Skip to main content

Invest in Equity Funds even after Retirement

The other day, I received a WhatsApp message from a senior citizen whose returns from a fixed deposit have gone down by 25%. This difference has come about between a five-year deposit that he made in 2012, and when he renewed it upon maturity in August 2017. 

To those who are just reading the headline numbers on interest rates, this may not make sense. Depending on when you are measuring, interest rates have gone down by 2 or 3%. However, here's the exact message: "I was being paid Rs 35,352 every month (subject to income tax) enabling me to lead a worry-free life. Now on maturity I have reinvested the amount in the same bank and I will be paid Rs 26,489 


The interest rate on his FD may have gone done by just about 2.5%, but his income is down by 25%. In fact, this is an obfuscation in the way reduction of interest rates is announced and carried in the media. A reduction in the interest rate on a particular kind of deposit from, say, 10 to 8% is a reduction of 20%. If you were earning Rs 20,000 a month, you will now earn Rs 16,000 a month. The 2% reduction is an illusion. 


Retired from the economy 
The move towards a lower interest rate economy, while great news for the economy, is of little relevance to older, retired people. Lower inflation and interest rates, better fiscal management and higher economic growth carry no benefit for them because they are no longer in the earning and accumulative phase of their lives. An older person is not going to get a better job or a higher salary because the economy is growing. That phase of his or That phase of his or her life is over. 

However, wishing for higher interest rates is no solution. This yearning is there because we have been conditioned to ignore high inflation, the evil twin of high interest rates. I'm sorry to say this, but the person in the above example is financially doomed. For the last five years, when he was getting Rs 35,352 as interest income and spending it, he was actually eating away his capital. Out of that income, no more than Rs 7,000 to 10,000 was real income. The rest was just the inflated value of the currency. 

Here's the fact that he and crores others ignore: his real income has probably not gone down. If he was spending only his real, inflation-adjusted income, he would probably find that it has actually increased. And how would he have spent only his real income? The answer is, by spending only about 1.5 % of the deposit per year, and letting the rest compound. This is based on the assumption that FD rates are about 1.5% higher than the inflation rate. 


Obviously, he would need far more money to do that. Instead of Rs 40 lakh as deposit, he would need more than Rs 2 crore as deposit, which he does not have. There is no complete solution to this particular case. However, even a partial solution can only come from the returns that equity can generate. Real (inflation adjusted) equity returns are actually double or triple that of fixed income. Where a FD may generate 1.5% above inflation, equity will do 3 to 5%. 


There is no way out except to take some exposure to equity in a measured, de-risked and tax-efficient way. First, keep roughly three years' expenses aside and gradually invest the remaining amount into a set of two or three conservative hybrid funds (balanced funds). After three years, you can start withdrawing every year from these balanced funds an amount that is roughly 3 to 4%of the remaining sum. 

"If one is to avoid old-age poverty, then this phobia of equity investment in retirement must be gotten rid of. There is no other way." 

This will give you an amount that is equal to, or more, than what you are earning from a fixed income deposit today. The best part is that the value of the remaining investment will also grow at roughly the inflation rate. If you can implement this, then there is a virtual certainty that you will not be faced with old age poverty. The icing on the cake is that unlike your deposit interest, this income will be tax free. 

 

 
 
 


SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

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