Investment Objectives & Advice

Retirement Planning 4.0: Core & Satellite Portfolio Investing

Last post on the Path of financial freedom (Investment required calculator: Link) triggered the question by many about how their portfolio should be? Most of them take high risk synonymous to higher returns and build portfolio heavy on Small/Mid-cap funds etc. Though building a core portfolio is like building your physique. You do not join gym and do only biceps or squats alone, It has to start with strengthening the core and then build the holistic physique. Similarly While exercising with heavy weights you need to protect your core by using the waist belts etc, same way you need to protect your core portfolio as well from sudden risks.

Core & Satallite Portfolio

How to build core portfolio?

Core portfolio should be followed with discipline of investing regularly and should have limited volatility with sufficient growth to beat inflation and should not be tapped into unless extremely critical. This will provide you the stability needed to build sustained wealth over time. This is given with healthy mix of Debt and Equity.

For employed people, Employee Provident Fund (EPF) is a great investment avenue and still least talked about. It gives good stable returns as well as disciplined investing of 12% of basic salary (additional 12% added by employer). The 24% of basic salary is getting invested automatically as well as for long term build a great corpus together. If you are not not employed, you can chose options like PPFs, Sukanya Samridi, FDs or Debt Mutual funds etc. (To know how to build your debt portfolio: Link)

On the strength of the Debt portfolio, you should top it up with equity investments of similar amount to help you beat the inflation by good margin. My suggestion will be to Large-cap mutual funds or Index funds/ ETFs. Though if you are risk averse you can use a Hybrid Equity/ Balanced advantage fund and if you are aggressive, you can opt for multi-cap funds. In any scenario, you should not get Mid or small cap funds in core portfolio.

How much money to invest in your core portfolio?

For employed people roughly 45-50% of the basic salary or you can check the amount required for your financial freedom. If you are self employed or a business person, you should aim to invest 30-40% of the net monthly income (Monthly Income – EMIs/House rent – insurance premiums) into core portfolio.

How to protect your core portfolio?

Your core portfolio is not only to provide for your retirement years but also to take care of your dependents.  There are two main risks to your core portfolio, health risk and mortality risk. Most of us feel uncomfortable buying health or pure term plans as in case of no event the premium paid is lost. We do not feel the same for buying the bike/car insurance as it is mandatory. We should consider the health and pure term cover as mandatory only for healthy and happy life.

This basic construction of portfolio will help you get a great foundation to build your overall wealth. (Check the Portfolio built using Cor portfolio: Link) If and when you can save more, then only you should create satellites in your portfolio in form of Small, Mid-caps, Direct Stocks, Futures & options, PMS, real estate, gold and other options.

Happy Investing!

Investment Objectives & Advice

Retirement Planning Part 3: Adjusting for Lifestyle Inflation

One common question i received over last few weeks is “Why are you focusing on retirement planning?”. I started with counter question, what other goal you want to plan for? Answers ranged from buying a car, buying a house or going for foreign trip, Child education etc. This made my reply simple, Have you heard of Car Loan, Home Loan, Education loan, Personal Loan? But Have you heard of retirement loan? During our retirement years, we are having limited future earning potential, Physical energy and fitness. Also, We should aim to have a peace of mind. Do you agree? If yes, Let’s continue.

In part 1 (Know your retirement corpus), we discussed about how to calculate your required retirement corpus. In Part 2 (Build your Retirement Portfolio), we talked about the type of funds to invest, based on corpus required and time horizons. Today onward we will talk about various risk in retirement planning and how to mitigate them. Due to increasing awareness, people have understood inflation but do you know two types of inflation?

Price & Lifestyle Inflation:

Inflation or Price inflation refers to rising price of products. 5 years back, If you were buying milk for Rs 30-35 per liter, probably today you will be paying Ra 40-45 per liter. In other words, If you were able to manage the household expenses in Rs 10k a month, today you will need Rs 12-15k a month. This is due to increasing prices of Fuel, Rentals, Grocery, Vegetables etc. As RBI now targets to manage this inflation, we can safely assume that it will stay in range of 5-7% over the next 5-10-20 years and hence can be planned for. This is uniform for all of us and we already adjusted for this, In part 1 (Know your retirement corpus).

Lifestyle inflation is more personal in nature and varies drastically. This is very high in the starting period of your career as you go through a lot of changes in your lifestyle. E.g. 10 years back, I depended on tiffin services for my food at Rs 20 per meal in turn Rs 1,200 to 1,500  month. with 5-7% price inflation this should have doubled to Rs 2,500 to 3000 a month. Though in reality, Now I try to eat from a better place, also order food from outside more frequently and occasional fine dine outings have moved my food bill to Rs 12k to 15k a month, which is growing by 8-10 times in 10 years. This is because of Lifestyle inflation.

Similarly, Now i will prefer travelling by flights or A/C coaches vs Sleeper or general class in trains. Prefer to stay in gated society in 2-3 BHK flat vs Individually rented rooms/sharing accommodations. Prefer to take a cab vs local buses, prefer to go to multiplexes vs watching a downloaded movie etc. These are all examples of Lifestyle inflation and should be there as your capacity to earn and earning rise over the years.

How to plan/ adjust for Lifestyle inflation?

We should definitely not devoid ourselves from the pleasure of buying the desired watch or go for the long due foreign trips but still make sure that it should not derail our retirement plan. There are two ways to keep the risk form lifestyle inflation in check.

  1. As the earning power increases, with your income, your expenses and savings should increase in similar proportions. Means, if your salary increases by 10-20% a year so should your investments. This will keep our expense ratio to income constant which should decrease after 10-20 years of working life as the growth of expenses should slow down.
  2. As the expenses are growing by not only by price inflation, Every year you should review your retirement portfolio requirement and investments need based on latest expense.

Read more on Mutual fundsRetirement Planning. Happy Investing!!