Post Retirement period obviously means a cautious outlook and often conservative investments. The retirement corpus hardly gets invested in Equity Mutual Funds. Given the inflation and longevity being the real challenges, it would be helpful to leverage equity asset class in post-retirement period, keeping in mind below requirements:
1. Keep the principle safe
2. Beat Inflation
3. Save on Taxes
4. Leverage Magic of Compounding
It is often observed that at this age, one has either been fooled in to a poor investment or has lost money in stocks. With this experience, naturally the attitude is ‘I don’t want equity’. What one should try in this situation is to find better ways to leverage the retirement corpus.
FD Interest = Equity MF SIP Formula
Let’s say ‘Mr. & Mrs. Retired’ receive a pension that takes care of their expenses and leaves a little bit of surplus. They also get some financial support from their children and also receive lump sum money once in a while. They also have an additional flat on rent. They combine these savings and convert these to FDs. They can consider leveraging the Equity MFs in below manner:
1. They can invest in FDs with monthly interest pay-out and invest the monthly interest amount in Diversified Equity MF SIPs. The capital is intact in FDs and growth is invested in Equity MFs that can grow further
2. Let’s say that they are doing FD of Rs. 5,000 a month for a year @ 9% p.a with a cumulative interest option. From Month 13 onward, they will have FD maturing every month for Rs. 5,450. They will also have the original FD Budget of Rs. 5,000 p.m. on. The maturity interest of Rs. 450 can go in to SIP from month 13, to 24. From month 25-36, the maturity interest will be Rs. 900 and the SIP budget can thus be increased. Here, with a same saving of Rs. 5,000 p.m. every year, the FD investment as well as MF SIP will keep increasing and hence both the FD and Equity MF kitty is growing.
3. The rental returns in real estate are often low around 3%. One tends to hold the real estate even at this age in expectation of a capital gain. If there is no dependency on the rental income, then fully or partly this can be invested in Equity MFs.
4. Let’s say they would like to gift Rs. 5 Lakhs each to their Grand Children. Again, a better way would be to keep the capital with them via say Fixed Deposits and invest the monthly interest pay out in Equity MFs in the name of Grand Children. This will allow them to use the capital in case of any emergency or corpus deficiency
5. Their Daughter keeps worrying about their financial support for last years. She can invest a small amount of money in Equity MF via SIP and in 8-10 years this can possibly grow to a sizable corpus.
How the retirement corpus gets utilized?
A typical post retirement period is likely to be around 25 years. It is observed that initial period is comfortable with substantial corpus generating returns more than the expenses. It’s only in the later years when the inflation catches up, the corpus returns are not sufficient and hence one starts eating away from the corpus. Below diagram explains this. So if one uses the initial 12 years or so in building Equity MF portfolio, then this can generate a sizable corpus and it can come handy in later years.
Where to invest in Equity MFs?
Diversified Equity Mutual Fund isa preferred route. Given the low risk tolerance level at this age, one should look for Mutual Funds with low volatility and auto asset balance structure. So going in for a Hybrid Mutual Funds can be a good idea. One can start with Hybrid Mutual Funds with a majority of investment in Debt component and a small component in Equity. Once one becomes comfortable, then the Hybrid Mutual Funds with majority in Equity component can be invested and then finally 100% Equity Diversified Funds can be invested. Based on the stage of retirement, one can also look at investing in Index Funds.
Precaution
The Equity MF investments should be made for a period of at least 5 years. The portfolio should be reviewed at least once in a six month. The taxation angle should be kept in mind. As an example, the recent budget has increased the tax rate and holding period for Debt Mutual Funds. Instead of FD, postal savings can also be leveraged in a similar way. Before starting Equity MF investments, one should revisit the cash flows and only use surplus funds.