Fifty six-year-old V P Verma is a happy man. He has fulfilled all his responsibilities and is waiting to retire. Being a Central government employee, income after retirement is also not a big concern for him. On retirement, Verma will be entitled to a pension of Rs 25,000 a month.
“But medical expenses at this age can crop up any time. So, I want to channelise all my investments towards safer avenues,” he says. Verma wants to shift Rs 20 lakh from equities to debt instruments. Also, he wants to keep Rs 5 lakh in cash. Verma’s only dependant is his wife (49).
A rule of thumb is that as you approach your retirement, you should gradually shift all your money to debt instruments. While traditional instruments provide safety with assured returns, everyone may not be as lucky as Verma and may need an income.
For instance, Amitabh Mishra, 59, is on the lookout for something that ensures a regular income, along with a kitty that he can dip into for emergencies. Mishra has Rs 10 lakh in largecap stocks and another Rs 3 lakh in cash. His dependants are his wife (53) and daughter (21), who is a student.
“In both the cases, inflation is a threat even after retirement. They need to invest in something that gives safety with returns. Look beyond assured return products (traditional ones), and opt for products with perceived returns such as debt funds,” says Hemant Rustagi of Wiseinvest Advisors. Obviously, your core portfolio should comprise debt, but you may want to have a small equity exposure, and not exit it completely.
Since Verma is going to retire in four years, he should use this period for accumulation. Abhinav Angirish of www.investonline.com suggests that Verma may invest Rs 15 lakh of the total corpus (Rs 20 lakh) in debt-oriented monthly income plans (MIPs), which put 20-25 per cent in equities. Another Rs 5 lakh can be invested in such short-term funds as liquid and liquid-plus funds to build an emergency kitty. Short-term fixed deposits of a year can also help provide liquidity to the portfolio.
Those who are one year away from retirement can choose one-year fixed maturity plans. At present, it gives a return of eight per cent, but remember, it is not a liquid option.
Since Mishra has only two months left for his retire, he should exit equities completely. Considering he will not get any pension, he will need a regular income. Experts say he should invest Rs 4 lakh in conservative debt MIPs with 10-15 per cent exposure in equities for regular income for two-three years. Mostly, MIPs have an equity exposure of 25-35 per cent, and in booming market conditions, fund managers can take a higher exposure you may not be comfortable with. Debt-oriented hybrid funds for two-three years is another option for such individuals.
Additionally, Mishra should invest Rs 5 lakh in long-term fixed deposits (three or more years) or secure bonds with a regular interest payout option.
“Further, Mishra should invest Rs 4 lakh in gold exchange-traded funds, as he will be expecting his daughter’s wedding in the next three-five years,” says Angirish.
However, remember there is a dividend distribution tax (DDT) levied on MIPs. In this case, systematic withdrawal plans should help. For those in 30 per cent tax bracket, the dividend payout option suits better. That is because for an investment of less than a year, if you redeem it in six-nine months you will be charged DDT at 14 per cent. And, if you invest for over one year, the growth option will help as long-term capital gains on debt funds are 10 per cent with indexation, and 20 per cent without it. It especially helps over two-three years, where indexation works out the best.
Additionally, both Verma and Mishra must ensure they have adequate health insurance plans.
