MF Query Board

I am set to retire in June 2023 and will receive approximately ₹50 lakhs as my retirement benefits. Currently, my annual income consists of ₹2.40 lakhs from fixed deposit interest, ₹4.80 lakhs from rental income and my salary income. I have no othere investments and anticipate an annual requirement of ₹9 lakhs for FY24. With the goal of capital preservation considering inflation, how should I invest my retirement corpus of ₹50 lakhs? - Ajit Jaiswal[EasyDNNnews:PaidContentStart]

To begin with, it’s important to consider valuations when entering any asset class or security. As the current valuations are high relative to their long-term average, it’s advisable to avoid investing the entire amount at once. It would be wiser to invest in a staggered manner. Taking advantage of the sharp correction in global equities this year, building some allocation in a staggered manner could be beneficial. Diversification is crucial when constructing a portfolio as it helps cushion against adverse movements in a single security or asset class. One should be diversified across asset classes such as equity, fixed income and commodities, sectors, style such as value or growth, funds, and even fund houses. 

Monitoring the portfolio at appropriate intervals and rebalancing the asset allocation to the recommended allocation in response to subsequent market movement is also important. Following an asset allocation-based approach (a mix of equity and debt) is recommended for investing towards your goal. While fixed income provides stability to the portfolio, equities play a crucial role in generating wealth over the long run with the potential to deliver superior inflation-adjusted returns compared to fixed income. It’s advisable to assess your risk appetite before deciding on the asset allocation. It’s also important to have an emergency fund worth at least six months of expenses. You should also have a term plan and health cover to safeguard your family against any untoward incidents. Considering your goal, the recommended portfolio mix should consist of 40 per cent equities and 60 per cent debt. The equity component should be further diversified with 30 per cent in Large-Cap, 5 per cent in Mid-Cap, 0 per cent in Small-Cap and 5 per cent in international equities. The international equity allocation offers diversification across geographies and acts as a hedge against rupee depreciation. Fixed income funds with a high (safer) credit quality portfolio such as banking and PSU Debt Funds, corporate bond funds, short duration funds and medium to long-term funds are worth considering. Allocating some exposure of about 5-10 per cent) to gold as part of your strategic asset allocation is also recommended. 

Gold offers a hedge against inflation and a safe haven asset in times of market drawdowns. Investing according to the recommended allocation should enable you to meet your annual funding requirement of approximately ₹2 lakhs (₹9 lakhs minus ₹7.2 lakhs income from fixed deposits and rent). At the end of 25 years (assuming a life expectancy of 25 years after retirement), you may have a portfolio value of ₹1 crore, assuming equity market returns of 11 per cent per annum and fixed income returns of 6.5 per cent per annum. We also assume that fixed deposit interest and rental income will grow in line with an inflation rate of 6 per cent. To accumulate a higher corpus, consider topping up your investments whenever you have any excess savings or windfall gains. 

I am 31 years old and new to mutual funds, but I have a basic understanding of them. I started investing in mutual funds in May 2021 with a long-term goal of building a retirement corpus over the next 20-30 years. I would like to know if I need to rebalance my portfolio or exit any mutual funds and how I should go about doing it. - Ayush Singh

You have not provided information about your risk profile, which makes it difficult to provide specific advice about your mutual fund portfolio. It is important to choose mutual funds based on your investment goals, time horizon and risk profile. For instance, if you have a conservative risk profile and want to build a retirement corpus, it is advisable to invest in large-cap mutual funds or aggressive hybrid schemes. On the other hand, if you have a moderate risk profile, flexi-cap mutual funds may be more suitable. It is recommended that new investors should avoid investing in high-risk options like mid-cap schemes, small-cap schemes and sector schemes as they can be volatile and may result in short-term losses. Investing a modest amount of money can make diversification challenging. It is better to invest in one or two schemes that align with your investment objectives. As you start investing more in the future, you can add more schemes to your portfolio.

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