I am nearing retirement and want to rebuild my portfolio for the same. I plan to hold on to the mutual funds till I retire, after which I will be using them for meeting my regular expenditures. I have also not invested in any tax-saving funds as the provident fund deductions have been more than Rs 1 lakh per annum.
I need suggestion for consolidating my portfolio to 3 - 5 proven and established funds.
- Basab Ghosh
Retirement Portfolio
For any retirement portfolio, these are the first qualities to look for - compact, stable, inflation-shielded and easy to manage.
Safety and Regular Income
One of the safest avenues for regular income for those above 60 years is senior citizens savings scheme that offers 9 per cent per annum. You and your wife can, individually, invest a maximum of Rs 15 lakhs in your accounts, totaling to Rs 30 lakhs. On retirment, make this the primary source of fixed income.
The rest of the portfolio should be spread between mutual funds, emergency funds and other risk-free investments such as bank deposits. We suggest that you also keep a sufficient portion in savings bank account as emergency fund.
Shielding against Inflation
Inflation will mean that the net returns on your investments will come down. Going high on debt can put you in trouble. Your equity investments will earn more returns to help you fight the risk of negative net returns. Also, since the withdrawals from equity investments will be spread over many years, it will reduce the risk of cyclicality of equity returns.
Withdrawals from this investment can be used to fulfill the need for additional income and increased cost of living.
Current Investments
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The total debt investments (bank deposits, provident funds, income fund and debt component of balanced funds) account for about two thirds of your total investments. This is not too high, but can still be reduced without compromising on stability. While bank deposits are secure investments, their returns and liquidity might be an area of concern. In your remaining working years, focus on reducing allocation to bank deposits and rebuilding your mutual funds portfolio.
Consolidating Mutual Funds Portfolio
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You currently have 20 equity funds (including balanced funds), mostly good ones. Of these, about 11 funds are capable of forming the core of your portfolio. We suggest that you focus on balanced funds as the core of your portfolio.
Balanced Funds as Core
A breakup of your balanced funds portfolio reveals about 70 per cent allocation to equities and the rest to fixed income, which is typically how a balanced fund behaves. The investment in fixed income cushions the fund from extreme market movements - their rise and fall will be less than an average pure equity fund.
Apart from stability, they offer you a peculiar tax advantage as well. All these funds are treated as equity funds and taxed accordingly. In effect, the 30 per cent fixed income component too becomes tax-free after one year, which otherwise a fixed income fund is not. As a result, the allocation to a fixed income fund in your portfolio will also come down.
Let's see how this can be done.
Since all the balanced funds in your portfolio are proven funds, you can choose any 3 from the 5 that you currently have. This will make the portfolio compact enough with adequate diversification.
When choosing the funds to retain, ensure that the consolidation exercise is tax-efficient as well. Firstly, you need to take care that the movement of the funds is the minimum so that securities transaction tax (STT) liability is minimum and secondly, redeem only from those funds that have completed one year as they will not attract any capital gains tax liability.
Income Fund
Templeton India ST Income is a good fund. A small part of the mutual funds portfolio, about 10 per cent should stay here as this will come handy in regular rebalancing.
Sector Funds and Stocks
Although your portfolio will still be complete without any sector fund, you may invest a part if you have a privileged understanding of a particular sector. Similarly, hold on to your stocks only if you have the time and understanding to research the companies. Ensure that your sector funds or stocks holdings do not cause an skewed allocation to a single stock or sector. It is also important to avoid acting on tips and flowing with the market momentum.
This article was originally published on April 01, 2010.
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