Here’s a step-by-step guide for wealthy retired NRIs.
Planning helps align investments with the risk profile and allocate available funds prudently and efficiently across different asset classes to achieve different goals. A risk profile is nothing more than an indicator of your knowledge of the financial markets, your ability to invest and your nature and temperament or psychological disposition as an investor. All sophisticated wealth managers use the risk profiler to understand their clients before making investment recommendations. Risk profiling will give more or less precise information on whether you are a prudent, moderate or aggressive investor. From this assessment of the risk profile derives what is called asset allocation, i.e. where exactly the money needs to go, or the investments need to be made.
It is important that the investment portfolio is stable with some predictability as to risk, returns and other outcomes. To achieve this, you have to look to what are called traditional asset classes or primary asset classes. These are fixed income or debt and equity instruments. When you allocate funds, core asset classes take up a large part of the allocation. While stocks can give you growth through higher returns over the long term, fixed income securities give you relatively low but stable returns. Fixed income securities ensure portfolio stability. Beyond traditional assets are what we call alternative assets. These include asset classes like gold, real estate, etc. Gold offers some protection against inflation and it is worth keeping it in the portfolio, but up to 5% of the portfolio as it will not give you regular cash flow or income, but over periods of time. longer, you will get some appreciation.
It may not be advisable to gain exposure to all asset classes and sub-asset classes in the portfolio. In other words, we must avoid investing in a large number of instruments and be exposed to two or three asset classes and sub-asset classes. The more you spread your exposure over several asset classes, the greater the risk you bear on the portfolio. In other words, the vulnerability of your portfolio to negative events increases if you are exposed to a number of investments and instruments. One of the principles followed when selecting a combination of asset classes is to choose two or three that have a low positive correlation in terms of return and performance. Again, good financial advisors will almost always tell you about the selection process they go through while recommending particular products and rejecting others. The selection methodology and adherence to the process would ensure that the basket contains only good apples.
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Some goals like raising children would require investments in assets denominated in dollars or euros. This will ensure that you earn in the currency in which you are most likely to spend. This would largely remove the currency risk from the table. As you may know, education in reputable universities is expensive and you have to plan carefully from the start to achieve this goal. Costs may increase over time. There are a number of products that invest in the United States, Europe, developed markets, emerging markets, etc. in addition to various sector themes and ideas. There are a number of good products available in the mutual fund space. And, finally, as part of normal investing activity and finally for retirement planning as well, it is necessary to look at rupee assets. India is one of the fastest growing economies in the world, and its demographic positioning, large consumer base are factors that will help the country to become one of the largest economies, which will also be reflected in the stock market. The decades to come will be decades of faster growth in India, and selective investing in stocks alone will help reap the promised returns. Therefore, a well-considered asset allocation can bring optimal results.