Focus on Life in Retirement | Value Research In the pre-retirement phase build a portfolio that focuses on stability with growth that can generate income in retirement
The Plan

Focus on Life in Retirement

In the pre-retirement phase build a portfolio that focuses on stability with growth that can generate income in retirement

I am 59 years old and plan to retire at 65. I have no liabilities to worry about. What changes should I make to my portfolio for better returns?
- Hatim

To have no financial liabilities as you approach retirement is a great way to enter life in retirement. At a time when inflation is on the rise and life in retirement getting longer, being able to build a sizeable corpus to manage retirement is a dream come true. Having the right financial balance with savings and investments at this stage will go a long way for financial wellbeing in the post-retirement years. You have all the necessary ingredients in the making for a comfortable life in retirement.

Risk mitigation
You have no liabilities and if you have no financial dependents, you may as well forget considering any life insurance. However, what you definitely need is health insurance for yourself and your spouse as well. Healthcare costs are rising and one would be better with de-risking their finances by opting for a health insurance policy than dip into their reserves to manage any medical emergency. You can also look at creating an emergency fund worth a couple of month's household expenses in a liquid fund or even with your bank account to be sure you have the reserves if necessary.

Current portfolio quality
The earliest of mutual fund investments that you have are 16 years old and over the years you have built a well diversified portfolio of funds riding on equity diversified funds across market caps. While it is not clear if the investment in these funds have been periodic of in a single go, you have demonstrated the discipline to stay invested in funds over market cycles which has helped your investments swell into a sizeable corpus.
However, there are a few issues that you need to address; you have opted for the dividend option in the funds that you have invested in; if you do not have the need to supplement your current income from these investments you should consider sticking to the growth option. With the DTC coming into force from next year, this will help you reduce your tax burden because dividends from mutual funds will attract tax, impacting the income stream created in this fashion.
There is also a lesson for you; you should track the performance of your funds frequently to move from funds that are not performing well. Also, the choice of an ultra short term debt fund is not clear, if growth is what you seek. With 23 per cent of your portfolio allocation in this fund; it is time you consider deploying it to funds that will help you achieve growth.

Current Portfolio
Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
DSPBR Top 100 Eqt Reg Large Cap **** 10.97 15.96
Franklin India Bluechip Large Cap ***** 12.05 14.09
HDFC Top 200 Large & Mid Cap ***** 15.6 17.08
Tata Pure Equity Large & Mid Cap *** 7.47 11.29
ICICI Pru Discovery Mid & Small Cap **** 19.58 13.86
Reliance Growth Mid & Small Cap *** 8.94 14.64
Magnum Taxgain Tax Planning *** 3.48 10.07
Sundaram Taxsaver Tax Planning *** 7.12 11.57
HDFC Cash Mgmt Treasury Advantage Retail Debt: Ultra Short Term *** 6.54 6.97
Returns as on March 16, 2011 Ratings as on February 28, 2011

Retirement planning
The five years prior to retirement is crucial because it is a phase when one needs to evaluate retirement goals and have a more realistic picture of expenses in retirement. Until some years ago, retirees and those approaching retirement were advised to take their savings and lump-sum payouts and invest everything in ultra-safe debt funds. However, with rising inflation and increasing life in retirement, the conventional wisdom is to increase one's exposure to equity to generate higher returns and serve as a hedge against inflation.
The basic premise that retirees will need to generate higher returns to support longer lives is absolutely correct. It is also true that equity tends to outperform fixed income investments and can provide an effective inflationary hedge. The problem, however, is to create a portfolio that will be stable, offer growth as well as income. The suggested portfolio has 60 per cent equity exposure providing scope for growth with the balance acting as cushion against equity volatility. You can retain your holdings in DSPBR Top 100 Equity, Franklin India Bluechip and HDFC Top 200; all these three funds have a proven track record and performance to fit into any portfolio. But gradually move your other investments into the suggested portfolio with equal allocation across all the four funds. As the mandated 3-year lock-in in Magnum Taxgain is over, you should consider exiting it right away. Also, make use of tax benefits in tax planning funds to the fullest this year and the next before DTC comes in as these do not fall within the list of instruments that enjoy tax concessions.

Suggested Portfolio
Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
BSL 95-G Hybrid: Equity-oriented **** 13.16 15.12
FT India Dynamic PE Ratio FoF-G Hybrid: Asset Allocation Not Rated 10.49 13.67
HDFC Balanced-G Hybrid: Equity-oriented ***** 15.25 13.57
Reliance Regular Savings Balanced-G Hybrid: Equity-oriented ***** 15.17 15.61
Returns as on March 16, 2011 Ratings as on February 28, 2011

Adopt a strategy of setting systematic withdrawals when you need income than being invested in dividend options; as funds do not regularly declare dividends. By setting up an SWP; you will create a regular income stream while the rest of your portfolio will continue to grow. And make sure to review the performance of your fund holdings periodically to assess its performance and growth. Stay invested in a more stable portfolio in retirement and you'll pay less for market volatility and sleep better. You will also raise the odds to spend more each year in retirement.

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