Importance of Asset Allocation in Retirement Planning

After retirement, every person looks forward to some sort of financial freedom and sufficient financial coverage in the absence of a stable and regular monthly income. The added bills due to doctors visits and regular medical check-ups etc. put an added burden on the pockets and often, the retiree has to rely on her/his hard-earned savings to catch up with expenses and to support the dependent spouse. No retired person wishes to be a financial liability on her/his family and therefore, it s very essential to start planning today for the requirements of tomorrow. In order to achieve the required fund corpus by the time you retire, it is essential that you plan early and take a timely decision. You must list out your projected needs and prepare a plan accordingly. While planning, it is essential to consider the factor of inflation as well because this directly impacts the coverage amount required by you and your spouse after retirement. By then time you retire, there must be a credible financial base for you in place, which will enable you to stay financially stress-free for the times ahead.

It is equally important for you to decide the factor of asset-allocation for creating a retirement corpus after retirement. After all, the overall returns that are generated are in direct proportion to what kind of an investment option you follow. Generally, the investment options may be equity-linked, debt-linked or a mixture of equity and debt-linked instruments. Equity options have the feature of investing in ownership stocks listed by various companies or even in dedicated sectors (for instance, investment in energy or FMCG sector etc.). The debt-linked instruments offer the feature of fixed interest instruments for risk-free and stable returns, while a hybrid instrument gives the option of both the features and offers the scope for a balanced investment portfolio.

Asset allocation defines the quota of fund-allocation towards different investment options. Following are three important parameters that you must keep in mind while allocating your assets towards specific investment options:

1. Equity allocation:

   This is when you allot the bulk of funds towards high-risk and high-return equity instruments. As a rule, if planning late in life, high-risk allotments or investments must be avoided. However, if you are young and planning for retirement, then equity allocation can form an important part of your financial portfolio.

2. Debt allocation:

   Again, the allocation towards debt instruments that offer low-risk returns over a period of time must be done in a balanced manner. Assuming overtly safe routes may not enable you to have a sufficient financial coverage at the time of requirement. However, depending on the kind of required coverage, debt funds must be duly covered under investment.

3. Hybrid or mixed allocation:

   This is considered to be the most viable and the balanced mode of investment, as this enables you to reap the optimum benefits without undue risks. Allocating your funds towards a mixed investment portfolio enables you to ensure a stable rate of growth for your money.

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