Ask Morningstar: Investing the Retirement Corpus

Nov 23, 2022

I will be retiring in June 2023 and will be getting about Rs 50 lakh as retirement benefits.

My current annual income is Rs 2.40 lakh from fixed deposit interest, Rs 4.80 lakh from rental income, and there is my salary income as of now. I do not have any other investments. I estimate my annual requirement for FY24 at Rs 9 lakh.

How should I go about investing my retirement corpus of Rs 50 lakh with an objective of capital preservation considering inflation?

Let me start by making a few points.

Valuations play a crucial role while entering any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. One should be cognizant of the prevailing valuations while entering any asset class. Given valuations are currently high relative to their long-term average, it is advisable to avoid investing any lumpsum amount and instead invest in a staggered manner. To capitalize on the sharp correction in global equities in the YTD period, one could look to build some allocation in a staggered manner.

Diversification is a key aspect while constructing a portfolio, as it cushions the portfolio against any adverse movements of a single security/asset class. One should be reasonably diversified across asset classes (equity, fixed-income, commodities), sectors, style (value/growth), funds and even fund houses. You should monitor your portfolio at appropriate intervals and re-balance the asset allocation back to the recommended allocation in case of any material drift due to subsequent market movement.

You should follow an asset allocation-based approach (mix of equity and debt) for investing towards one’s goal. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with the potential to deliver superior inflation-adjusted returns compared to fixed-income. It is advisable to get your risk appetite assessed before deciding upon the asset allocation.

It is recommended to have an Emergency Fund in place worth at least 6 months of expenses, and a term plan and a health cover in place to safeguard your family against any untoward incident.

Specifics, keeping your goal in perspective.

Portfolio mix:

  • Equities: 40%
  • Debt: 60%

Equity component:

  • Large Cap: 30%
  • Mid Cap: 5%
  • Small Cap: 0%
  • International: 5%

The international equity allocation offers diversification across geographies and acts as a hedge against rupee depreciation.

Consider fixed income funds with a high (safer) credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Short Duration funds and Medium to Long Term funds.

You can also consider allocating some exposure (5-10%) to gold as part of your strategic asset allocation. Gold offers a hedge against inflation and a safe-haven asset in times of market drawdowns.

Investing as per the recommended allocation, you shall be able to meet your annual funding requirement of approximately Rs 2 lakh (Rs 9 lakh is needed – Rs 7.2 lacs income from the fixed deposit and rent). At the end of 25 years (assumed life expectancy) you may have a portfolio value of Rs 1.0 cr. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 6.5% per annum. This also assumes the fixed deposit interest and the rental amount grow in line with an inflation rate of 6%.

To accumulate a higher corpus, you may look to top-up your investments whenever you have any excess savings or any windfall gains.

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Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.


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