Investment Objectives & Advice

Retirement Planning 102: Build your Retirement portfolio

After the last write up on calculating your retirement corpus, Lot of you share your surprise and concerns about the need of 3 to 4 Crs as retirement amount. Some of you also had questions if you are calculating it right, which is confirmed that yes the amount required is correct. let’s quickly refresh how we need to calculate this with another example. Aniket is 30 year old,  married couple with kids,  with annual expense requirement of Rs 500K, he wants to retire at the age of 50 and expects the inflation to be 6% on his expenses. He wants to plan for 30 years in retirement i.e. age expectancy of 80years. Based on this information, we get two factors factor 1 (3.207) from table 1 of blog for 20 years accumulations stage with 6% inflation and factor 2 (23.178) from table 2 for retirement period of 30 years with similar inflation expectations. Aniket’s retirement corpus requirement will be Rs 500K x 3.207 x 23.178 = 3.72 cr.

Accumulating 3.72cr as corpus for retirement is like a dream and shocking to most of us. The real shock comes when we understand how much investment we need to make. Factor 3 from table 3 of Blog, we realize for 20 years of accumulation period if we can generate 12% return on our investments we will need 1,010.86 Rs per 10 lakhs required. This means that Aniket will need 3.72 cr x 1,010.86/ 10 Lakhs = Rs 37,570 per month. There are two challenges, first we are not in habit of shaving big amounts like Rs 37.5k per month and second that generating 12% per annual return is not a mean task. This gets further complicated because of below reasons:

  1. Getting perturbed by Market fluctuations: Markets are not like Fixed deposits which will give you regular and stable returns, It always keep on fluctuating high and low e.g. in this year market fall by close to 10% between Jan to March 2018 from 11,200 to almost 10,000 but also picked up now from March 2018 to July 2018 close to 11,000 levels. Such fluctuations create confusion in our head and heart that am i doing good by investing in market when it is falling? or should i invest more as markets are running up? Since we do not know a lot about market apart from this momentum we keep on losing money by investing when markets are high and stay out when markets are low.
  2. Temptation to withdraw:  We all have so many dreams and wishes to get fulfilled that once we see money getting accumulated in our portfolio, we get tempted to buy the car, we always wanted, or go on holiday, we dreamed for. These temptations just put our retirement at risk. Since our retirement is so far in future that most of us say, we still have few more years to go and we will be able to manage.

If we are able to overcome these challenges, we can build our portfolio for retirement successfully. For lucky people who just need 6-8% returns to achieve the required portfolio as they have existing portfolio or big saving habits or low expense requirements, They can leverage EPF, PPF, Sukanya Samridhi, Debt Funds or Fixed Deposits etc. For people looking for 8-10% returns can go to hybrid debt funds, which primarily invest in debt funds but also get some exposure to equity and provide capital appreciations. For 10-15% refund we can start increasing exposure to equity in sequential manner of hybrid equity, balanced advantage fund, Large cap funds, Mid and small cap funds etc. Each of these categories have increasing risk so has to be invested after consultation with your adviser.

Still some people might struggle with outlay of 37.5k per month than they can look for step up investments. One can start with 20k per month and step it up by 15% per year i.e. next year change the SIP amount to 23k from 20k and increase every year. This will enable you to accumulate 3.75cr over 20 years. Happy Investing!!

Mutual Fund

Balanced Advantage funds: 5 Reasons to invest

Since i started my journey in investment world, I have been hearing the importance of Asset Allocation. The recent drive of investor education by AMFI and various AMCs, also touches upon it as well as all the major finance magazines and news paper keep emphasizing on the asset allocation. First time i read about asset allocation and how to manage it, in one of the legendary book “The Intelligent Investor”. It preaches about a portfolio of 50% equity and 50% of debt, which can be 70% Equity & 30% Debt for a risk seeker, while for risk averse investors it can be 30% Equity & 70% debt. This should be re-balanced either on periodic basis or on basis of market scenario. If equity markets are undervalued increase allocation to equity and if they are overvalued decrease the allocation.

In theory this all make sense and a great advise of follow, though in reality it poses various challenges:

  1. Market understanding: Not all of us have a clear understanding of the market. It is difficult to judge whether the markets are overvalued or undervalued. To do so, you not only required market knowledge but also you need to track it more closely and regularly.
  2. Stock/ Bond Selections: We are usually conversant with the bank fixed deposits but the knowledge of Post office schemes is relatively less and it is very minimal when it is about the Corporate/ NBFC deposits or debentures. Similarly investing in stocks directly is not usually done by most of us as it needs time, rigor and knowledge to do so.
  3. Diversification: Even if we have a know-how of managing our portfolio, we need a large sum to have a robust diversified portfolio. If i am a small investor who saves few ‘000s each month, i can not but multiple stock in that.
  4. Costs: After we have a portfolio, the re-balancing means we need to continuously buy or sell the stocks and bonds to manage our required allocation or take positions based on market scenario. Each transactions costs us in form of brokerage as well as STT charges
  5. Taxation: When we sell our Stocks or bonds, we are liable to pay the tax on the gains. Short Term capital gain is 15% in terms of stocks and marginal tax rate of your in case of bonds, if we hold stock for less than a year and bonds for less than 36 months. Keeping track of each transactions and paying taxes can be too costly affair.

Balanced Advantage funds addresses all the above challenges and gives you a portfolio which changes its asset allocation based on market scenario. They also give you expert looking after your portfolio of stocks and bonds. Tax liability occurs only when you redeem the fund and is mostly treated as Equity investments. The investments can be started with as small as 500 INR per month. These funds have an ideal characteristics to be a fund in your core portfolio. Some of the recommended funds in this category are as below:

For Aggressive Investors: HDFC Balanced Advantage Fund, AUM: INR 36,000 Cr, 2.29% of expense ratio and returns over last 1, 3 & 5 years have been -1.14%, 8.57% & 16.51% respectively.

For Moderate Investors: ICICI Prudential Balanced Advantage Fund, AUM: INR 28,000 Cr, 2.15% of expense ratio and returns over last 1, 3 & 5 years have been 6.41%, 8.86% & 14.15% respectively.

For Defensive Investors: Aditya Birla SL Balanced Advantage Fund, AUM: INR 3,200 Cr, 2.33% of expense ratio and returns over last 1, 3 & 5 years have been 1.23%, 9.92% & 12.66% respectively.

NFO of the Kotak Balanced Advantage fund is open till July 27, 2018 can also be considered.

Happy Investing!

Disclaimer: Please speak to your adviser to check their suitability for yourself. Mutual funds are subjected to market risks, please read the scheme/offer documents before investing.