A retirement corpus for your parents

By Morningstar |  18-12-19 | 
 

Before we address each query, do read these 4 pointers which are applicable to all.

#1: We believe that investors should consult with a financial adviser before investing. What we offer are just broad suggestions.

#2: These links may be of help:

#3: For portfolio construction, asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which has the potential to deliver relatively higher returns compared to fixed income over the long term.

#4: One may refer to Morningstar Investment Packs, offered exclusively on the Paytm Money app, as a solution to help you meet your goals. These investment packs are the outcome of Morningstar Investment Adviser India’s asset allocation and fund selection expertise.

Each investment pack has 3 to 5 underlying funds, and are diversified across large cap, mid cap, multi cap, small cap equity categories as well as debt categories like liquid, ultra short, low duration and banking & PSU.

Based on an investor’s risk suitability assessment created by Paytm Money, a risk profile (Low Risk, Conservative, Moderate, Growth and Aggressive ) is identified and an appropriate investment pack is recommended to the investor. These packs will be monitored on an ongoing basis and reviewed by Morningstar.

Please note, the investment packs are exposed to market risk and do not guarantee the protection of the investors’ money against capital market movements.

 I want to invest Rs 10 lakhs with a duration of 5 years. Where must I invest, in terms of asset class? Also, is an equity fund better than the direct stock route?

- Rakesh

Investing through equity mutual funds is better than direct stock investing.

  • Direct investments require professional expertise on global and domestic macro environment, sectors, stock research, management quality, etc. for asset allocation and security selection. Detailed research on companies requires considerable resources and time, which an individual investor is unlikely to have. Mutual funds meet these requirements at reasonable costs, which is unlikely in case of individual investors.
  • Mutual funds offer exposure to diversified portfolios, which an individual may not be able to achieve given a low investment corpus,
  • Individuals selling stocks have to pay short-term capital gains tax each year. On the contrary, investors are not subject to capital gains tax when the fund sells securities, hence more corpus remains invested in the fund which boosts the post-tax return at end of investor’s horizon.

Assuming a moderate risk appetite, given no information on existing investments and the relatively short horizon of 5 years, you can have a portfolio mix of about 45% into equities and 55% into fixed income funds.

The equity allocation can be split up as 30% into large-caps, 4% into mid caps, 2% into small caps and 9% into international equities. The international equity allocation offers diversification across geographies and a hedge against currency risk.

For investment in fixed income, you can consider accrual fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds and Medium-to-long term funds. As your goal approaches (1-2 years before retirement), shift allocation out of equity into arbitrage funds, as they offer lower tax rates than fixed income funds.

I want to start an SIP with Rs 10,000. I am 53 years old, and will retire at the age of 58. Please suggest allocation of Rs 10,000 per month. This is for my Retirement Corpus.

- Raj

Assuming a conservative risk appetite, given the retirement goal and the relatively short horizon of 5 years, you can have a portfolio mix of about 30% into equities and 70% into fixed income funds. The equity allocation can be about 25% into large caps and 5% into mid-caps.

For investment in fixed income, you can consider accrual fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Medium to long term funds. As your goal approaches (1-2 years before retirement), shift allocation out of equity into arbitrage funds, as they offer lower tax rates than fixed income funds.

I am 31 years old. My dependents are a wife (24), a son (5 months), and parents aged 55 and 65. My monthly salary is Rs 46,000. I invest Rs 50,000 per annum in PPF. I have an sip of Rs 7,000 in Axis Long Term Equity, which is an ELSS. I can only afford to invest Rs 11,000/month. I have 3 goals: Child’s education, his marriage, and my retirement. Please help me figure out.

- Mondal

Education and marriage goals are assumed at Rs 57 lakhs (present value of Rs 20 lakhs at an inflation rate of 6%) in 18 years and Rs 37.3 lakhs in 27 years (PV of Rs 10 lakhs at an inflation rate of 5%) respectively. Assuming an aggressive risk appetite, given the long-term goals, your portfolio mix can be about 80% into equities (Large cap – 60%, Mid cap -  15%, Small cap – 5%) and 20% into fixed income funds.

As the equity allocation is entirely being used for availing tax deductions, the equity allocation should be entirely into oriented ELSS funds following a multi-cap strategy broadly in line with the suggested allocation. You may consider splitting future equity SIP contributions across 2 multi-cap ELSS funds to diversify your investments.

For investment in fixed income, you can continue investing in the PPF to utilize your 80C exemption limit. As your goal approaches (2-3 years before retirement), shift allocation out of equity into arbitrage funds, as they offer lower tax rates than fixed income funds.

Investing Rs 11,000 per month as per recommended asset allocation and increasing the SIP amount annually by 10%, you may be able to attain your goals comfortably leaving you with about Rs 2.8 crore at retirement. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.

My parents are in their late sixties, retired government employees. Their retirement corpus over the last 6 years has been lying in bank fixed deposits. They have no liabilities, own 2 houses and have an assured income of around Rs 10 lakh/annum by way of pensions. I want to invest their retirement corpus in mutual funds. What must be the asset allocation?

How about Rs 25 lakh in ICICI liquid fund, Rs 25 lakh in SBI liquid fund, and do a STP of Rs 15,000/week to ICICI Balanced Advantage and SBI Equity Hybrid fund?.

They have another Rs 50 lakhs still in their FDs.

- Anoop

Given that your parents have an assured regular income of Rs 10 lakh per annum, we assume the investment under their name is for bequeathing the assets. Selecting pure equity and debt funds, gives one greater control over the desired asset allocation, whereas the allocation in hybrid funds may move based on the fund manager’s views.

Hence, assuming a moderately aggressive risk profile and a long-term horizon of more than 7 years, you may consider an allocation of about 60% into equity funds (Large cap – 40%, Mid cap -  10%, International equities – 10%) and rest 40% into fixed income funds. The international equity allocation offers diversification across geographies and a hedge against currency risk. For investment in fixed income, you can consider accrual fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds. You may retain a part of the fixed income allocation under the fixed deposits, which provide deduction on interest earned up to Rs 50,000 p.a. for senior citizens under section 80 TTB.

You may start off by deploying the investable corpus first into liquid funds and then doing an STP into funds under the recommended asset classes. As your goal approaches, shift allocation out of equity into fixed income.

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