Set of Assumptions
ii iii
1. 5 percent 2.0 percent
5.0 percent 7.0 percent
Source: Author’s assumption
asset class
government of India bonds
Equity
i
1.0 percent
3.0 percent
TaBlE 5 Wealth Generation for Retired Life
Accumulated wealth at the age of 75 years in Indian rupees
Set of Assumptions
set of assumptions i pessimistic ii normal iii optimistic
government of India bonds RS 298,002 RS 322,486 RS 349,915
100 percent equity RS 415,250 RS 604,797 RS 915,701
Source: Author’s calculation based on the assumptions. (details of calculation are given in Appendix A.)
ment regulations for pension fund managers, ranging from 100 percent debt to
100 percent equity. Assuming each saver,
beginning at age 25, contributes Rs. 300 per
month (excluding fees and other expenses)
and contributions grow at 4 percent per
annum to the age of 65, the potential real
yields of the various assets could be measured as is shown in Table 4.
As soon as the investment is made, a
corresponding number of units would
be allotted to the investors. Over the
course of 40 years, the economy may
pass through several cycles, including
a boom phase (with annual economic
growth of up to 9 percent) and a re-cessionary phase (in which the annual
growth may drop to 5 percent). Perfor-
mance of the economy will affect the
return from stocks and bonds, which in
turn will affect the return from equity
and debt funds.
I would encourage an investment
strategy of constant rupee averaging (like
constant dollar averaging in the U.S.), in
which greater numbers of units are allotted during recession days as the unit price
comes down and smaller numbers of
units are offered against the same amount
of investment during boom periods.
Ultimately, the fund will benefit from
the growth of the stock index during the
long-term working life of the saver. I
would assume that 75 percent of the accumulated amount would be converted
into an annuity plan upon retirement.
The remaining 25 percent would be used
to meet life emergencies such as illness,
disability, death of a spouse, etc.
The present price of annuity products from Life Insurance Corp. of India
(the largest life insurer in India) requires
Rs.100,000 in a lump sum to generate a life
annuity with the return of the purchase
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