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Retirement Planning

I have been investing in mutual funds since Nov 2005 and will stay invested for five yrs. My agent is asking to book profits. I will have no source of income after retirement. Please review my portfolio -JP Dhanda

I have been investing in mutual funds since November 2005. I will retire in a year or two. I intend to remain invested for the next five years. My agent is asking me to book profits. Please review my portfolio and suggest measures to improve the quality of my portfolio. Apart from these mutual funds I have close to Rs 40 lakh invested in bank fixed deposits. Please advise me how much more should I invest. Keep in mind that I intend to retire soon and have no source of income by way of provident fund or any other pension scheme
-JP Dhandha

JP Dhandha's Portfolio
Funds  % Allocation
ABN AMRO Opportunities-D 4.68
Franklin India Flexi Cap-G 2.34
Franklin India Prima-G 12.63
HDFC LT Advantage Fund-G 4.68
HDFC Taxsaver-D 3.28
HDFC Taxsaver-G 6.56
HDFC Top 200-D 4.68
Magnum COMMA-G 9.36
Magnum Contra-G 29.03
Reliance Growth-G 18.07
Reliance Vision-D 4.69
Total  100
Running SIP
Funds  Per Month Amount
Reliance Growth 2000
Reliance Vision 1000

Given that you will retire in about a year or two, your asset allocation is optimal. In reviewing your portfolio, our objective has been two-fold. First, we aim to rationalise your mutual fund holdings. The second objective is to allocate monies to appropriate debt instruments that are capable of yielding an income for you, post retirement.

As of now you have Rs 10.71 lakh spread across 10 funds and what needs to be corrected is the skewness in the allocation between funds. At the same time it must be said that your fund selection has been good, with a high weightage to 5- star and 4 -star rated funds. Even among the non-rated funds, Franklin India Flexi Cap has been a good performer.

Equity Portfolio
What is a little worrisome is the level of concentration in your portfolio. A high allocation of 29 per cent to a single fund is not recommended and we suggest a rationalisation of this holding. It would be advisable for you to book your profits in Magnum Contra and invest the proceeds in another large-cap oriented fund of a fund house other than SBI mutual fund. For this purpose funds such as Reliance Vision, HDFC Top 200 and Franklin India Flexi Cap, which already exist in your portfolio in small proportions, fit the bill.

Similarly your exposure to Reliance Growth is very high. But rather than exiting, we would suggest you to stop making incremental investments to this fund and move it to DSPML Opportunities. This will ensure that over a period of time its proportion in the portfolio will come down by itself.

Another step towards consolidation would be to move out of ABN AMRO Opportunities and Magnum COMMA and use these funds to increase holdings in Reliance Vision and Franklin India Flexi Cap.

Going forward, periodically review your asset allocation. As and when the equity markets run-up substantially, book profits in your equity holdings and move this money towards debt instruments. This will ensure that your investments don't get excessively skewed towards equity, thus adding to your risk. As simple rule that you can follow is to re-balance on an annual basis, or whenever the proportion of debt and equity changes by 10 per cent, whichever is earlier.

Income Yielding
Your corpus of Rs 40 lakh (presently invested in fixed deposits) is what you should be looking at to generate regular stream of income for you to sustain upon, post retirement. We would recommend two instruments namely the Post Office Monthly Scheme and the Senior Citizen Savings Scheme. Both these products are available at post offices. You can download the forms for these schemes at: http://nsiindia.gov.in/.

The Senior Citizen Savings Scheme is available for people aged above 60 years and carries an interest guarantee of 9 per cent per annum paid quarterly. This interest payout would be taxable. The maximum amount that can be invested is Rs 15 lakh with five year tenure. The Post Office Monthly scheme on the other hand will give you 8 per cent per annum payable monthly. The maximum one can invest here is Rs 3 lakh under a single account and Rs 6 lakh under a joint account. The maturity period is six years with a 2 per cent exit load for withdrawal after one year but before three years and a 1 per cent deduction on the deposit will be payable for withdrawal after three years.

Apart from these safe instruments that will ensure capital protection, you could look at Monthly Income Plans (MIP) managed by various mutual fund houses. The advantage with these funds is that they do not have any lock-ins, and you can redeem this money to meet any contingencies.

However, the quantum and frequency of dividends paid here will not be assured. While some MIPs have managed to produce returns in the 10-14 per cent per annum range over 2006, there is no guarantee that this performance would be repeated this year.

Even the bank fixed deposits are yielding attractive returns these days, but they score poorly on the regularity of income. If you think that you would have a stash left after investing in the above-mentioned instruments to generate income for you, then it may not be a bad idea to invest the remaining amount in bank deposits. As a senior citizen you will receive additional benefits as well.

In a Nutshell
We have suggested an allocation of your funds between various instruments. However, you must first assess your monthly expenses before making this allocation.

We would suggest you to exhaust the limits under post office monthly scheme and the senior citizen savings scheme, and work out an allocation for the remaining between bank fixed deposits and MIPs, depending upon your income and liquidity needs.

Suggested Portfolio
Funds  % Allocation
DSPML Opportunities 8.78
Franklin India Flexi Cap-G 12.00
Franklin India Prima-G 12.63
HDFC LT Advantage Fund-G 4.68
HDFC Taxsaver-D 3.28
HDFC Taxsaver-G 6.56
HDFC Top 200-D 10.00
Magnum Contra-G 12.00
Reliance Growth-G 18.07
Reliance Vision-D 12.00
Total  100