My Dad retired last month and has about Rs 10 lakh in retirement payout for investments. His requirements are capital growth with preservation of capital. Rs 5 lakh can be put in for long term whereas the other Rs 5 lakh need to be somewhat liquid as it would be used in the next year and half for my sister's marriage. He does not need any monthly income, as his pension will take care of the monthly expenses. After talking to a few investment advisors I have come up with the following portfolio.
Post Office MIS: Rs 6 lakh for 6 years. This will give a monthly return of Rs 4,000. We plan to open a post office recurring deposit account of Rs 4,000 that will give assured returns of 8 per cent. Taking the maturity 10 per cent bonus in PO-MIS after 6 years, this would give an effective ROI of 9.5 per cent for the 6-year period. Alternatively we can invest the Rs 4000/- into MIP/debt mutual funds through SIP for a higher return though with higher risk but greater liquidity.
Rest of the Rs 4 lakh will be invested in mutual funds/equity with the following allocation:
MIP: Rs 1.25 lakh (Alliance MIP (G), FT MIP (G), HSBC MIP Savings Plan, Tata MIP)
Debt: Rs 1 lakh (Please suggest some funds here as the choice is so vast)
Equity: Rs 75,000 (HSBC Equity, Franklin Bluechip, Reliance Vision, Tata Equity Opp, Kotak 30, Deutsche Alpha Equity)
Quality IPOs: Rs 1 lakh
Please analyze the portfolio and advise any changes if required.
To an extent, you have done an excellent job in preparing your father's post-retirement portfolio. The Post Office Monthly Income Scheme (MIS) is a boon for every retired person. The capital is protected here and earns a monthly income at the rate of 8 per cent per annum. So we agree with your Rs 6 lakh investment in MIS. But for that, your father will have to open a joint account with your mother to be able to invest Rs 6 lakh in MIS, as there is a maximum investment limit of Rs 3 lakh under a single account.
However, we disagree with your plan of transferring the MIS interest income into Post Office Recurring Deposit or into MIPs or debt schemes. Instead we would advise you to opt for a SIP in two diversified equity funds. One large-cap and one-mid-cap fund would do the job. Among large-cap funds, you can chose funds like Franklin India Bluechip or HDFC Equity. And for the mid-cap fund, go for Franklin India Prima.
This will help in fulfilling your high-risk high-return criteria and also take care of the liquidity aspect, as all funds are open-end today. But in case of Post Office Recurring Deposit, the investment gets locked-in for 5 years. Though there is high-risk element in equity funds, but that should not be a cause of concern, as your capital is not touched here (protected under MIS). You would only be investing the gain or the interest part in these equity funds.
And for the remaining Rs 4 lakh, the best option would be to invest the entire sum in MIPs and spread it over four to five funds. The MIPs chosen by you are perfect in the sense that each has a different risk-return profile in terms their maximum exposure to equities. HSBC MIP Savings Plan can take a maximum equity exposure of 25 per cent, whereas, it's 20 per cent in FT India MIP, 15 per cent in Alliance MIP and 10 per cent in Tata MIP. This will not only simplify your overall investment, but would also take care of the liquidity requirement for your sister's marriage. MIPs charge a CDSC of up to 0.5 per cent for redemption before 6 months and not beyond that.
Here, we would like to discourage IPO investing as there is no guarantee that there will be more company IPOs in the coming years. Even if so happens, there is no guarantee that you will get the allotments. When the market was hot, companies were coming up with IPOs. But now that the market has taken a bit of a hit, the primary markets may dry-up, as has been the case in 2001 and 2002. Thus, it may happen that Rs 1 lakh kept aside for IPOs could remain idle. And since IPOs are more risky, it doesn't suit your father's profile. So you should forget about IPOs and invest that amount in the MIP. We have charted out a very simple, conservative yet justifiable portfolio for your father's post retirement investment.