Generate positive returns on your assets to set you up for post-retirement happiness


As the COVID-19 pandemic has wreaked havoc on the personal finances of a large portion of India’s population, it has served to underscore once again the importance of financial planning to meet such demands. With rising inflation and a low interest rate regime weighing on household financial savings, planning for the future has become a complex challenge for those who have relied on investment advice until now. traditional. This requires a balanced approach when allocating savings between safer debt instruments like term deposits and riskier asset classes like equities. In addition, performing a periodic assessment of one’s debt level and reviewing the performance of the investments made assumes a greater role in the quest to generate positive long-term returns.

Let’s look at the fundamentals that, if followed, can positively impact your net worth and lay the foundation for a comfortable life after retirement.

Understand how inflation affects the value of money is essential to set milestones to be reached during the different stages of life. Even a single-digit rate of inflation can erode the real value of savings and returns generated on assets, causing either a reduction in current spending levels or a dramatic increase in the flow of income. Therefore, as a general rule, it is essential to carefully evaluate the current inflation-adjusted rate of return on the deployed assets and to modify one’s investment strategy accordingly to achieve financial freedom. Additionally, a persistently high rate of inflation can encourage people to spend on items that lose value more slowly, further impacting the capital available to invest in better financial products or assets that have a higher potential to generate positive returns. This calls for a periodic review of the corpus needed for retirement and the capital needed for impending expenses. Consulting a financial planner is the most crucial step towards financial independence.

As you age, the importance of paying off your debts cannot be stressed enough, especially for those who depend on a single source of income or who have dependents who are entirely dependent on it.

Goals like buying a house should be done early to gradually reduce debt levels over time. Discretionary spending involving the depreciation of assets such as vehicles should be avoided unless excess funds are used rather than financing them by incurring additional debt. It is essential to be disciplined to avoid increasing interest costs and to ensure the preservation of capital in order to pursue more important objectives. For dual-income families, it’s prudent to effectively use excess capital to reduce debt rather than investing it in high-risk asset classes like cryptocurrencies in hopes of hitting the jackpot. This strategic approach to reducing the overall debt burden will help build future income as more capital is freed up closer to retirement.

Debt instrument allocation planning is crucial for keeping capital aside for short-term but essential goals. For example, planning a family vacation or buying a vehicle can be done using financial instruments such as fixed deposits and bonds that can be liquidated in the short term. For larger expenses such as your child’s college education or wedding expenses, a public provident fund (PPF) or investing in government guaranteed savings schemes with a longer lock-in period is ideal considering tax benefits on accrued interest income. For other expenses such as children’s higher education or wedding expenses, investments should be undertaken in debt programs or mutual fund programs, with a clear focus on long-term investing . Withdrawals from the PPF, whether partial or whole, are exempt from tax under Section 80C of the Income Tax Act 1961, making the entire accumulated amount available for use. On the other hand, a fixed deposit with a similar investment term would incur tax charges on interest income and could significantly reduce the overall returns generated for those in the highest tax bracket.

Adopting a Cost Averaging Approach When Investing in Stocks has proven to be the best long-term investment strategy, either directly or through mutual funds. This involves allocating a fixed monthly amount to equities and not worrying too much about short-term price volatility in stock markets. At the same time, it is advisable to repay the invested capital while retaining the profits in the markets to minimize risk and stress levels during bearish phases. With regard to the amount of capital allocated to equities, it makes sense to gradually reduce the allocation as age advances in favor of less risky debt instruments. Taking such a balanced and disciplined approach when investing in the stock markets has paid off over time, a principle embraced by renowned investors who have created immense wealth over the past few decades.

Allocating excess capital wisely, adopting the right instrument for each objective or need, understanding the tax implications on accrued returns, and investing prudently in equities are key to maximizing the chances of generating positive returns over time. Good financial and tax planning is paramount to achieving financial independence before retirement, which makes the case for a much stronger dedicated advisor and worth the extra expense. After all, the key to generating wealth is how hard your money can work for you, and a clear plan to get there.



The opinions expressed above are those of the author.



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