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For Sunshine In Sundown Days

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For Sunshine In Sundown Days
Manik Kumar Malakar - 01 October 2021

“Retirement is the only time in your life when time no longer equals money.”

Thus says the philosopher in the financial markets. While this may be true, planning for finances in your post-retirement life goes a long way in easing the day when you can no longer work. To this end, investing in mutual funds (MFs) can be a way to ease your concerns about money in the sundown years.

“While you would have taken care of most of your financial goals by the time you hang up your boots, you need a retirement corpus that can outlast your life,” says Rahul Jain, president and head of personal wealth advisory at Edelweiss Wealth. Do remember that given the overall improvement in lifestyle and consequent increase in average life expectancy, your retired life could last well up to 20-25 years and even more.

Thus, while planning for your retirement or when you are no longer earning or working, ensure that your corpus is large enough to help you sail through this period without any hiccups.

“It’s very important for people to plan for their retirement or for their old age in personal finance along with their health. It doesn’t matter if you’re not interested in them because your personal finance and health is interested in you,” says Siddharth Kothari, chief investment strategist at Om Kothari Group.

Mutual funds can help you relax in your waning years. But there has to be some careful assessment and planning to be done.

“Retirement planning should be one of the most important priorities during our professional life,” says Pranjal Kamra, CEO of Finology. Many people sacrifice this attribute for the sake of their children’s education or marriage and often end up losing their financial independence during retirement.

MFs are investment tools that help you get exposure to different sub-asset classes which might help you gain good returns. Historical data also shows that equity has been the best performing asset class and has the potential for long-term wealth creation.

“A mutual fund is a great tool to plan for goals, and especially your retirement goals as one will get a longer time horizon to stay invested in the stock and bond markets via mutual funds,” says Nitin Mathur, CEO of Tavaga Advisory Services.

Planning for retirement should start at an early age as one can reap the benefits of compounding over the years. With mutual funds, one can opt for an SIP up to five years before the retirement date in various MF types.

But now comes the planning part. You have to balance your MF choices (investment) against both your expected income as well as your investment outlook. Essentially, experts feel that you can have a higher risk-taking capacity when you are younger, but move towards more conservative investment classes as you age.

“Though the investment outlook depends a lot on the risk-taking capacity of an individual, ideally, people below 35 years of age should invest some portion of their income in equity mutual funds,” says Kamra.

However, after reaching this age, people should switch their investments to debt mutual funds to safeguard their portfolio against market volatility. Further, investments in mutual funds should be done via SIPs (systematic investment plans) as this helps an investor gain an advantage of rupee-cost averaging.

One can opt for an SIP up to five years before the retirement date in various asset classes, with major allocation to equity and equity-oriented instruments. As retirement comes closer, the asset allocation should change and tilt more towards conservative asset classes (such as short-term debt, gold exchange-traded fund and others), notes Mathur.

There are some very specific planning suggestions from the experts for your retirement nest egg. “You should create an emergency bucket,” says Arun Kumar, head of research, FundsIndia. This can be done by demarcating three years of annual requirement in a liquid/ultra short-term fund as an emergency corpus.

Once this is done, the next one-year requirement can be kept in a liquid fund and you can withdraw the monthly requirement from this for the next one year.

Finally, in the main portfolio, the remaining money can be split into a 50 per cent equity and 50 per cent debt allocation split. At the end of one year, move a year’s requirement into the next one-year bucket (which would have got depleted).

Rebalance back to the 50:50 equity-debt split while moving the money to the next one-year bucket. “This will ensure that if equity markets do well, you remove more money from equities and if equities don’t do well, you remove more money from debt,” advises Kumar.

Mutual funds are not only a great source of saving and investing, but can also be used to generate income through a systematic withdrawal plan (SWP). One can calculate the income requirements and place a one-time withdrawal request for every month.

“I really don’t think that there is a one-size-fits-all approach that can work but, in general, I suggest that you consider MFs that have a lower fee and where the fund management team has shown a great track record and is highly skilled in investing,” advises Kothari.

“One should always keep in mind that mutual funds that have higher Beta factors or return’s volatility aren’t suitable for retirement planning,” says Ankit Agarwal, managing director, Alankit.

Kothari also advises not to have a home country bias and invest in foreign companies too, especially in places like the US where there are themes and trends that don’t exist in India. Look at big tech companies, for example: Facebook, Apple, Amazon, Netflix, Google, even Microsoft. These tech giants are growing at a great pace despite being large in size and it’s rare in India to find companies that compare in terms of their moat and dominance.

“As an investor, it is recommended to rebalance the portfolio on a half-yearly basis with a holistic view of their required rate of return,” says Agarwal.

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Factors to Consider

The initial planning process requires a great deal of detailed understanding of the following factors:

  • Risk Tolerance
  • Inflation
  • Liquidity Requirements
  • Investment Horizon
  • Tax Implications
  • Existing Assets & Liability Evaluation
  • Real Rate of Return
  • Other Personal & Professional Situations

Source: Alankit

Importance of Investment in MFs

1. Potential to create big corpus
2. Mutual funds gives diversification of investments across different asset classes
3. Small sum of investment is required
4. Something is available for everyone: variety of investment options
5. Tax efficient returns

How passive and active mutual funds can be helpful for investment

Benefits of Active Funds

1. Potential to perform better than market
2. Ideal for complex market scenarios
3. Better research

Benefits of Passive Funds

1. Cost-efficient
2. Performance in line with markets
3. Better diversification

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Suggested MF Classes As Per Your Age

  • Equity: Till the age of 50 years
  • Balanced: At 50-60 years
  • Debt funds: After you retire

Ankit Agarwal, Managing Director, Alankit

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Risk And Retirement

There are two kinds of risk tolerance classifications that are usually considered while investing in mutual funds for retirement planning:

Conservative Investor: this is an investment strategy under which the preservation of capital is prioritised over market returns or growth.

Moderately Aggressive Investor: it is an investment strategy that values principal preservation. However, it is pretty okay to accept a small degree of risk and volatility in order to seek some appreciation.

Following are some viable mutual fund options for retirees to choose from:

Conservative Investor

Dynamic bonds:  Funds like dynamic bonds strive for interest rate risk and credit risk management dynamically. In other words, there are no restrictions that are related to security types of maturity profiles in which they have invested. These funds (dynamic or flexible funds) do not focus on long- or short-term segments of the yield curve but move across the yield curve that depends upon where they can spot the opportunity to exploit the changes in yields.

Fixed maturity plans (FMPs): Those funds that are closed-end in nature and invest in debt securities with maturities that match the term of the scheme are called fixed maturity plans or FMPs. Under these plans, the debt securities are redeemed on their maturity and are paid to the investors. This is the reason that FMPs are the most preferred investment among investors in a rising interest rate environment. The sole reason behind it is that the investor can lock into high yields.

The funds that one can choose from under these categories are HDFC Credit Risk Fund and SBI Magnum Medium Duration Funds.

Moderately Aggressive Investor

Hybrid funds: These funds invest in a combination of debt and equity securities where the allocation to each of the asset classes depends upon the investment objective of the scheme. The risk and return in the scheme are considered to depend upon the equity’s allocation and debt as well as how well they are managed. The expected returns from the portfolio increase with a higher allocation to equity instruments. Likewise, in case the debt instruments held are of short-term nature for generating income, the extent of the risk is lesser than if the portfolio holds long-term debt instruments that show greater volatility in prices. The capital markets regulator, the Securities and Exchange Board of India, has classified open-end hybrid funds as follows:

1. Conservative hybrid funds are where one needs to invest around 75 to 90 per cent in a debt portfolio and around 10 to 25 per cent of the total assets in equity and equity-related instruments. These are taxable as debt funds.

2. A balanced hybrid fund is where the retiree invests 40 to 60 per cent of the total assets in debt instruments and about 40 to 60 per cent in equity and equity-related investments.

3. Dynamic asset allocation or balanced advantage fund is the one that dynamically manages investment in equity and debt instruments.

4. Multi-asset allocation funds invest in at least three asset classes with a minimum of 10% of the total assets invested in each of the asset classes. The fund manager takes a view on which type of investment is expected to do well and will tilt the allocation towards either asset class. Within this, foreign securities will not be treated as a separate asset class.

Closed-end hybrid funds: Capital protection funds are closed-end hybrid funds. These are the types of funds where the equity exposure is, typically, taken through the equity derivatives market. The portfolio is structured while keeping in mind that the principal amount should be invested in debt instruments and grows to the principal amount over the term of the fund. For instance, let’s say you might invest `90 for three years to grow into `100 at maturity. This will protect the capital invested and the remaining portion of the original amount is invested in equity derivatives to earn higher returns.

Solution-oriented schemes: According to Sebi guidelines, a solution-oriented scheme has categorised open-end solution-oriented schemes such as retirement funds that are schemes oriented towards saving for retirement. Schemes will have a lock-in for at least five years or till retirement, whichever is earlier.


The author is a financial journalist

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