The Hindu Business Line : Financial literacy and retirement planning

ARE you aware you may have to retire very soon? Whether you like it or not, your health may fail, your employability may diminish or you may just have to call it a day for one reason or other. Are you ready for retirement? Are your finances in order? Have you readied a financial plan while you are still active?

Questions such as these are being asked with boring regularity by financial planners all over the world. This country is not an exception, not with so many people living on the edge of retirement. Slowly but surely financial literacy is on the rise and Indians are generally warming up to the concept of planning for retirement.

Mutual funds are increasingly talking about the role their funds can play in this regard - an issue (which this column has dealt with once or twice in the past) that needs to be taken forward by everybody concerned. They refer closely to the basics - the significance of the right asset allocation, the merits of diversification, the risks an investor may face and ways of mitigating such risks.

It is pointed out that one of the ways of reducing one's risks is to diversify investments across asset classes. In practical terms, it makes little sense to put all your money in, say, equity funds that are all alike. There should be room for equity funds with different investment styles as well, provided they fit into your overall asset allocation strategy.

Should you be only invested in actively-managed equity funds? Ask the proponents of passive management, and they will come out with an emphatic `No'! After all, the costs associated with sourcing and crunching information render active management a more expensive proposition (compared to indexing). Also, active managers are inclined to trade more than the index advocates, a tendency that also adds to their transaction costs.

Despite all this, Indian investors appear to love active management. They seem to be comfortable with the risks involved. Their addiction is based on the premise that actively-managed equity products will outdo the indices, thanks to some clever forecasting and efficient use of information.

It is, you will admit, extremely difficult to forecast effectively and use information in a superior manner. It is even more difficult to do this year after year, particularly when other players are also trying their best to achieve similar goals.

Coming back to financial planning, pundits have spoken out strongly in favour of drafting good plans. An investor will do himself a service if he listens to their advice. As we mentioned right at the beginning, he must always remember that retirement is a fact of life. He will have to quit one day. And that day may come sooner than he thinks.

Let's end with an interesting snippet we culled from the Web. In San Diego, the civic authorities have declared October 3-9 as `financial planning week'. This will feature a number of public events and educational shows, aimed at helping individuals understand the value of financial planning. There will be seminars on retirement, estate planning, saving for higher education and the like. Sounds interesting? Why don't you try to organise events in your neighbourhood, with or without the local civic body.

Fundspeak

A `pay yourself first' routine through an automatic savings plan is the most sensible thing you can do.

Sashi Krishnan, CEO, Chola Mutual Fund

Feedback may be sent to nilanjan@thehindu.co.in

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