XVII Retirement Adviser
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CHAPTER 3
RETIREMENT PLANNING
CHAPTER 4
CHAPTER 6
OTHER INVESTMENT PRODUCTS
CHAPTER 7
RETIREMENT PLANNING STRATEGIES
CHAPTER 8
SPECIAL SITUATIONS IN RETIREMENT
CHAPTER 2
FINANCIAL MARKETS AND INVESTMENT PRODUCTS
LEARNING OBJECTIVES:
Ø Need for making investments to reach retirement goals
Ø Difference between savings and investments
Ø Difference between asset and sub-asset classes
Ø Risk and Return trade-off
Ø Impact of macroeconomic factors on different asset classes
Ø Concept of asset allocation and impact on investor portfolio risk
Ø Indian Financial System and investment products
2.1 Need for Making Investments to Reach Retirement Goals
The retirement goal is unique in the sense that it requires a large corpus to be built out of owned funds since it cannot be funded through loans or borrowings. The other feature of the goal is that it is long-term in nature. It has to be met at a time well in the future. If the money saved for the goal was kept unused till it is required to meet the expenses in retirement, the money will lose value given the effect of inflation over the long period to retirement. Again, keeping the money idle would mean that the ability of money to be invested and earn returns is not being used.
Consider the case of ‘X’ who requires to accumulate a corpus of Rs. 2 crores over 30 years.
If X intended to keep the savings idle, then he would require a monthly contribution of Rs. 55,555 each month for 30 years to accumulate the Rs. 2 crores.
If X invested the savings in an investment that earned 10 percent, then he would require to invest only Rs. 8,847 each month for 30 years.
Investing the money instead of keeping the savings unutilized frees up a large chunk of X’s savings for other goals and needs.
Large goals like retirement can only realistically be met if the money saved is invested.
2.2 Difference between Savings and Investments
Saving refers to the excess income available to an individual or household after meeting current expenses. These are the funds available to be apportioned to future needs that are referred to as financial goals. If the individual wants to secure the savings from a loss in absolute value, then it is held in secure and guaranteed avenues such as savings bank accounts. Typically, funds that are required for meeting the near term expenses or goals, or funds earmarked for meeting emergencies are held in this form. As we have seen in the previous chapter, money left idle loses real value over time as a result of the effect of inflation and the purchasing power of savings erodes over time.
Savings are always scarce and seldom adequate to fund all the financial goals that an individual may have. It is important therefore to make most of the available savings. One way of doing this is to put the savings to work by investing it. Investing is the term used to describe the activity of employing available funds in suitable investment opportunities in physical and financial products with the intent of earning a return. The returns or gains made from investing are also then available to help meet the goals.
2.2-1 Trade-Off between Risk and Return
When savings are invested to earn returns, they are exposed to certain risks, depending upon the type of investments into which the savings are channelized. The investor needs to understand these risks before committing their savings to the investment. Risk of Liquidity: When savings are invested, they are typically locked-in for a defined period of time. Unlike cash kept in sources such as savings bank accounts,
invested funds are not available readily for use by the investor. Some investment products may allow easy realisation, but there may be a penalty imposed on early withdrawal, such as the penalty of lower interest imposed on a premature withdrawal of a fixed deposit with a bank.
Risk to Expected Returns: Depending upon the avenue chosen for investment, there may be a risk of the expected return not materialising. If the investment is a debtoriented investment, then the interest income is known at the time of investment. However, the issuer may default in paying the interest, unless it is a guaranteed product such as a post office deposit that is guaranteed by the Government of India. In case of equity investments, there is no fixed or assured dividends or returns. Investors make estimates about expected returns based on historical returns and assumptions on performance of the economy, company and other relevant factors. If the business does not do as expected the company may not declare a dividend for its shareholders at all and the price of the shares may not see the expected appreciation thus affecting the total returns from the equity investment. In case of real estate investments, the investor expects to earn a periodical rental income and appreciation in the value of the property. However, there is a possibility that a tenant may default on paying rent or the property may remain unoccupied and not earn rental income at all.
Risk to Capital Invested: Investments may involve the risk of a partial or even complete erosion of the principal invested. Investment in equity may see a fall in price to levels where there may be an erosion in the capital invested. A default by the issuer of a debenture at maturity may mean that the capital invested will be lost, unless the debt instruments are secured on the assets of the issuer. Physical investments such as real estate and gold too may see a fall in values that erodes the capital invested.
The potential for return from an investment is expected to compensate for the risk that is undertaken: higher the risk in the investment, higher is the expected return. Equity investments are expected to provide higher returns to compensate the investor for the higher risk to returns and principal. A bond with a higher credit rating will pay a lower coupon as compared to a bond of the same tenor but with a lower credit rating, to reflect the lower risk of default in payment of the periodic coupon income and repayment of principal. If an individual wants to select investments without too much risk, they must be willing to settle for lower returns. This is the
FINANCIAL MARKETS AND INVESTMENT PRODUCTS
risk-return trade-off in investments. The limited access to the funds invested and the risk of loss in investments are the trade-offs that are accepted for the higher returns that it is possible to earn from investments like real estate and equity. The extent of risk an individual is willing to take on for returns will vary depending upon their circumstances. For example, investors with a higher level of income and savings and greater financial security may be willing to take higher risk relative to investors without a secure source of income and lower accumulated wealth. If the goals for which the investments are being made are well in the future, then the investor may be willing to invest in products that may show volatility in returns, but has the potential to earn high returns over a period of time. On the other hand, if the goals are closer at hand and the funds are required to meet the goal, then the investor will seek to invest in low risk products that are likely to earn low returns but will preserve the capital accumulated.
When savings are invested, the returns earned on it help accumulate the funds required to meet the individual’s financial goals. For example, retirement is a goal that requires a large sum of money to be accumulated given the long years in retirement when expenses have to be met. When the savings being set aside for the retirement corpus is invested, the returns earned on the investment too contributes to the final corpus.
Consider the following example:
X wants to accumulate a corpus of Rs. One crore through monthly savings over a 25 year period. If X were to depend upon his savings alone, he would require to set aside approximately Rs. 33,000 per month. Instead, if the monthly savings were being invested at 8 percent, the savings required to reach the same sum of Rs. One crore in 25 years would be approximately Rs. 10,500.
If the money set aside is invested then the returns earned on the investment would also contribute to the corpus required, thus freeing up the savings for other goals and needs which otherwise would have had to be set aside for the retirement goal. In the above example, approximately Rs. 22,500 (Rs. 33,000 – Rs.10,500) becomes available to Mr. X each month to use for other goals because investing around Rs. 10,500 every month and earning compounded returns on it gets him to his goal.
Higher the returns earned lower will be the savings that have to be invested. In the above example, instead of 8 percent if the savings earned 10 percent then the monthly savings required to be invested to reach the corpus would be around Rs. 7,500
instead of around Rs. 10,500. Depending upon the type of investment selected to invest the savings, there will be some degree of risk taken on by Mr. X. Monitoring the investment periodically for any change in the circumstances that may increase the risk, and moving the funds if so required, will help Mr. X manage the risks.
2.3 Asset Class and Sub-Asset Classes
Every investment option is characterised by the risk and return features inherent in it. The returns may be described as high or low, pre-defined or variable, stable or volatile. This would depend upon the factors that affect the returns. For example, the returns on the equity shares of a company would depend upon the profits the company makes and the business risks that the company faces. This translates into the possibility of a higher long-term return if the company’s performance is good. But in the short-term the holder of equity shares is likely to see a good amount of volatility in returns as market participants evaluate the impact of different factors on the expected performance of the company and incorporate their view into the price of the share. The returns from bonds of a company would depend on the ability to generate enough cash to pay interest, even if the company would make losses or a minimal profit. The price of the bonds reacts to changes in factors that will impact interest rates in the economy. This translates into steady periodic return from interest income with some degree of volatility in prices. A group of investments that exhibit similar risk and return characteristics, and respond in a similar fashion to economic and market events are grouped together as an asset class.
Broad Asset Classes
Investment products are primarily classified as physical assets and financial assets. Physical assets are tangible assets and include real estate, gold and other precious metals. Physical assets are typically growth investments that are bought for the appreciation in value rather than the income they generate. Physical assets are also seen as a hedge against inflation. Financial assets represent a claim that the investor has on benefits represented by the asset. Financial assets include bank deposits, equity shares, bonds and others. These assets may be structured as growth-oriented assets where the appreciation in value constitutes the primary source of returns. Equity investments are an example of growth-oriented investments. Assets may be income-oriented, such as deposits, where the periodic income such as interest is the main source of return. They may also be structured to provide liquidity and capital
preservation. Financial assets are typically standardized products and controlled by the regulations in force at the point in time.
Based on the return and risk attributes, financial assets or investment options can be broadly classified into the following asset classes:
Ø Equity
Ø Debt
Ø Cash
Physical assets can be categorized as:
Ø Real Estate
Ø Commodities
2.4 Features of Different Asset Classes
Each asset class has distinctive features as regards returns, risk and liquidity.
Equity
Equity represents ownership in the company that has issued the shares to the extent of shares held. Shareholders participate in the management of the company by exercising the voting rights associated with the shares held. They also participate in the residual profits of the company i.e. the profits remaining after all the dues and claims against the company have been met. In periods of high revenues and profits, the shareholders benefit from high dividends that are paid to them and from the appreciation in the value of the shares. However, if there are no residual profits or the Board of Directors of the company do not recommend a dividend from available profits then equity shareholders do not receive a dividend. Equity shareholders cannot demand a return of the capital invested. If the shares are listed on the stock markets, then the shareholder can sell at the current value. This may be higher or lower than the value at which the investment was made.
Investment in equity is investment in a growth-oriented asset. The primary source of return to the investor is typically from the appreciation in the value of the investment. Dividends are declared by the company when there are adequate profits and provide periodic income to the shareholders. The returns from equity investments are neither pre-defined nor guaranteed. They can be volatile from one period to the next and can even be negative. This makes equity investments risky, especially in the short-
term. Since the market values of shares may decline in response to company-specific or economy-wide reasons, investors may find that they have to exit at a loss. Over time, the value of well-managed and profitable companies will see appreciation and generate high returns for the investors. Selecting the right stocks, monitoring the performance of the companies and exiting stocks where the performance is not as expected, is important for success in equity investing. Listed equity shares are liquid and can be easily converted into cash by selling in the market at prevalent prices. Within equity as an asset class there can be sub-categories based on the industry to which a group of companies belong, or the size of the company based on its market capitalization (large, mid or small). Sub-asset classes within equity may have features that are specific to that group. For example, among the universe of stocks available large-cap stocks typically feature greater stability in earnings relative to mid and small-cap stocks. They are therefore seen as less volatile in comparison to mid and small cap categories. Similarly, revenues of companies in the technology sector are sensitive to currency fluctuations since exports form a large segment of revenues, companies in interest-rate sensitive sectors such as real estate, see benefits when interest rates in the economy comes down, and so on.
Debt
Debt represents the borrowings of the issuer. The terms of the issue will determine the conditions such as the coupon or interest payable on the debt, the tenor of the borrowing after which the borrower/issuer has to return the principal to the lenders/ investors, the security against the assets of the borrower offered as collateral, if any, and other terms.
Debt may be raised in the form of deposits or by issuing securities. For example, a bank may accept deposits from the public, which is a borrowing of the bank and they have an obligation to repay. A bank may also issue securities to raise debt from the public. Securities are standardized in terms of the face value of each bond, coupon payable and tenor of the security. Deposits are typically unsecured, while debt securities are secured against the assets of the borrower and therefore offer greater protection to the holder of the security. Deposit holders can exit the investment only at the end of term of the deposit. Pre-mature withdrawal may imply a penalty in the form of lower interest on the deposit. Securities issued through a public issue have to be mandatorily listed. Investors can exit by selling the security on the stock exchanges. The price at which they sell may be higher or lower than the price at
which they bought the debt security. A higher price implies capital gains, which adds to the total returns of the debt security holder.
Debt as an asset class represents an income-oriented asset. The major source of return from a debt instrument is regular income in the form of interest. The interest is typically known at the time of issue and may be guaranteed either by an undertaking of the government or by security created on the physical assets of the issuer. Some debt instruments may be unsecured, in which case it is seen as riskier. Debt is issued for a specific tenor or term after which it is redeemed and the principal returned to the investor. Debt securities, such as bonds and debentures, may be listed on the stock markets. Such bonds may see an appreciation or depreciation in its value. The total returns to the investor in such securities will be from the interest income and the gain or loss in its value. The price of debt securities reacts to interest rate levels in the economy and this brings some volatility in the total returns from debt securities. Risk in debt securities primarily comes from the possibility of default by the issuer in paying interest and/or repaying the principal. Liquidity in debt instruments is low, even when they are listed. Most debt-oriented instruments impose a penalty if the funds are withdrawn before the committed time. Sub-categories within debt may be created based on the credit risk associated with the instruments (Government securities or corporate securities), or the tenor (short or long-term) of the securities.
Cash and its equivalents
Cash and its equivalents are investments used for parking funds for a short period of time and earning a nominal return. The objective of investments made in such assets is preserving the absolute value of the capital invested and high liquidity rather than earning returns. Cash and equivalent assets have the highest liquidity. Other products that meet these specifications include savings bank accounts and money market mutual funds, among others.
Physical Assets
Physical assets are tangible assets and include real estate, gold and other commodities. Changes in the value of physical assets are impacted by demand and supply. The return from physical assets is primarily in the form of the appreciation in value rather than the income they generate. Some such as real estate may provide both income and growth, while others such as gold are pure growth-oriented assets. The value of physical assets is seen to move in tandem with inflationary trends, and as such they may be able to generate inflation-protected returns. The primary risks in
physical assets are from the illiquidity that some, such as real estate, suffer from. It is not easy to be able to sell a property quickly at what is perceived as the right price. Real estate also suffers from opacity in valuation and transactions, apart from legal and maintenance issues. The other limitation of physical assets as an investment is that they are typically large ticket investments and require substantial savings, or a combination of savings and loan to acquire the asset.
2.5 Asset Class Returns
The nature of returns earned from different asset classes is likely to be different. This difference makes each asset class suitable to cater to a different need of the investor. Some asset classes may cater to the need for growth, others may cater to the need for income, and still others may cater to the need for liquidity. The return from an asset class may be evaluated on the basis of these questions:
Ø What constitutes returns from the investment: periodic income, capital appreciation or a combination of the two?
u If it is a combination of the two, which component is the primary contributor?
Ø Are the returns from the investment known in advance? Is it fixed? Is it guaranteed?
Ø Will the returns vary from one period to the next?
u How much do the returns vary, if they do?
The return earned from an asset class may be in the form of periodic income such as dividend, interest and rent. The periodic income may be known at the time of investment. For example, an investor buying a bond or investing in a fixed deposit knows the coupon rate or interest rate they are going to receive. Investors in equity shares do not know the dividend they may receive. They may even not receive dividend income in a year. The interest income remains the same throughout the life of the debt instrument. There are a few debt securities that offer interest that vary with market rates. In the case of dividend income, the rate of dividend goes up when the company’s revenues and profits go up and may go down when profits are low. Some interest income may be guaranteed. For example, any investment made in government securities, small savings schemes and post office deposits, among others are guaranteed by the Government of India. Some interest income may be secured
against the assets of the company. If the issuer fails to pay the interest income, then the holder of security has the right to the asset to the extent of their dues. The return from an asset class may be in the form of appreciation in the value of the investment. Equity shares, debt securities, real estate properties are all capable of earning an appreciation in its value. In case of equity shares, this component of returns is typically the primary source of return and it may see frequent changes since share values are reported on the stock markets on each trading day. Debt securities see a change in value with changes in interest rates in the economy. But the gains constitute a smaller portion of the returns, especially for debt securities. In real estate investments too, the appreciation in value is a significant portion of the total return. However, the change in values are not frequent. An asset such as gold provides no periodic income and appreciation is the only source of income. Asset values can see a depreciation instead of an appreciation, and this will bring down the returns and can even make it negative. For example, if a bond pays 8 percent per annum coupon interest but the price falls by 10 percent in the year then the total return from the bond is -2 percent (8 percent +(-10 percent)).
Following is the list of generally used asset classes and their main features:
Cash Risk of inadequate returns (inflation risk).
Bonds Corporate bonds have the risk of default by the issuer. Investments in debt instruments are subject to inadequate returns (inflation risk), fall in value (interest rate risk) and reinvestment risk.
Periodic interest income. Low returns commensurate with the low risk.
Bonds provide fixed return in the form of coupon/ interest income. They also have the potential to gain in value if there is a fall in interest rates and the risk of loss in capital value if interest rates rise (interest rate risk).
High liquidity. Can be withdrawn at any time with no cost or penalty.
Liquidity in debt instruments is low. There may be a lock-in, penalty for early withdrawal or low trading in the stock markets, all of which make these instruments low on liquidity.
Asset
Classes Risk Returns Liquidity
Stocks Stock prices are volatile (market risk) and hence seen to be a risky investment unless the investment horizon is long enough to provide the opportunity for appreciation in the value of profitable businesses. It is important to select the right stocks (selection risks) for investment.
Real estate
Liquidity risk is the primary risk faced in real estate investments. Moreover, it cannot be sold in smaller units if so required.
Lack of transparency in pricing and transactions and weak regulatory protection are among the biggest risk that real estate faces.
Managing the property and legal issues are other risks that real estate investors face.
The returns are impacted by economic cycles.
Gold The primary risk in gold is from the volatility in prices driven by speculative forces.
Returns from equity is primarily from the appreciation in value of the stock along with the dividend that the company may declare. The fall in the value of the stock may result in loss to the investor.
Listed equity investments can be easily sold at the current price, which makes them liquid.
Return from real estate is both from the rental income as well as the appreciation in value. The returns from real estate are seen as a hedge against inflation.
Liquidating real estate investments is a long and cumbersome process. Lack of transparency in the pricing of real estate investments makes the process complicated.
Returns from gold is only from the appreciation in price
2.5-1 Total Returns from an Asset Class
Liquidity is high in gold and gold linked securities
Asset class returns may be from a combination of periodic income such as interest or dividend or rent and the appreciation in the value of the investment made. This is the total return from the investment.
Rs. 530/-
RETIREMENT ADVISER
AUTHOR : National Institute of Securities Markets (NISM) | An Educational Initiative of SEBI
PUBLISHER : Taxmann Publications
DATE OF PUBLICATION : November 2025
EDITION : Workbook Version - June 2025
ISBN NO : 9789357784290
NO. OF PAGES : 352
BINDING TYPE : PAPERBACK
DESCRIPTION
Retirement Adviser is a focused, practice-oriented workbook designed to meet the knowledge standards prescribed under the Pension Fund Regulatory and Development Authority (Retirement Adviser) Regulations 2016. Developed by the National Institute of Securities Markets (NISM), it provides a uniform knowledge benchmark for individuals offering retirement advisory services. The workbook integrates regulatory expectations, retirement products, advisory processes, compliance norms, and operational workflows to deliver a complete understanding of retirement planning. Aligned with the NISM Retirement Adviser Certification Examination, this book covers core planning concepts, retirement products and strategies, fund performance evaluation, National Pension System (NPS) mechanisms, compliance requirements, and the full scope of responsibilities expected from a licensed Retirement Adviser. This book is intended for the following audience:
• Individuals, Partners, Proprietors & Representatives
• Financial Planners, Wealth Managers &Investment Advisers
• NPS-focused Professionals
• Employees of Intermediaries
• Students & Aspirants
• Banks, Insurance Distributors & Financial Inclusion Professionals
The Present Publication is the September 2025 Workbook Version, developed in collaboration with the Certification Team of NISM and Sunita Abraham. This version of the book has been reviewed by Jitender Solanki. It is published exclusively by Taxmann, featuring the following notable highlights.
•[Complete Coverage] Fully aligned with the Retirement Adviser Certification Examination
•[Advisory Lifecycle Coverage] Awareness building, onboarding, advisory duties, compliance, reporting & servicing
•[Structured Retirement Planning] Practical approach covering goal setting, contribution planning, risk profiling & product fitment
•[Comprehensive NPS Module] Registration, fund choices, asset classes, KYC, forms, reporting & operational flows
•[Compliance-focused Insights] Code of Conduct, KYC/AML/CFT norms, conflict management, confidentiality & fraud prevention
•[Practical Guidance] NAV interpretation, fund evaluation, market trends & portfolio monitoring
•[Operational Resources] Annexures with NPS forms (including for NRIs) and detailed instructions