Skip to main content

Strategic Investing for Retirement

Getting a strategic orienta tion to investing is a tough task. Typically , investors become too ambitious about what they want: good return, low risk, capital protection, and access to money at any time. The quest for the best investment choices begins with this question: what is the one thing that cannot be compromised? This is the core investment objective.
 
After this, strategic investing demands to know the constraints in getting there. The resulting investment plan is a compromise solution because it recognises that one cannot have it all.
 
 

The investors who are about to retire hold a corpus built through several years of work.They are past their peak income and primarily depend on this corpus for their post-retirement income. Many of them recognise their primary strategic need as a steady flow of income and, therefore, choose fixed income assets.Bank deposits, government saving schemes and bonds are the popular choices. They believe their decision is strategic and correct because they have chosen on the basis of what they need--interest income, protection of capital and low risk.However, they may have missed a critical point.

 

 

The single most important objective after retirement is to earn an income that fights inflation.The fixed interest income from these traditional investments might look good in nominal rupee terms, but inflation is a number that compounds year after year. So, `9 lakh of interest income from a corpus of `1 crore might look more than adequate today , but if inflation were 7-8%, the expenses will double every 10 years. The corpus should double to keep the investor afloat, but since capital protection was sought to earn the interest income, the corpus will remain unchanged. If the investor lives for 25-30 years after retirement, penury will hit at an age when increasing the corpus in any manner would be impossible to achieve.

 

 

Investment decisions for the retired investor should take on board this core objective: the corpus should continue to grow and compound in value so that it fights inflation, while the investor draws income from it as required. On the face of it, this is a complex problem to solve. There are two broad types of assets-those that offer growth in value, but earn a limited income; and those that offer a regular income, but do not grow in value. Growth assets are typically risky since their value fluctuates in the short term, but they appreciate in value in the long term. Real estate, equity and gold are examples of growth assets. The rental yield and dividend yield is tiny , and gold offers no income.However, these assets hold the potential to appreciate in value.Deposits, bonds and saving schemes are income assets. They provide a regular income, but do not appreciate in value. If the retired investor chooses growth assets, he would be able to fight inflation as his corpus would appreciate, but there would be no income to draw. If he picks income assets, there would be income without the ability to fight inflation.

 

 

Assume that `1 crore is invested at a fixed interest rate of 8% and the investor hopes to draw `6 lakh a year as expense. If you consider an inflation rate of 7%, the interest income will fall short of the expense in a short span of five years since inflation would have taken the `6 lakh at the start well past the `8 lakh of annual interest income. The reinvestment of the initial years' surplus will enable the investor to stay afloat for another two years. There will be a serious shortfall if one considers 25-30 years as the postretirement period. How does the retired investor attain the core objective of inflation-adjusted income over the years?


He should consider the compromises. What can he give up to achieve his strategic objective?

 


The investor should see his expenses as withdrawal from a corpus that is allowed to grow, rather than ask for a regular income and preservation of the principal. The principal amount that is compounding in value over time, while rising and falling in value and eventually being drawn down, might be the compromise in exchange for an inflation-adjusted cash flow. An asset allocation, where a portion is in growth assets and another portion is in income assets, might be the solution. The crux of this strategy is the compounding of the invested amount to fight inflation, and the utilisation of the corpus over time to meet income needs.This strategic approach means the investor is not focused on the income his assets generate; instead, he is concentrating on how it is growing year after year.

 

It is not tough to make the investment choices in this context. An 8% special deposit, which accumulates at a compounded rate and allows the sweeping out of withdrawals, might serve this need. Or a PPF account, which is opened before retirement and holds the corpus that is available for withdrawal, serves this need. The lower the gap between the rate of growth of the investment and the rate of inflation, the faster the depletion of the corpus. At 8% compounded return and 7% inflation, a `1 crore corpus will be depleted in 18 years. At 12%, it will last 30 years and leave `1.34 crore.

 

How could one earn a 12% annual growth? Isn't equity risky?
Asset allocation holds the answer. A strategic portfolio will be defined as one that runs at an average rate of 12% with a maximum downside of 10% over 2530 years. A portfolio that had 25% in the Nifty , 60% in the PPF , and 15% in gold would have grown at 12% over the past 10 tumultuous years of equity markets. The maximum erosion in the corpus would have been 3% in 2008. The only task for the investor would be to focus on these proportions and restore them once a year without caring for the markets and views. Such is the power of diversification.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now