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Portfolio Makeover

For many investors, complete financial independence after retirement remains elusive as they stare at the possibility of outliving their savings.

More Scope for MFs
I am a 52-year old doctor with an annual income of Rs 7-8 lakh. I plan to retire after eight years. I have Rs 15 lakh in PPF, Rs 30 lakh in RBI tax-free bonds (to be redeemed in Jan '07) and Rs 9 lakh in NSC. I also have Rs 16 lakh in my savings bank account and have shares worth Rs 11 lakh. My spouse is a housewife and earns a rental income of Rs 4 lakh annually. Of this, she invests Rs 70,000 in PPF. Till date, she has accumulated Rs 26 lakh in PPF account, which she has extended for five years. Both my sons are in their early twenties and are studying. Each of them has Rs 8 lakh in their PPF accounts. Since Nov '05, I began investing Rs 23,000 per month in MFs via SIP route. I also have an apartment in Shimla. The total value of both may houses is Rs 80 lakh. My total expenses amount to Rs 1,70,000 p.a. Where should I invest now? Real estate is out for us.
- Ashok

For many investors, complete financial independence after retirement remains elusive as they stare at the possibility of outliving their savings. Fortunately, you are far from such worries. To illustrate, a portfolio worth Rs 1.8 crore can comfortably last 40 years given an annual outflow of Rs 2.5 lakh (with a 5 per cent increase in each subsequent year to cover for inflation) by earning as little as 2.2 per cent. Therefore, an investor with an accumulated wealth and a lifestyle similar to yours can lead a comfortable retired life even by keeping all his savings in a bank account. But that will certainly be a very inefficient allocation of assets.

With the kind of savings you have, you are not only in a position to generate sufficient assured income to meet all your expenses, but also be a bit aggressive and aim for wealth maximisation. Broadly, you can see your portfolio in terms of three types of assets:

Those yielding regular and dependable income. This will take care of your day-to-day expenses. Those aiming for capital appreciation. Market-linked investments like MFs will work to increase your wealth.

Liquid assets. Cash and money in your bank is necessary for contingencies which come uninvited in the old age.

The first task is to figure out how much to allocate to each of the three types.

Here, you have a lot of flexibility to vary your asset allocation depending upon how aggressive you want to be. Based upon some calculations and assumptions, we would give you suggestive allocations, which you can alter depending upon your preferences.

Regular Income
The most critical component is to have an adequate provision for regular income. Therefore, you should first decide how much to have in the assured return instruments. Your present household expenses are Rs 1.7 lakh per annum. With a 5 per cent escalation every year, they would stand at about Rs 2.51 lakh eight years hence, when you plan to retire. Starting from there, we would make the following assumptions:

A continued escalation of 5 per cent in the annual expenses

An after-tax yield of 5.6 per cent (8 per cent less 30 per cent tax) on fixed return instruments

A life span of 40 years after retirement

With the above assumptions, you will need to have Rs 90 lakh invested in fixed return instruments which would last the entire 40 years at the assumed 5.6 per cent yield, given you maintain a similar lifestyle. In this light, having investments worth at least one crore rupees in fixed return instruments should safely meet the objective of regular income.

Ensuring Liquidity
The next is the liquid part of the portfolio - the cash and bank balances. Adequacy of this component is necessary to ensure that you have enough funds at your disposal in case of an emergency, which could often be health related in old age.

There is no way to determine the exact amount but a ballpark figure of Rs 16 lakh, that you at present hold in your savings bank account, should adequately fulfill this objective.

Choosing Investments
You can be aggressive with the remaining part of your portfolio and invest it in mutual funds and shares. This portion is going to play the role of maximising wealth. You can dig into this part of your portfolio for things like buying a new car or planning a vacation.

Among the fixed return instruments, Senior Citizen Savings Scheme and the post office monthly income scheme are the best options which combine surety of income with regularity. While the former pays a handsome 9 per cent per annum, the latter yields 8 per cent per annum. But both have an upper limit to investment - Rs 15 lakh in case of the former and Rs 6 lakh (jointly held) in the latter. You can consider exhausting these limits at the time of your retirement.

PPF will continue to be attractive even post-retirement. There are two reasons for it. First, the interest that it earns is tax-free and, second, though it does not provide a regular stream of income, you can 'create' it for yourself. You can withdraw once a year after the expiry of the initial tenure of 15 years. Therefore, once you retire, you can keep transferring an appropriate amount from your PPF account to your savings account each year to meet your expenses.

Bank deposits are attractive these days. Some banks are offering 8 per cent on one-year deposit. Earning 8 per cent assured interest with a short lock-in of one year will suit you. However, much of this will depend upon the rates of interest on offer eight years hence, and therefore, you will have to re-visit the decision of choosing actual assets for your portfolio later.

Your real estates can be a good source of regular income. Rental income can be a very stable source of income in old age. Moreover, property rents tend to move up with inflation and hence the rental income tends to be inflation-protected. But till the time they are vacant, they will remain unproductive assets in your retirement portfolio, while commanding a sizeable allocation. It is here that you will have to make a decision. If you think that renting out is not a possibility, then consider selling at least one of them.

Moving on to your market-linked investments, we believe there is scope to invest more in mutual funds. Consider creating SIPs out of a part of the money from the maturity proceeds of RBI bonds. Give preference to mutual funds rather than investing directly in stocks. You have invested in good funds so far but reduce the number of funds. For example, eliminate any one: Franklin India Bluechip or Franklin India Prima Plus. Ditto with HDFC Equity and HDFC Top 200. Avoid ELSS funds as you can easily exhaust your Rs 1 lakh limit through PPF, NSC and life insurance premiums.

Lastly, there is one important aspect to take into account in your planning - succession to your wealth. You are likely to leave behind a sizeable stash for your heirs. Therefore, may we suggest you to carefully choose your nominees so as to enable succession in a manner you deem appropriate.