FINANCIAL PLANNING: Gaurav Mashruwala

Many financial planners are advising me to invest in international equity funds. Do you think it makes sense considering that returns in India are much better compared to the rest of the world?
In all kinds of investments, there is return and risk. They are two sides of the same coin. One cannot exist without the other.

While you are right in saying that returns in India are the highest, you also have to consider the risk associated with these investments.

If you closely look at your balance sheet, you will observe that virtually all your investments are in single currency — Indian rupee. Your house, jewellery, equity, debt, retirement corpus, bank balance, cash balance, land and real estate, etc, are in India. If due to any internal or external factors like geo-political situation, natural or man-made catastrophe or economic turbulence, our economy gets affected, all your investments will be impacted.

For decades, we have never considered these risks purely because we were a closed economy. Our central bank never allowed us to diversify across regions and currencies.

Now, we can access international markets in two ways. One is to invest in mutual fund schemes that are domiciled in India but invest in international markets, either directly or through acting as feeder funds to some international mutual fund schemes.

Another option is to directly transmit funds abroad and invest. According to the Foreign Exchange Management Act, an Indian citizen can invest up to $2,00,000 per year in foreign markets (with few restrictions). The best part about this is that no prior approval is needed from any regulator.

What is the right age to start planning for retirement?
Usually, an individual starts earning between 20 and 25 years of age. If we consider the retirement age as 60, she/he has a working life of 35 years. In these many years, she/he has to support his family, build his/her house, get children educated and married, support parents and build a corpus which will last for 20-25 years after retirement.

Over the years, life expectancy of individuals has been steadily increasing. In first half of the 20th century, an individual use to live for two-three years after retirement. This period increased to 7-10 years around the middle of the last century. Today, people live for 15-18 years after retirement. By the time we reach 2020, an individual may live for about 25 years after retirement.

Planning for retirement should start the day we earn our first income. Set aside very small portion of income for retirement. In earlier years of life, our financial responsibilities are least. Also, the sooner we start, the lesser will be the effort to build a retirement corpus.

If we want a corpus of Rs 1 crore at the age of 60 and if we can invest in an instrument that generates 8 per cent returns per year, the amount that needs to be saved every month from the age of 25 is Rs 4,359. If we start at 45, we need to save Rs 28,898 per month to reach the Rs 1 crore-mark at 60. And if we wait till the last hour and start building the corpus from the age of 55, we will have to save Rs 1,36,098 per month.

The writer is a certified financial planner. The counsellor’s views expressed here are his own. Send your queries at yourmoney@bsmail.in