A retirement corpus requires balanced investment

PORTFOLIO MAKEOVER

I am 58 years old and have opted for pre-mature retirement from the armed forces. Currently, I am working in a software company. My salary and pension are enough to provide for my monthly expenses. I have invested my retirement proceeds of Rs 35 lakh in mutual funds and RBI bonds. Both my sons are married and my financial goal is to plan for my retirement in about two years. I request you to look into my portfolio and suggest restructuring.

- K R Reddy

FINANCIAL GOAL:

 

Earning a regular post-retirement income

Observations:

Good choice of funds Conservative and risk-averse approach

Portfolio cluttered with too many funds

Appropriate equity-debt allocation

Low large-cap allocation (53 per cent)

Good quality debt papers

Of the 22 funds, 11 have allocation below five per cent

Funds'equity holding spread across 267 stocks and debt holdings spread over 124 debt instruments

Diversified sector allocation with top five sectors accounting for 62 per cent

MISSING LINK

Diversification doesn't mean that the portfolio should have many funds. Few funds can also solve the purpose

Investment should always be done in disciplined and regular way so that you don't have worry about your investment in falling market.

We believe that you are pretty much on the right track. In particular, the equity-debt mix in your portfolio, which is in the right measures to bring you steady returns and protect you against downside risks as well.

There are few investment mistakes that you have made. We feel that the basic reason behind the grey areas of your portfolio could be the existence of a few investment myths. Let's try to clear those out before we move further.

 

Myth No 1: Too many funds provide diversification

Most investors hold the misconception that investing in a high number of funds provides diversification. That is not true. Fewer good quality funds can provide the adequate amount of diversification. Moreover, too many funds make the portfolio unmanageable

 

Myth No 2: Lump sum investment is better

Investors with a long-term objective should generally avoid investing in lump-sum amounts. Investing in a systematic and disciplined way is always the better option as it helps in rupee cost averaging, especially in volatile markets. Moreover, with this approach, the unnecessary tension of timing the market is also avoided.

 

Myth No 3: Equity allocation should be trimmed down when investor is close to retirement.

This is a common misconception. The aim should be to have an appropriate debt-equity mix rather than going too high on debt. High exposure in debt instruments can erode the capital invested when inflation is on a rise. But a reasonable equity exposure can counter the impact of inflation.

We hope few of your ambiguities are cleared. Let's correct the mistakes in your portfolio.

SUGGESTIONS:

Make a reasonable estimation of income requirement

Reduce number of funds

Keep few well rated diversified funds with large-cap exposure

Avoid heavy investment in theme based or sectoral funds

Choose debt funds with medium or long-term horizon for better tax efficiency

Invest via Systematic Investment Plan (SIP)

Rebalance the debt-equity allocation of your portfolio once a year

You can opt for systematic withdrawal plan for receiving money on periodic intervals from funds with growth option, after your retirement. This too is tax efficient.

Value Research