentioned above, without an estate plan, there can
be a lot of fees and taxes involved in the transfer and
segregation of assets. Hence, with an estate plan, the
grantor can reduce fees and taxes, which will help avoid
more money being taken out of the estate to pay the
said fees and taxes.
 Types of Estate Planning Trusts
• 1. Revocable Trust
• A revocable trust, as the name suggests, can be
adjusted, revised, or canceled completely. These types
of trusts are beneficial to the grantor, as it avoids any
legal battle. However, the creditors of the grantor can
have access to the estate by getting a court order.
• 2. Irrevocable Trust
• An irrevocable trust cannot be adjusted, revised, or
canceled once the grantor transfers the assets to the
trust. However, the grantor can take a second to die/
survivorship life insurance, where the beneficiary gets
the payout only when all the insured parties are dead.
Also, since the beneficiary gets the payout only on the
death of the insured, it could lead to criminal offenses
like murder.
• Apart from revocable and irrevocable trusts, below are other types
of trusts set up in estate planning:
• 1. Asset Protection Trust
• While in a revocable trust, a creditor can get access to the estate by
court order, an asset protection trust protects the grantor from this
type of risk. After transferring the assets to the trust, the grantor or
trust maker doesn’t become the beneficiary.
• Hence, the funds are protected from any creditor attacks. Once the
trust is terminated, the assets are given back to the grantor.
• 2. Charitable Trust
• A charitable trust is beneficial to the trust maker, as it reduces or
avoids paying taxes. It also helps when the trust maker owns very
high-value assets. By putting the high-value assets in the charitable
trust, they avoid paying huge taxes and also receive a huge payout,
while a portion of it goes to charity.