There is a sense of panic and insecurity among individuals when they visualize their post-retirement lives because uncertainties hamper the true manifestation of post-retirement desires in many cases. Here, the concept of strategic retirement planning comes into play. Think of it as an intricate puzzle with countless pieces that an expert financial advisor can fit together. LDI, which stands for liability-driven investment, is one of the efficient strategies that ensure a prosperous retirement.
To understand LDI, we can assume it to be an investment plan implemented to generate returns to pay for financial obligations, and it is common among the defined-benefit pension plans. Since retirement and liability planning go hand in hand, LDI is the perfect extension of an investment strategy targeted to achieve a specific financial goal associated with a particular liability while minimizing the risk. LDI is applicable for both individual and institutional investors, as it serves the purpose of both investors who plan to generate long-term returns from any pension plan and insurance companies to generate assets for their participants and customers.
What is the purpose of using LDI? How does it solve the problem?
Before you head to any financial advisory platform to get sorted with investment options in this category, you must be level-headed with the pain point associated with it. The financial health of any investment plan or pension plan deteriorates due to certain factors like fluctuating interest rates and market volatility. This can be problematic for investors, whether individuals or institutions, as fluctuations blur the clarity of the returns expected from any pension plan or retirement investment.
We have seen in the past how returns on certain bonds went down drastically, impacting the returns those investments initially promised. So, in order to avoid such circumstances and keep a check on the financial health of investments, any financial planner should come up with a solution to ensure that retirement schemes deliver what they promise. This involves the allocation of assets into bonds that act like a shield against fluctuations in long-term interest rates, but putting all the money into these bonds will not yield the expected returns.
Some types of liability-driven investments provide the desired income to meet the liabilities as well as protection against potential risk factors.:
- Government bonds
- Inflation-linked bonds
- Corporate bonds
- Derivatives for hedging purposes
- Real estate
- Infrastructure projects
For insurance companies and pension fund managers in India, LDI has been gaining traction in recent years. For retirees seeking an efficient goal planning strategy, LDI serves as a sophisticated tool that thrives in financial markets that have a diverse selection of fixed-income and derivative products to support. Regulatory bodies like RBI (Reserve Bank Of India) and IRDA (Insurance Regulatory & Development Authority India) are encouraging insurers to explore this category of investment. Since the financial market of India is sensitive to fluctuations in interest rates, using LDI can help manage the same effectively.
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Apart from various financial services, liability and retirement planning is also something they offer with the promise to handle debt responsibly while shielding from uncertainties. Checking for a liability driven investment on such platforms can be a great way to explore this segment of retirement planning.