Tuesday, December 6, 2011

Some conservative equity options for senior citizens

The retired folks are in a fix. Their favourite investment destinations like Public Provident Fund (PPF), fixed deposits (FDs) and so on — traditionally considered safe — are not generating the kind of returns they expected them to meet their spiralling expenses. Most of them are contemplating how to generate a little more from their corpus.

It is a real test for many because the first thing they do once they retire is to lock-in the corpus to generate regular income for the rest of their life. However, the trouble is that they never accounted for inflation while considering the regular income. They typically did some back-of-the-envelop calculation, depending on their corpus, and assumed that the regular income would be enough to keep them going. However, today they have been proved wrong. Mainly because they did not account for inflation at all while calculating the returns.

Though it is prudent to follow a slightly conservative approach after retirement, it is important to remember that one may need to depend on retirement funds for many years. Therefore, the key is to maintain a portfolio that will continue to grow for many years after one retires. Equity and/or equity funds should still be part of the portfolio, though in a moderate percentage.

The traditional investment options like bank deposits, bonds, small savings schemes and debentures have been the mainstay of their portfolio for years. Though as a category, these instruments do address their concern for the safety of their hard-earned money, most of them do not have the ability to beat inflation. That’s because they not only offer low returns but also are not tax-efficient, barring PPF. Besides, lack of liquidity in most of these instruments can be a major hindrance in the flexibility required to make changes in the portfolio from time to time.

No wonder then that of late there has been a small change in the outlook of these seniors. Many of them are seriously taking a look at investing in equity because they have realised that this is the only way to generate extra income. Earlier, the perception was totally different. Many people were of the view that retired people should stay away from equity, as it is the most risky instrument. However, the mindset is slowly changing.

It also helps their cause that today you have various mutual fund schemes to assist in their endeavour. Once you have discussed how much of your portfolio will be invested in equity, you have the choices of index fund or large cap schemes — just to name a few — to bank on. Those who are unfamiliar with equity schemes also opt for hybrid schemes because they consider them safer. In a way, it suits them because the portfolio would automatically get rebalanced as the fund manager doesn’t have the mandate to invest above a particular limit in equities.

Investing in equity is a wise move, but I would want these seniors to be mindful about the risk associated with it. Don’t entertain fantastic notions about the returns. Have a realistic figure of 12-15% annual over a long period. Also, don’t earmark a large part of your portfolio for equity investment. Ideally, you should limit your equity exposure to 10-15% of your portfolio — especially if you have a small corpus to begin with.

Source: Economic Times

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