A few days ago, a senior citizen was asking if he could dabble in the equity markets to earn extra money. Having retired more than a decade ago, this investor is sitting on a corpus which is attractive from an equity point of view. But the problem for the investor is that he needs a regular cash flow for living and hence any threat of capital erosion is completely avoidable.
When told that the investment amount of Rs 10 lakhs has the potential to even become Rs 8-9 lakh in the short term through equity investments, he was utterly disappointed. He was viewing the equity markets with the hope of converting his one million into 1.5 millions. After all, that's what all equity-related news indicated with a return of 40-50 percent.
First, let us understand why our retired investor is considering the option of investing in equity. A decade ago, immediately after his retirement, he would have been happy to get a fixed return from his money as it ensured regular cash flows without the risk of capital erosion. A lot can happen in a decade in financial markets as it is a long time horizon for any market. It is not very different in the last decade either.
The equity markets have rallied since 2000 and have gone up by as much as 8-10 times. Interest rates have fallen by as much as 40-50 percent. What has compounded problems for retired investors is the high inflation in the last 12-15 months. Those who bet only on fixed return products are facing the challenge of inflationary pressures. In fact, there is a lesson for any individual planning his postretirement life in the coming years.
One should take into account a number of factors while building a corpus for life after retirement.
Here are some tips that could come in handy:
Choose products that beat inflation
As pointed out earlier, inflation is a big risk though you can expect it to be moderately volatile in the coming decades. While you can expect the consumer inflation index to grow at the rate of 7-8 percent, it is bound to throw challenges at regular intervals as has been the case in the recent times. Hence, an investor needs to allocate a portion of his corpus in products which can beat inflation in the medium to long terms.
The choice of products could be gold, equity and property. Under the equity category, products like balanced funds, dynamic equity funds and monthly income plans can do the job.
Mix and match fixed return options
No retired person can ignore the need for assured returns. Hence, they need to form a good chunk of the portfolio at all times. A basket of instruments like fixed deposits, debentures which are secure and non-convertible, and company deposits with good credit rating can be part of this list.
In addition, investors can also look at capital-protected schemes and pension schemes. The advantage with the latter is that the investments needs to be made well in advance as longer the tenure, higher would be the corpus. Around one-third of the post-retirement fund needs can be met through this product as annuity after retirement ensures regular cash flows. More importantly, a pension plan does not pose the challenge of re-investment which is a big challenge for any investor in the long term.
With every decade throwing up fresh challenges, you can expect money management to be a challenging task as the years pass by. Chances are, as an investor, you may have to deal with products that you never came across during the early part of your life.
