Investing Retirement Savings in Zero-Risk Products is a Terrible Idea

People generally harbour many confusions and myths about their retirement related investments. Often people falsely believe that funds meant for a post-retirement corpus must be parked in zero-risk products. However, this belief is a far cry from reality. Let us understand in detail why investing retirement savings in zero-risk products is a terrible idea.

Risk is a fundamental aspect of financial planning. Risk directly pertains to the loss of capital or the investment not fetching the expected rate of return. In short, risk refers to the possibility of a negative return on investment. Therefore, it is natural for an investor to fear risk. However, risk must be incorporated into one’s retirement plan constructively and must not be simply discarded.

There is a lack of financial inclusion and awareness in India, which leads to zero-risk products becoming everyone’s top choice. Debt-oriented investments, especially bank fixed deposits (FDs), have been a time-honoured investment option. They are synonymous with retirement savings in India as every Indian household swears by banks. With such a savings culture, it isn’t a matter of surprise that in a population of more than one billion, barely 30 crore people invest directly in stocks.

Investors perceive post-retirement savings, simply as a means to maintain status-quo and keep the bread coming home. No one is chasing real growth post-retirements. Experts term this behaviour as ‘prevention focus’ which makes people resort to risk-free products. However, earning high returns is not the only reason why one should avoid focusing on zero-risk investments.The cost of inflation poses an ever-looming threat to one’s financial plans. Investors usually account for factors like expected returns, risk premium, etc. but forget to provide for the effects of inflation. As a rule of thumb, the rate of return should at least cover, if not ideally beat the ongoing rate of inflation. Otherwise, the investment has only generated a notional profit, but in actual terms, incurred a loss.The major dichotomy one faces is between two conflicting concerns- the need for a safety net during one’s post-retirement phase and the need for growth to overcome the costs of inflation. However, the strategy here should be to assess one’s risk appetite, take calculated risks and benefit from a well-constructed risk-return matrix. In Conclusion The fear of loss leads to inaction. Even though every investor would desire earning high returns without taking any risk, it is imperative to take risks if one wishes to pursue high returns.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.