Your portfolio needs to generate enough returns to support your lifestyle.
When you are close to retirement, there are many concerns. The critical one is ensuring that the retirement corpus that has been created over the year is safe. But the tricky part is that the portfolio also has to generate enough returns to beat inflation and give regular income.
Hemant Rustagi, chief executive officer at Wiseinvest says one should realign the portfolio. “You have to assess your monthly expenses and see if the pension is good enough to take care of them.” If you have to be dependent on returns from the corpus for additional income, it has to be invested in a manner without harming the principal amount.”
What makes planning for a retired life a lot more difficult is that life expectancy is on the rise. Says Vishal Kapoor, director & head (wealth management), Standard Chartered Bank, “The general tendency of people in this age group is to cut out all the risky asset classes from the portfolio. But being completely conservative is not a good idea, considering that you will have to plan your portfolio with at least 15 to 20 years in mind,” he says.
Say, your portfolio is worth Rs 1 crore at the age of 49 years with equity constituting about 70 per cent. But as you grow older, the ability to take risk comes down significantly.
The thumb rule is that as you approach retirement your exposure in high-risk asset classes should come down gradually. “Every five to seven years you should slowly start reducing your exposure in equity and increase your holding in debt,” says Vicky Mehta, Senior Research Analyst at Morningstar.
Financial advisors say that an exposure of between 10 and 20 per cent in equity is a necessity, even when you are planning your investments for retirement. Prashanth Prabhakaran, President of Retail Broking at India Infoline says that when looking at investing in equity mutual funds you should park your money largely in diversified mutual funds. “It is a safer bet. In case of sector funds, one needs to continuously monitor,” he adds.
And if you are not so sure about pure equity funds, look at balanced or hybrid funds. There are balanced fund options with high exposures to either equity or debt. That is, 70-80 per cent in equity or debt, depending on the fund’s mandate. Choose the one that suits your needs. If you think there will be a high requirement for funds post retirement, go for the equity option.
However, remember that the taxation for both kinds of funds will be very different. For an equity-based balanced funds, there will be no tax on returns after one year. For debt-based funds, there will be 10 per cent without indexation and 20 per cent with indexation after one year.
But the present circumstances offer interesting options in the debt space. The present high interest rate scenario may offer good options. For instance, a five-year bank fixed deposit will fetch you anywhere 8.25-8.75 per cent annualised returns. Fixed Maturity Plans are also an investment option that should be considered as they give returns as high as nine per cent post tax.
One needs to have the right mix to beat inflation. Say if your portfolio constitutes 80 per cent debt and 20 per cent equity and inflation is around seven per cent. Your debt portfolio will give you returns of between eight per cent and nine per cent but say in the eventuality of the markets dipping, your equity portion takes a hit of 10 per cent or so, you would be still fine because there will not be any capital loss.
