How to beat inflation post retirement
8/15/2011 2:24 PM Monday
Q. I am a retired government employee with some surplus funds available for investment. I have around Rs 500000 lying in bank Fixed Deposits, and another Rs 700000 in National Savings Certificates (NSC). The NSC deposits will be maturing soon. Can you please suggest some good investments for me to park these funds in? I have fulfilled all my responsibilities and have nothing left out.
- Subodh Nair
A. The primary objective of investing is to beat inflation. Generally, the Reserve Bank of India (RBI) guides interest rates, such that the depositor gets something over and above inflation, which is around one per cent. This is called the real rate of return. So, if inflation is nine per cent p.a. and the deposit rates are 10 per cent p.a., we are getting one per cent more than inflation – this is referred to as the real rate of return. Of course, since taxation cannot be wished away, the net return after paying income tax should be considered, to check whether we are getting a real rate of return.
Among the best ways of beating inflation is to invest in equity through equity mutual funds. This becomes all the more important after retirement, because that is the time when the salary stops coming in but inflation continues to rise. Equity has always beaten inflation over the long term, as the fundamental nature of equity is business ownership. However, investing a large proportion of funds in equity after retirement is risky, and should be avoided. It is risky because the short term patterns are un-predictable, and hence, cannot be depended upon to generate regular income.
The probability of making gains in a one-year period in the Sensex is only around 60 per cent, and increases with time. A mix of 70 per cent debt instruments and 30 per cent in equity funds should be a fair mix to beat inflation. Since you are likely to be in a low tax bracket, you could retain the debt component in long term Fixed Deposits, and invest 30 per cent in equity funds through a Systematic Transfer Plan spread over a year. Three equity funds that I will recommend or the equity part of the portfolio are: 1. DSP Blackrock Top 100 Equity Fund
2. HDFC Equity Fund
3. Franklin India Bluechip Fund
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