The importance of retirement planning and proper asset allocation cannot be underestimated for long-term financial stability, given that a large section of India’s population is underpaid or receive inadequate social security, said Puneet Sehgal of SBI Mutual Fund during a session of Outlook Money’s 40After40 Retirement Expo in New Delhi on Saturday.

Puneet emphasised that retirement planning is essential for ensuring financial security. It involves three key components: assessing your financial goals to understand what you want to achieve in retirement, estimating future expenses to prepare for your financial needs, and determining how much you need to save and invest to meet those goals. By addressing these aspects of retirement planning, individuals can take proactive steps toward securing their financial future.

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What is Asset Allocation?

Sehgal defined asset allocation as a prudent strategy that helps balance risk and return in an investment portfolio. He listed the following asset classes to consider: equities, which are stocks that offer growth potential; debt, which refers to bonds providing a steady income; gold, as a traditional hedge against inflation; and property, including real estate investments, for potential appreciation.

Key Benefits of Asset Allocation

Sehgal outlined several critical benefits of asset allocation:

1. Risk Management: Different asset classes react differently to market conditions. A well-diversified portfolio can significantly reduce overall risk.

2. Potential for Growth: Allocating a portion of investments to higher-risk assets like stocks can provide greater growth potential over time.

3. Inflation Protection: Growth-oriented assets, particularly stocks, can help portfolios outpace inflation, preserving purchasing power during retirement.

4. Income Generation: Investments in bonds and dividend-paying stocks can offer a steady income stream, which is crucial for retirees.

5. Personalisation: Asset allocation can be tailored to individual risk tolerance, investment timelines, and retirement goals. Regularly reviewing and rebalancing ensures that investments align with changing needs and market conditions, keeping investors on track for a secure retirement.

Different Approaches to Asset Allocation

Puneet discussed two main approaches to asset allocation:

1. Strategic Asset Allocation: This approach involves holding a passive, diversified portfolio without frequent changes based on market conditions. Sehgal noted, “You just hold, add money, and rebalance.”

2. Tactical Asset Allocation: This strategy allows investors to adjust their asset allocations based on current market conditions and economic forecasts.

Key Parameters to Consider When Investing

Puneet highlighted many key variables to consider when making investment selections. The first factor is returns, which refer to the investment’s expected profitability. The next category is risk or volatility, which determines the risk associated with each asset. Capital protection is also essential, with a focus on investment preservation. Liquidity guarantees that investments may be readily turned into cash as needed. In the end, tax efficiency includes picking assets that maximise after-tax earnings. Keeping these traits in mind allows investors to make more educated selections that align with their financial goals.