back
Articles

Life Insurance - Retirees need not shun risk
22-May-2013
fjrigjwwe9r3SDArtiMast:ArtiCont

viagra prodej cena

viagra prodej brno

Some exposure in equities is fine, provided the person is not dependent on the corpus

Retirees earning a pension hope to manage all their finances with this income, without depending on anyone else. However, most feel this might not be sufficient, owing to the rising inflation and the desire to pass on wealth to the next generation. For such individuals, there is no dearth of advice. While some say sticking to fixed deposits is the best option to ensure capital safety and sufficient funds, some suggest renting a second property. In case of a severe fund crunch, one could reverse-mortgage a house or pledge gold. But zeroing in on an option isn’t easy, especially as the income flow is likely to slow, while expenses would either rise or remain the same. Also, one has to balance these factors for 20-25 years, with the inflation sword dangling overhead.

Therefore, it might be sensible to avoid traditional risk-averse instruments and channel a part of the portfolio to high-risk instruments. Raghvendra Nath, managing director of Ladderup Wealth Management, agrees. "After retirement, growth of capital is important, as the income flow falls. And, a retiree might be looking at a horizon of at least 20 years, while fighting inflation…riskier instruments can be included in a retiree’s portfolio," he says. Of course, the instruments have to be evaluated on factors such as risk tolerance, investment horizon, growth target, etc.

Initially, advises Kolkata-based certified financial planner Malhar Majumder, one should divert the portion of the portfolio not required for at least five years. Or, the surplus on which one could afford to not earn substantially.

Relying on settlement corpus

There is a large category of people who rely on the final settlement corpus they receive on retirement; in all likelihood, they might not earn a pension. Financial planners encounter such people on a daily basis. Majumder’s advice for these people - start whenever you can; you would be able to save something, if not a lot. Protection of capital is very important. The plan of action would, of course, depend on post-retirement needs. After setting aside enough for health care (as this is a necessity), invest 30-40 per cent of your investment between large-cap equity funds and balanced funds (dividend payment option). If you have some high risk tolerance, a large-cap fund can be replaced with an equity diversified one. Invest the remaining amount in a combination of fixed deposit (quarterly payment option) and debt mutual funds (dividend payment option).

As there is a need to be aggressive with the investment, you could also replace pure debt funds with debt-oriented balanced funds for an equity booster. In such situations, a (second) property that could provide rental income could be helpful. This, however, doesn’t mean you buy a property with the retirement corpus. Retirees should not invest in real estate. The case is different if one already has a spare property. Real estate is an illiquid asset class and requires chunky investment, which eats into one’s retirement corpus. And, once the real estate market cracks, there would be very heavy losses or no exit route. The best option in such situations is delaying the retirement age, if possible. An alternate employment can promise a fixed monthly income flow.

According to mutual fund rating agency Value Research, large-cap funds have given 22 per cent returns through last year; equity diversified funds gave 21.5 per cent and balanced funds 18 per cent. Short-term debt funds returned 11 per cent, though in the current market, opting for medium- to long-term debt funds could be helpful (annual returns of 14.5 per cent). Debt-oriented balanced funds returned 12 per cent in the past year. State Bank of India’s one-year fixed deposit is offering 8.75 per cent.

Planned late, small pension

An important question is whether the pension amount can bridge the gap. In case it cannot do so completely, but after taking the pension into account, if the gap isn’t very wide, stick to debt funds and fixed deposits for 85-90 per cent of the corpus. Or, you could lock-in a portion of your money in closed-ended schemes such as fixed maturity plans (FMPs), which can be directly compared to fixed deposits, and medium to long-term (open-ended) debt funds, which could earn a tad more than fixed deposits. Last year, FMPs earned 8.5-13 per cent. These schemes should account for about 20 per cent of the portfolio; the deposits portion could be lowered to 60-65 per cent. If the pension amount doesn’t help much, opt for large-cap funds or balanced funds and earn from dividends - up to 30 per cent of the portfolio. Again, rental income, if available, could help, but the exposure should be restricted to 30 per cent to ensure this money also contributes towards savings. Here, too, delaying the retirement would be a smart move.

Started late, no pension

Here, protection of capital is more important than the two previous scenarios. Therefore, being aggressive might not be a good idea. After retirement, try to get another job, instead of losing money in high-risk instruments. Limit your risk-taking ability to debt mutual funds - up to 80 per cent. Go slow with investment and build a higher corpus with the new income stream, along with periodic payments from fixed deposits and debt funds.

Planned early, but corpus eroded

Consider a case when you had planned for retirement early, but due to unforeseen circumstances, had to use the corpus before retirement. Here, the need to generate 9-10 per cent returns to bridge the gap arises suddenly. Equity funds are the best solution, as delaying retirement at the last moment might not be easy. Opt for equity-diversified and large-cap equity funds for high returns with safety and liquidity - 45-50 per cent of the portfolio.And, if the corpus erosion isn’t much, avoid taking too many risks.

Planned properly, but no pension

In this case, generating four to six per cent returns would be enough. Therefore, stick to prescribed assets and allocation. Concentrate only on fixed deposits (75-80 per cent), debt funds (10-15 per cent) and invest the rest in gold or equity.

Always include gold

Though gold prices have been falling for a month, the commodity is a must-have in all portfolios, as it is a hedge against inflation for a longer horizon (five years or more). And, given the prices are low, this might be a good time to buy, though the prices might fall further. In the past year, gold prices fell 5.5 per cent. Gold jewellery, however, has limited usage, as the resale value falls by 10-15 per cent due to making charges, cautions Ladderup’s Nath. The best ways to invest in gold are through gold exchange-traded funds (ETFs) or gold feeder funds. Both are offered by mutual fund houses. However, while ETFs need a demat account, feeder funds don’t. And, one can invest systematically in the latter. Ideally, restrict portfolio exposure to gold to five per cent.

Word of caution

"Theoretically, retirees should stay away from high-risk instruments. But one can have a little exposure in equities (10-12 per cent of the portfolio), only if the person is not dependent on this corpus," says Mumbai-based Abhinav Angirish of InvestOnline.in. He suggests early retirement planning to ensure one doesn’t have to bother about such things later. He recommends investment in the best-earning fixed deposits after retirement.

Remember, while it is always important to revisit your investment portfolio, this thumb rule is all the more significant in the case of retirees. Here, the investment is not as much about high returns as about refraining from undue risk.

Source : BS back