Reaching Goals Or Risk Profiling – Who Gets Priority

All of us have our financial milestones to reach in our life and we need to make appropriate investments for achieving the desired goals. According to wealth managers and also financial planners there are various asset allocation strategies and risk profiling questions which have to be considered while deriving the investment plan for any client. In one of my meetings – I was interacting with a client aged approx 50 years who is one of the partners in an organization. His query was what should be the ideal asset allocation for his age.

As a thumb rule it should have been 50% equity and 50% debt but I usually differ on this point because as financial planners as well as portfolio managers also we have to consider various other points in reaching a conclusion on the ideal asset allocation.

Our primary aim is to help the clients achieve the goals without undertaking undue risk. So if we see that the client has around 10 years for retirement and he does not have sufficient corpus created and also not much of an amount to be invested monthly on an immediate basis then what can be ideal asset allocation for him – will the 50% calculation enable him to reach anywhere close to his corpus. It’s a BIG NO. So shall he surrender to the situation or take calculated risk.  He has to take a higher call in equity if he has to reach the goal. He can take a call of going into equity mutual funds for the first 5 years and then slowly move into debt in the next 3 years and then into liquid for the last two years. This approach towards his retirement corpus can only help to reach closer to his destination with his limited resources.

Investment planning is at times very similar to one day cricket matches wherein the overs are limited to reach a particular score set by the opponent and one has to reach it without losing all the wickets. If the opponent has set a tall target what is the usual tactic undertaken by the chasing team – they usually play aggressively during the power play when the field restrictions are more and lofted strokes can be taken over the infield to get the boundaries or over boundaries with lesser probability of being getting caught on the boundary line. Same is the strategy undertaken above wherein we can classify the initial 5 years as the power play overs. As we approach the target we have to get cautious and take lesser risks and keep the scoreboard running by taking the singles and hitting occasional boundaries and rotating the strike. This is similar to the debt fund investing in the year 6 to year 8 period wherein we shall slowly move into debt from equity as we inch closer to the target year to cut down on the risk component of the would be retiree.

Just as in a cricket match we have to take some element of risk to topple a big score, similar is the case where you have to get a big corpus with a limited time horizon. If we don’t take chances during the power play we may be giving the opposition a tame walkover and will be treated a meek surrender. So we have to our chances carefully and try to keep the asking rate within manageable limits so that we don’t have to play rash shots during the final overs while coming closer to the target and loose wickets in a hurry.

So if we approach the investing strategy for the client who is having the Planning for Early Retirement target 10 years down the line with limited resources – we have to check his inflow outflow statement to extract if some unnecessary expenses can be reduced or controlled and thereby increase the investible surplus to some extent. Thereafter, we have to plan the investment strategy while considering a higher return in the initial 5 years while reducing it gradually over the next 3 years and then shifting totally to safer avenues to protect the accumulated corpus.

Therefore, we can conclude that an investment strategy for reaching goals should be given first preference while risk profiling will surely play a supporting role to cut down on the chances of a financial loss for the customer as well as the anxiety as he will be closing down on the retirement year.

About Subhabrata Ghosh

Subhabrata Ghosh has written 5 articles for FPG India..

Subhabrata Ghosh is a Certified Financial Planner and is one of the partners of Gennex Consultants which is a financial services organization dealing with Life, General, Health Insurance and Portfolio Management services.

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