Risk appetite holds the key in product diversification

Many a time, when we mention about retirement, the immediate response is about having a secured regular income flow, ideally a constant income for a certain period of time or till one survives. When considered about regular flow, the inflows to be inflation adjusted and in the latter case one may include also of the immediate dependent or spouse, but most of the times, this is the mandate for us to plan for. And to have a ballpark figure of the requirement, there're numerous calculators available for free to show what the corpus required is. Of course, these do assume certain variables like that of the inflation, the longevity of the corpus and the return on the corpus, etc., all the right aspects to be considered.

Retirement planning simply has two phases: Wealth creation or accumulating the desired corpus to the needs and wealth distribution or annuity phase where the corpus is consumed to the needs. For the wealth creation i.e. corpus generation, there's a lot of literature available on the asset allocation strategies, the instruments to be opted for etc. while little emphasis is given on the wealth distribution phase or the annuity phase when truly the management skills would be of higher requirement. Just to paraphrase the needs, there is a huge requirement for tax-efficient nature of the returns out of the amount withdrawn or inflows from the corpus. To just get a sense of what's at stake is that many of us spend a good part of decade-and- half to two decades to create a corpus that should last for at least for two decades from the date of beginning of the distribution. While the idea of generating a large corpus could be done from high yielding assets, it would skew the risks in an untenable way for the investor.

Hence, it's imperative for one to follow a diversification that suits the investor profile, while changing the allocations as the need nears. Life is not like the laboratory test conditions and despite assuming all the possible variables, one might find in an awkward situation due to an unexpected event. This is why asset allocation along with diversification forms the key in wealth generation.

In addition to the systematic investing in equities or other riskier assets, the traditional investments into Public Provident Fund (PPF) or Employee PF (EPF) play a significant impact of creating a larger corpus. The other options are insurance solutions, rental income from property, dividend or interest income from stocks or bonds, etc.

Amounting to a rhetoric, I reiterate that no financial product is good or bad, but should be viewed if they're suitable or not from an investor's perspective. The blind bias to either accommodate or exclude a product is not good for an investor. This is true with the case of insurance solutions, some of which could be employed to the investors' advantage. When the hunger is to generate a consistent regular income, which is tax-free for a lifelong period with a possibility of estate transfer, insurance turns out to be an attractive option. Again, I'm advocating for a measured allocation and stick to diversification as per the risk appetite.

As I mentioned earlier, a solution for consistent regular income coupled with tax efficiency is highly advantageous. Even if someone were to purchase from the secondary market now, the rate (yield) and the tenor (time left for maturity) would be unattractive for an allocation to their corpus. Annuity is considered as income and all incomes are taxed, so despite creating a huge corpus through a high yielding or tax efficient instrument during the wealth creation phase, it needs to be employed to generate the desired inflows. In an ideal situation, the trade-offs among various needs of taxation, liquidity, returns, safety/risk, etc., are done to achieve a concoction in a portfolio is arrived suiting the risk profile, needs and timelines of an investor. One may have allocations across tax-free instruments including those of PF/insurance, high yielding investments (Equity/MF), rental yields, interest and/or dividend income (bonds/MF) and liquid instruments - only the proportion of allocation would vary between the wealth creation and distribution phase.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])