Safeguarding Your Nest Eggs
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I am a 50-year old software professional. I plan to retire at 55, and have saved about Rs 2 crore as my retirement corpus. Currently, I have invested Rs 120 lakh in shares and Rs 80 lakh in fixed deposits. I am not keen on debt as I have heard that equity is the best asset class. Also, I do not have any liabilities or commitments as of now. Please advise me on my investments.
- Ruhan Mittal
Your current allocation is oriented towards equity. As you are only five years away from retirement, this is an aggressive portfolio.While equities do have the potential to generate high long-term returns, they can be extremely volatile in the short term. Historical data provides examples of time periods where debt instruments have outperformed equities – notably in 2008 and 2011. This kind of allocation would be ideal for individuals just starting their career but not for an investor approaching retirement. Any kind of stock market crash in the run up to your retirement can erode your corpus significantly.
Considering your situation, you should reduce your exposure to equities and increase your holdings in debt. You should also invest in equity mutual funds rather than in direct stocks alone. This is especially if your existing portfolio of shares is not effectively diversified. Another consideration is that the expenses of managing a stock portfolio are substantial.
Investments in mutual funds have several advantages over investments in shares. A mutual fund can diversify at lower costs as fund managers manage large amounts and can pool money and execute trades at lower costs. Fund managers are professional investors and can track data related with macro-economic trends and company financials more efficiently than individual investors. Therefore, a fund manager is more likely to pick the top performers than an individual investor.
The table shows a recommended asset allocation. It ensures that the majority of your investment (Rs 120 lakh) is in short-term debt mutual funds. These funds are low risk and will effectively serve as a cushion in case of any jerks to equities. These funds typically have maturity periods of one-two years.
| Asset Class | Recommended Allocation (Rs/Lakh) | Recommended Allocation (%) |
|---|
| Equity - Large Cap Mutual Funds | 60 | 30 |
| Debt - Short Term Mutual Funds | 120 | 60 |
| Debt - Fixed Deposits | 20 | 10 |
| Total | 200 | 100 |
The short-tem funds listed here have generated impressive returns in recent times. Birla SL Dynamic Bond and Templeton India Short Term Income Fund have 4-star Value Research ratings, while IDFC SSIF (Medium Term Plan) and Templeton India Low Duration Fund have 5-star ratings.
Given their performance and track record, short-tem funds are a relatively better investment avenue than fixed deposits.
| Scheme Performance | Returns (Annualised As On 29-Aug-2012) |
|---|
| | 1 Month | 3 Months | 6 Months | 1 Year |
|---|
| Birla SL Dynamic Bond-Ret(G) | 8.14 | 10.69 | 9.87 | 9.97 |
| HDFC High Interest-STP(G) | 8.87 | 10.93 | 9.61 | 9.35 |
| ICICI Pru STP-Ret(G) | 8.62 | 10.6 | 9.11 | 9.19 |
| IDFC SSIF-MT(G) | 7.68 | 10.58 | 9.55 | 9.82 |
| Templeton India Low Duration Fund(G) | 9.27 | 10.07 | 10.64 | 10.22 |
| Templeton India ST Income(G) | 9.2 | 10.6 | 10.2 | 9.57 |
Investing 30 per cent of your Rs 2 crore corpus in large-cap equity funds will enable some acceleration of your portfolio, which is needed to beat inflation. Large-cap funds generally invest in stocks of blue-chip companies whose shares are generally more stable and less volatile than the shares of small or mid-cap companies. The large-cap funds in the table have a history of consistent performance and have generated high risk-adjusted returns.
| Scheme Performance | Absolute (29-Aug-12) | Compound Annualised (29-Aug-12) |
|---|
| | 1 | 3 | 6 | 1 | 3 | 5 |
|---|
| | Months | Years |
|---|
| DSPBR Top 100 Equity-Reg(G) | 3.43 | 3.91 | -3.39 | 6.22 | 6.82 | 8.63 |
| Franklin India Bluechip(G) | 1.61 | 4.99 | -3.26 | 6.45 | 8.22 | 7.6 |
| FT India Dynamic PE Ratio FOFs(G) | 1.22 | 4.03 | -0.4 | 6.88 | 7.13 | 9.23 |
| ICICI Pru Focused Blue Chip Equity-Ret(G) | 2.65 | 5.85 | -2.05 | 8.94 | 10.2 | - |
| ICICI Pru Top 100(G) | 2.35 | 4.12 | -1.85 | 15.02 | 7.64 | 6.01 |
| BSE Sensex | 3.87 | 6.4 | -1.48 | 6.53 | 3.18 | 3.13 |
The remaining 20 per cent of your corpus could remain invested in fixed deposits for additional safety and diversification.
The proposed allocation is geared towards debt and includes a modest allocation in relatively stable equities. Following this kind of allocation will enable your portfolio to retain adequate safety along with a positive real rate of return. Historically, the probability of a negative return on the Sensex for a five-year rolling period has been eight per cent. So, with a 30 per cent allocation to equity, the probability of a decline in the equity component of your portfolio is 2.4 per cent.