Skip to main content

Invest in equities to save for your retirement

Invest in equities to save for your retirement





Adequate savings and investments that beat inflation are a must to build a big enough corpus for a comfortable retirement. Investment in equities is essential

 

A cousin of mine will retire in the next three years. He lives in his own house and his children are married and well-settled. He will receive about `30 lakh as settlement amount. His simple question was: Is this money enough? In retirement planning, this is the critical problem to solve. Retirement planners call this problem the adequacy of corpus.

To my cousin, `30 lakh seemed like a lot of money, until I pointed out that, going by his current earnings, it was just five years' pay. My cousin is addressing the retirement problem too late. Even if he finds that he has not saved enough, there isn't much he can do at this stage. He quickly pointed out that he would spend much lesser. Retirement is associated with frugal living and careful spending since investors reconcile to managing within the wealth they have accumulated. He told me that he will learn to `manage' but needs ways to invest it `safely'. Outliving the wealth is a fear most retired investors face, which is also the reason why they like to protect what they have.

Adequacy of corpus can make all the difference to post-retirement welfare and choices. Retirees are vulnerable. Retired investors fall prey to financial scams when they discover that their corpus is unable to fight the growing expenses. They make risky choices with their money, much like the daily wage earners who buy lottery tickets out of sheer desperation to get rich.

How do we ensure that we have enough before we retire? There are several calculators that can help with the math. Is there a common sense approach to solving this problem? Since inflation is the villain in this piece, let us build our case around it.

First, consider the income during the earning years. If it is has grown at a rate that beats inflation rates, it is a positive factor. Technically, there is an opportunity to build wealth only when incomes match or exceed inflation.

Second, consider the amount of income set aside as savings. Inflation hurts the money needed for expenses every year. Savings should persist and increase even after inflation. This needs both adequate income and controlled expenses.

Third, savings have to be invested at a rate that exceeds inflation. Since only a portion of the income is saved, it needs to work hard to become a large number that will provide for future expenses.

To secure retirement, all these three factors should move favourably over all the earning years: income should grow at a rate higher than inflation so that expenses can be met; savings should be positive and grow even if inflation increases the expenses; and investment return should exceed inflation rates so that savings grow in value over time. Consider a case where out of every `100 earned, `20 is saved. Assume that the inflation rate, the income growth rate and the investment return are all identical. This investor will not have an adequate retirement corpus. Why? It takes four years of savings to make up for one year's expense. And savings are not growing enough to beat inflation. Unless the years in retirement are fewer compared to the earning years, this money will not be adequate. Adequacy of corpus needs savings that cover the income in shorter number of years, and investments that grow at higher rates over a long period of time. What are the steps to take? First, ensure that the growth rate of income always exceeds the rate of inflation. Families with more earning members, professionals that up-skill themselves to earn more, and those who work towards enhancing their earnings are in a better place when it comes to retirement. Second, make it a habit to save since your life actually depends on it. As incomes move up, saving rates should also move up. Essentials needed for the household form lower and lower proportion of income, as income increases. Higher savings rates ensure a higher corpus. Third, take charge of the assets that have been built with your savings to make sure that they grow at a higher rate.

Many investors are careful with their income and their savings, including my cousin. However, the risk he runs is in the manner in which his wealth is being held. The `30 lakh he will get only represents the money he accumulated in his provident fund after allowing for withdrawals to buy a house and to conduct his daughter's wedding. He has a three-bedroom house in which he lives, worth about `1 crore in today's value. His investments in bank deposits, PPF, mutual funds and savings certificates amount to `20 lakh. Has he secured his retirement? Maybe not.

He may have assets, but they are not available for his retirement. As long as he lives in that house, he will not earn any rental income. He plans to leave the house behind for his son. It looks like my cousin has spent his earning years accumulating assets for his son, even if he fails to see it as such. It is tough getting him to see the house as the white elephant.

Retirement cannot be secured if investments are made in assets that cannot be actually used. Households that do not have financial assets expose themselves to this risk. However much may be the appreciation in value, real estate and gold represent assets that are not easily sold off. Rental yields can be too low, maintenance costs can be high, and unless properties enjoy prime location, they may not earn a steady income to help in retirement.

Many see equity as a risky asset. But they fail to see the risk of lower corpus, if they do not invest in equity during the earning years. A diversified equity portfolio including an equity index can catapult the retirement corpus to a much larger size. Long-term goals such as retirement are ideally funded by equity, whose short-term volatility can be borne for the long-term benefit. If an 8% return leads to the doubling of value in nine years, a 12% return can do that in six years. Over a 36-year savings period of accumulation, it can make all the difference.

Secured retirement is about saving and investing sensibly. As long as each earning year is evaluated for adequacy of income, savings and investments, retirement is most likely to be secure.

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

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

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

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

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

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...
Read more

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...
Read more

Buying a Used Car

Invest in Mutual Funds Online Download Mutual Fund Application Forms   Pre-owned car can make sense in these inflationary times. But buying one can be trickier than getting a new vehicle    If you are thinking of buying a car but are worried about the rising inflation and higher EMIs eating into your budget, you should consider buying a used car. For those learning to drive, the general advice is that they should hone their driving skills in a used car. However, buying a used car is not an easy task. Though a used car costs less, there are a lot of aspects to be considered while buying one. You should do your due diligence before buying such a car. For example, two cars of the same model would carry two different prices. The difference in price could be on account of the age of the car, how many people have driven, etc. First Fix Your Budget Since used cars are available in a wide variety of models and prices, the starting point would be to determine your budget befor...
Read more

Debt Mutual Funds Best Fixed Income Investments

Debt Mutual Funds - Invest Online     In the last one year, except for a select few sectoral funds and small cap funds, not many of the equity funds have given great returns. On the other hand, debt funds have done relatively well in terms of returns. So far in the new year too, the stock market has been extremely volatile, pushing investors to look for safer havens. In this context, debt funds are looking safer bets for those investors who do not have the appetite for higher level of volatility. Investors who look for a regular income stream, also look at fixed income products like debt funds, bank fixed deposits and post office monthly income schemes.  Among the fixed income products, debt funds score over others because of chances of higher return, has nearly similar level of risks and liquidity. According to Shah, people looking for regular income could opt for a systematic withdrawal plan (SWP) in debt funds , which, if done judi ciously could also save on taxes. Shah explaine...
Read more

Diversification is key to gain more

Even those who prefer debt for its safety are looking at more options    It is not often that you find more than a couple of asset classes producing good returns at the same time. Invariably, assets such as gold and equity don't perform in tandem, and hence it was easier to allocate to them in line with the risk profile of the investors. In the last couple of quarters, however, more than one asset has turned attractive - gold, debt and equity. In line with the trend, you even have monthly income plans with a combination of more than two assets.    In the past, those who stuck to debt were a different class of investors who didn't wish to take risk with their money. The changing lifecycles and the growing integration of investment markets across the globe have pushed even individual investors to embrace the concept of asset allocation. Hence, you have individuals who were using debt to park profits being prepared to take advantage of other assets.    For instance, when the...
Read more
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