Is it safe to build a large retirement portfolio comprising entirely of mutual funds, provided the asset allocation is based properly on the risk tolerance? How safe is it to invest Rs 2.5 crore over 25 years in a portfolio of about five diversified equity funds for retirement? Are there chances of mismanagement and fraud in private funds that might cause loss of money? Is it better to go for instruments with sovereign guarantee over such a long timeframe?
There is nothing wrong with investing the money you want to keep aside for retirement in mutual funds. It is entirely acceptable to have all of Rs 2.5 crore invested in pure equity schemes, given a long time horizon of 25 years. But keep track of your funds and make changes should the need arise. Moreover, start getting more defensive as the time passes by. Gradually increase the debt component when you are just 7-8 years away from retirement. This you can do by shifting the money to categories like MIPs and assured return savings instruments.
You need not worry about the chances of fraud since mutual funds are run quite professionally, and they are also regulated by SEBI. They have to make regular disclosures about various aspects of their operations. Therefore, there is no chance of a mutual fund just running away with your money one fine morning. As far as mismanagement is concerned, a mutual fund can inflict losses only by making poor investment decisions on your behalf. But should a fund under-perform consistently, you can easily switch your money to better options.
Assured return instruments will not be suitable as their earning potential is quite low as compared to equities and with them you will not be able to accumulate the kind of wealth which you can by participating in equities. Not that anybody can predict future, but the chances of incurring a loss in equities is significantly less over a long term. And fortunately, you have a lot of time by your side. But if you are not comfortable with a portfolio entirely invested in equities, then take the middle path and keep a part of your investments is assured return instruments as well.