MF Query Board

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I am 26 years old and presently working with an IT firm. My annual package is Rs4 lakhs per annum. Can you guide me to work out a retirement plan and engage in proper financial management?

-- Yogesh Wattamwar

I t is nice to hear that you are planning for your retirement so early. You would indeed reap benefits of starting early. Coming to your question, it is quite a subjective matter when it comes to giving you guidance as there is no general rule that applies to all. Retirement planning or financial planning is quite personalised in nature and depends upon an individual’s financial position. And further, there is not much information from you about your investments, dependents, current expenses, etc. to arrive at any computations. However, just to give you a rough idea, you could take the following things into consideration:

1. Have a retirement budget. You know your expenses better that anyone else does. You know how much money you need right now in order to survive on a monthly basis. And assuming inflation of 7 per cent on a conservative basis would give you a fair possibility that you will need a lot more money to survive when you retire than you do now. The smart way to determine your retirement budget is to gather all your expense receipts such as telephone bills, electricity bills, credit card statements, restaurant invoices and grocery receipts to identify your current monthly spending. Getting to know about your expenses is a good way to start with retirement planning.

2. Identify your risk appetite. What type of investor are you? Are you an aggressive investor who doesn’t mind investing a large amount in equities with the hope of earning higher profit margins? Or are you a conservative type who doesn’t mind lower but steady income? Your risk appetite does play an important role in not just planning your retirement but also in investment planning.

3. Calculate the years left for retirement. In order to know this, you simply need to find the difference between your current age and your approximate age of retirement. This will help you know the number of years you have in hand to build a retirement corpus. Investing in direct equities offers high risk-to-return ratio. That said, you can consider investing in mutual funds as they generally are capable of diversifying an investor’s portfolio. No matter where you invest, make sure you give yourself enough years to potentially grow your corpus.

4. Identify income sources post retirement. Well, postretirement your monthly salary won’t be credited in your account anymore and hence there should be some other ways which would help you to have continuous source of income. For instance, you can receive a pension from your employer, you could own an extra home which could earn you rent, or you could be hired as a guest faculty in an educational institution and receive fees for sharing your expertise with the students. Are these sources of income adding up to help you build enough money so that you are ready for unexpected expenses?

5. Stay off debt in retirement. While taking care of debts might feel like a cakewalk right now, trust us but you do not want to owe anyone money later in life, especially when you are about to retire. Hence, it is advisable to not have any pending loans or unpaid credits in the kitty as you near retirement. Pay off all your debts if you do not wish to lead a debt-ridden retirement life.

I have invested in the following close-ended funds which are going to mature in January 2021: ABSL Resurgent India Fund-Series 7, HDFC HOF-1, Regular Fund and ICICI Value Fund Series-19. All these schemes are performing poorly; the AMCs managing these close-ended funds are extending the maturity period and making them open-ended funds. Investors are to make a decision by mid-January 2021. I am a retired person and worried about my investments. As such, I need your advice on a most urgent basis about what action should I take regarding these funds.

- Meenakshi Gaur

We believe that it makes more sense to invest in open-ended funds rather than in close-ended funds. On paper, though, the close-ended funds are the ones that stand to benefit as money can only be withdrawn on maturity or selling their units on exchanges. Therefore, the fund manager in this case doesn’t face a liquidity issue or any redemption pressure and can invest for the long run. But when it comes to performance delivery, open-ended funds seem to be a better option over close-ended mutual funds. The major benefit of open-ended funds is liquidity. Investors can exit from open-ended funds whenever they feel like and also re-invest when they deem fit.

But it is difficult to say whether open-ended funds are better than close-ended funds or vice versa. The performance of a fund, whether open-ended or close-ended, depends on its portfolio, fund management and investment style. Some investors of open-ended funds are impatient to redeem their units after the net asset value (NAV) of their investment appreciates by say 5 per cent to 10 per cent to book short-term profits. This hurts the investors who remain invested in the funds.

On the other hand, close-ended funds are better options in such situations because the lock-in period prevents early redemption and protects the interest of long-term investors. Further, the funds listed by you are consistent underperformers and therefore it would make more sense to exit from them and invest in a good mix of open-ended equity and debt funds. Also, we would urge you to have a retirement plan in place which would help you understand your cash flows during retirement and also help you plan your investments during retirement.