Over here, we have highlighted how an asset class can help you realise your financial goal. Note the role of each asset class will depend on your age and investment profile and there is no one size that fits all.

Equity is a very attractive investment avenue if one is investing for such a long period of time. Now it may seem pretty dangerous to invest your retirement planning money in the stock markets but don't jump to conclusions just yet.

Investing in the stock markets can be done in two ways  directly by purchasing stocks of companies listed on the stock exchanges or indirectly by buying units of mutual funds, which in turn invest in the stock markets. Investing directly in the markets is advisable only if you are adequately experienced to make an investment call (alternatively you can use an investment advisor, but this will cost you a bit). In most cases it is advisable to invest in mutual fund units.

Investing in mutual funds too is not a risk free exercise and some home work needs to be done before the actual investment is made. Download Guide. One of the better options is to invest in an index fund (funds which invest in stocks which form a part of an index such as the NSE  50). Index funds have several advantages over the regular diversified funds

• Since there is no need for an active fund manager in such schemes, the expenditures are much lower  this in effect adds to returns
• The fund manager is unable to use his discretion in investing in stocks  thus the risk of his making a wrong call is eliminated
• Finally, returns generated by an index fund track the markets very closely. Over time returns generated by low cost index funds tend to compare well with the more expensive diversified funds.

What is the kind of returns you can expect from equities over a period of time?

Diversified Equity Funds	NAV (Rs)	1-Mth	6-Mth	1-Yr	3-Yr	5-Yr	Incep.
FRANKLIN PRIMA FUND G	28.1	6.1%	-3.8%	31.1%	-2.2%	26.0%	12.1%
ZURICH I EQUITY G	21.8	8.8%	-4.1%	13.5%	0.1%	27.8%	11.0%
FRANKLIN I BLUECHIP G	22.4	11.2%	-0.5%	11.7%	0.3%	27.6%	21.3%
FRANKLIN PRIMA PLUS G	22.8	8.2%	-1.7%	9.7%	-4.4%	27.5%	11.9%
TEMPLETON GROWTH G	12.6	8.3%	-4.5%	3.7%	2.1%	9.4%	5.7%
ALLIANCE EQUITY G	24.9	11.9%	-8.6%	0.3%	-9.7%	NA	22.9%
BIRLA ADV FUND A	23.5	6.8%	-11.4%	-3.1%	-20.1%	21.9%	15.3%
IDBI-PRIN INDEX (Nifty)	8.3	11.3%	-0.1%	-3.4%	-9.4%	NA	-6.0%

(NAVs as on December 11, 2002. Returns over 1-Yr are annualised)

The other investment avenue is Fixed Income securities like bonds and deposits. Here one needs to keep in mind that in such investments, the capital does not grow i.e. an investment of Rs 100,000 in bonds at face value will yield the same Rs 100,000 at maturity. The benefit that will accrue in such investments is the interest income, which can be reinvested to benefit from the compounding effect.

Provident Funds fall in the fixed income category. At present such investments yield very attractive tax-free returns. But here again the financial viability of such schemes is in doubt given the constant decline in interest rates (even as returns announced year after year stay stubbornly high). One should not go overboard with investments in the PPF.

Instrument	Return (p.a.)	Tenure (Yrs)
HDFC FD	7.80%	3
Kotak Mahindra FD	8.25%	3
IDBI (Suvidha Deposit)	8.75%	3
NSC	9.00%	6
8% Relief Bonds	8.00%	5

The other major investment avenue is life insurance and pension plans. The attractiveness of investing in life insurance is two fold –

• An unforeseen eventuality takes care of your dependents needs
• In case you were to live through the duration of the policy, you get tax-free maturity benefits.

Returns generated by life insurance policies may not be attractive, but as mentioned, they help take care in case any unforeseen eventuality were to take place.

However, there is one insurance product in the market today that is becoming increasingly popular  the savings bond, and rightly so. The reasons are not far to seek.

Let's take the example of the HDFC Standard Lifes product. Here the investor has to pay 95% of the sum assured as premium. The main attractions are -

• tax free returns
• Returns are compounded annually (this makes effective returns more attractive)
• It basically functions as a balanced mutual fund, which has a down side protection i.e. the capital amount is guaranteed. Also, once the bonus for a year has been declared and attached to the policy, it is guaranteed (the value of your bond does not depreciate in case the insurance company were to announce a negative return in a year)

Particulars	Amount (Rs)
Sum Assured	25,000
Premium	23,750
Maturity Value	61,473
* CAGR	9.97% p.a.

Investing in a pension plan is another option. However one needs to bear in mind that though investments in a pension fund earn tax benefits (upto Rs 10,000 per year under section 80 ccc), the benefits i.e. the monthly income that accrues from the pension fund post retirement is not tax-free.

We have discussed some investment options and the returns they are likely to generate over a period of time.

Now depending on your risk profile, you need to allocate a large chunk of your money in these three options (other options include gold etc). For someone with a high-risk appetite, a higher exposure to the equity category is desirable, as over the long term, they will most certainly generate a much better return as compared to other investment options. To know which investments best fit into your age and risk profile, take a look at our Asset Allocation Guide.

If done systematically the process of financial planning is simple. However, one needs to devoteregular time to this activity initially to draw up the plan and subsequently to evaluate it to ensure that you are on course to meet your objectives.

As a parting note, investors need to bear in mind that the age of assured returns is over. To earn higher returns, we need to take more risk. The faster we adjust to this new regime, the better it is.

If you are in Mumbai and need help in planning your finances,give us a try. We are experienced and qualified and are in a position to meet your requirements.

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