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Retirement Retreat

Foresightedly preparing for retirement is crucial to enable you to live a comfortable life

I started investing in mutual funds five years ago. Over time, I made several changes in my portfolio, guided solely by neighbourhood advisors. However, except for a 25 per cent gain made in the first two years, I was going nowhere. How can I go about setting things right?  I am 60 and retired, my risk appetite is low-medium and I need an income of approximately Rs 40,000 per month to retain my current lifestyle. My children are well settled. I and my wife have adequate insurance.

I have Rs 9 lakh in my savings account, received recently from the government as compensation for acquired property. Of this, Rs 7 lakh is subject to long-term capital gains, which I would like to invest.

Mutual Fund Portfolio
Top 10 Funds  Percentage
Reliance Regular Savings Equity 13.76
Reliance Diversified Power Sec. 10.49
Reliance Vision 9.29
Reliance Growth 7.97
HDFC MIP Long-term 7.8
HSBC MIP Savings 6.92
DSPBR T.I.G.E.R. 4.93
HDFC Arbitrage 4.62
HDFC Prudence 4.5
Kotak Opportunities 3.99
-Ashok Rao

Foresightedly preparing for retirement is crucial to enable you to live a comfortable life, where every need can be adequately serviced and all emergencies can be positively dealt with.

Any hitches happening in your efforts to ensure the same can be frustrating to say the least. And as such, we can understand your disappointment at not being able to get decent returns from your mutual fund (MF) portfolio. If you look at the Retirement Portfolio Principles, you would realize you have gone against many of those guidelines. The most obvious ones are having invested in too many funds and keeping a higher allocation to aggressive or thematic funds.

To bring your portfolio in line with your requirements, here is what we think you should do:

Clear the clutter
Over 50 per cent of your current MF portfolio is in thematic and aggressive funds. The performance of these funds is driven by movements in their underlying themes and market-cap ranges (small- and mid-cap stocks), making your portfolio risky.

We recommend that you opt for a balanced fund. It invests a minimum of 65 per cent of its assets in equities, and the rest in fixed income securities. Due to its debt component, it will not give you the high returns that a pure equity fund would, but, having such a fund as a core holding will considerably decrease the riskiness of the portfolio, together with bringing some semblance of stability.

Divide your MF investments among three or four balanced funds. You may find these ones suitable for your needs: HDFC Prudence, Canara Robeco Balance, DSPBR Balanced and Magnum Balanced.

Rebalance Recurrently
The portfolio must get rebalanced regularly every year so that the ratio between debt and equity investments always remains at 80:20. This entails shifting of funds from one to the other. In your case, keep 30 per cent of your corpus in balanced funds (since balanced funds also have a debt component of their own) and 70 per cent in debt.

Senior Citizens Savings Scheme (SCSS) is a Post Office savings scheme having a maturity of five years with an interest of nine per cent payable quarterly. When your banks’ fixed deposits (FD) mature, check whether the interest being given there is less than in SCSS. If so, you can consider shifting the FD proceeds to the latter. But be mindfull, one cannot invest more than Rs 15 lakh in SCSS.

Contingency cash
Keep about Rs 5 lakh in flexi-fixed deposits and keep about Rs 50,000 in your savings account to meet any emergencies that may crop up.

Medical insurance
Get a health cover for both you and your wife as sudden medical expenses can make a serious dent in your retirement plans.

Escalating Expenses
Due to inflation, expenses will increase, but interest income from debt investments will not. Therefore, to compensate, you can withdraw parts of your investment in the balanced funds as and when required, to meet monthly expense needs. For your benefit we have calcuated how you could have kept ahead of inflation in Dodging Inflation, had you retired 10 years before.  

Income Tax
Money received from FDs and Post Office MIS are added to the investor’s income and taxed as per the applicable income tax slab. Hence, while calculating tax, if any part of your income is taxable then you might consider investing up to Rs 1 lakh from balanced fund in either SCSS or a tax-saving fund. But keep in mind that your current life insurance and medical insurance premiums also qualify for tax exemption.

LTCG on Property
Long-term capital gains from property are taxed at the rate of 20 per cent. Hence, for Rs 7 lakh gain from the property you willhave to pay Rs 1.40 lakh as tax. Since you are not interested in investing the proceeds to purchase other property, you can invest the gains in notified capitals gain bonds to get a tax exemption.

Both National Highways Authority of India (NHAI) and Rural Electrification Corpora-tion (REC) have this kind of bonds for a maturity of 3 years and they pay 6.25 per cent and 5.75 per cent respectively. But here again, the interest income from these bonds are taxable as per your tax slab.

On the other hand, you might consider paying the tax and then investing the remaining in equity funds. Considering a conservative return of 10 per cent from equity funds at the end of three years, you would end up with Rs 7.45 lakh compared to Rs 8.42 lakh from capital gains bonds (assuming interest is invested in FDs at 8%).

Though this might not seem very attractive, if you stay put with your investment in equity funds, then the returns from this avenue can be far higher and tax-efficient than capital gains bonds.

Dodging inflation

Investment with balanced fund
    Balance Funds
Year  Income Req.  Withdrawal  Amt. Remaining
0 4.8 0.6 13.9
1 4.99 0.79 14.44
2 5.19 0.99 11.63
3 5.4 1.2 10.24
4 5.62 1.42 11.16
5 5.84 1.64 15.09
6 6.07 1.87 18.06
7 6.32 2.12 22.7
8 6.57 2.37 28.73
9 6.83 2.63 30.25
10 7.11 2.91 27.16
(in Rs lakh)

  • Required Income - Rs 4.8 lakh per year
  • Income from fixed return instruments - Rs 4.2 lakh per year (Rs 35,000 p.m.)
  • Investment in Balanced funds - Rs 14.5 lakh
  • Making up Shortfall - Considering an inflation rate of four per cent, the required income per year would increase to Rs 4.99 lakh after the first year itself. Hence, any shortfall in income should be met by withdrawing from balanced funds.