I will soon retire. I plan to hold the mutual funds units till retirement and later use it for regular expenditure. I have no tax-saving funds, the provident fund deductions have been over Rs 1 lakh a year. Advice to consolidate my portfolio to three-five good funds. Retirement portfolio should be compact, stable, inflation-shielded and easy to manage. Senior citizens savings scheme is the safest option for regular income for those above 60 and gives nine per cent a year. Both you and your wife can put a maximum of Rs 15 lakh each (total Rs 30 lakh). On retirement, this should be your main source of income. Divide rest of the portfolio into mutual funds, emergency fund and other risk-free investments like bank deposits. Also have sufficient money in savings bank account, as emergency fund.
Shielding Against Inflation
Inflation will reduce the net returns on your investments. Allocating higher amounts to debt can be troublesome. Equity investments will earn more returns, help you fight the risk of negative returns. Also, since withdrawals from equity investments will be spread over many years, it will reduce the cyclical risk of equity returns. Use equity withdrawals for additional income and higher cost of living.
Debt investments (bank deposits, provident funds, income fund and debt part of balanced funds) account for two-third of the total investment. This is not very high, but can be reduced further without compromising on stability. While bank deposits are secure investments, their returns and liquidity might be an area of concern. For the rest of your working years, focus on reducing the allocation to bank deposits and rebuilding your mutual funds portfolio.
You currently have 20 equity funds (including balanced funds), mostly good ones. Of these, about 11 funds can form the core of your portfolio. Focus on balanced funds as the core of your portfolio.
Balanced Funds As Core
A break up of your balanced funds portfolio reveals about 70 per cent allocation to equities and the rest to fixed income, very typically of balanced funds. The investment in fixed income cushions the fund from extreme market movements - their rise and fall will be less than a pure equity fund. They also offer a peculiar tax advantage for all these funds are treated as equity funds and taxed accordingly. In effect, the 30 per cent fixed income component too becomes tax-free after one year, which otherwise is not the case with fixed income funds. As a result, the allocation to a fixed income fund in your portfolio will also come down.
Since all balanced funds in your portfolio are proven funds, you can choose any three from the five you hold. This will make the portfolio compact enough, with adequate diversification.
Also Read
When choosing which funds to retain, ensure the consolidation exercise is tax-efficient as well. First, you need to take care that the movement of the funds is minimum, to keep the securities transaction tax (STT) minimum. Second, redeem from only those funds that have completed a year, as they would not attract any capital gains tax.
Income Fund
Templeton India ST Income is a good fund. Only a small part of the portfolio, about 10 per cent, should stay here as this will be handy in regular rebalancing.
Sector Funds And Stocks
Although your portfolio will be complete without sector funds, you may invest a small part if you have an understanding of such funds or stocks. Ensure sector funds or stocks holdings do not cause a skewed allocation to any single stock or sector. Importantly, avoid acting on tips and flowing with the market momentum.