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Home Learning Centre FAQWealth and Asset Allocation

Wealth and Asset Allocation

What is wealth?

Wealth is the difference of value between what you own (assets) and what you owe (liabilities). Wealth enables you to achieve your financial goals by increasing your assets and decreasing your liabilities. It is the overall reserve of assets (cash, fixed assets, savings etc.) which you have after meeting your liabilities.

How does Retirement Planning help in accumulating wealth?

A well-conceived retirement plan ensures you meet your expenses adequately at various stages of your life including your liabilities and contingencies. Wealth creation is a lifelong process and so is retirement planning. Accumulating wealth and simultaneously incurring cost for meeting your needs warrants that you have proper wealth creation and management strategies in place. Retirement Planning is one of the most important strategic exercises that you need to do to accumulate wealth.

Are regular / traditional savings like PFs, PPFs, EPFs etc. not enough to take care of life after Retirement?

No,regular savings including PFs, PPFs, EPFs, bonds or any debt instrument are not enough to see you through your life after retirement.  The returns from these regulardefault investments are guaranteed but low in comparisonand are not sufficient to beat inflation and market volatilities. Besides, the quantum of savings made in these instruments might not be enough if future requirements are not carefully considered and planned for.

Can retirement planning beat inflation?

Inflation can erode your retirement corpus and diminishthe purchasing power of your savings. It’s necessary to absorb the impact of inflation with a sound and prudent Retirement Planning strategy in place. It’s important to make realistic projections for the rising rate of inflation and adjusting your savings accordingly. Seek professional / expert advice to create an investment portfolio which gives you higher returns and helps you meet rising costs and inflation.

What is asset allocation?

Asset allocation is essentially an investment strategy to stabilize risks and returns by choosing investment instruments according to your financial goals, risk tolerance and time horizon. Asset classes have different levels of risk and return variability. Each asset class may perform differently over time. Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk.

Why is asset allocation critical for retirement planning?

Asset allocation is critical for long-term investing and retirement planning as it can help absorb the impact of market fluctuations and balance your tolerance for risk.  A downside of a specific asset class is usually neutralised by an upside of another asset class. This way you can enjoy the upside and de-risk the downside to a great extent. Asset allocation is one of the most important steps in retirement planning and research has shown that 90% of returns are on account of asset allocation decisions.

How can asset allocation absorb the impact of market fluctuations?

Prudent asset allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single asset allocation strategy may be right for everyone. Some investments may be up while others may be downhelping minimize the overall potential impact of market decline and enable you to reach your retirement goals smoothly.

How can I balance my risk tolerance?

High-yield assets typically experience high volatility. You can balance these assets by investments with lower but guaranteed rates of return (like debt or sovereign instruments) to protect against large scale decline in value.

How do I go about my asset allocation?

Prudent asset allocation can help you balance your appetite for risk within your timeframe and retirement goals. This requires assessing, adjusting and tracking your investments regularly.

  • Assess your portfolio — Assess your portfolio allocation regularly to make sure it matches your risk tolerance, time horizon and retirement goals and needs.
  • Adjust your allocation — Adjust your allocation mix and re-align it to your retirement goals based on your risk tolerance and investment horizon.
  • Track your investments — Revisit your asset allocation regularly to make sure your investments are aligned with your retirement goals, since your investment timeframes and risk tolerance may change over time.
How often do I need to check my asset allocation?

A 3-6 monthly financial check-up for the short term and a three-year long-term horizon check to make sure your investments are aligned with your risk tolerance and long-term retirement goals is usually recommended. However, you need to review your portfolio when you anticipate a major life-event.

How do I ensure that my retirement savings do not erode over time?

You would be required to do the following:

  • Make a realistic assessment of your existing wealth and risk appetite based on your life-stage.
  • Perpetuate your income ladders.
  • Make wise investments and stay invested.
  • Make wise choices and do not overestimate or underestimate your options.
  • Be prudent and disciplined with your finances.
  • Seek professional advice.
How do I continue building wealth even after retirement?

It is necessary to continue building wealth even after you retire. Some of the ways to make more wealth out of your preserved wealth are:

  • Reinvest in annuities, debt instruments and equity investments.
  • Avail tax free investment options as far as possible.
  • Invest in debt funds with dividend options.
  • Take all tax breaks available under senior citizen schemes.
  • Seek professional advice.

Have a question? Write to us at inquiry@principalindia.com.


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