FUND TALK

I am 55 years old, I earn about Rs 7 lakh as gross annual salary. I regularly invest in the stock market and have equity holdings. I have lost quite a bit of money but I continue to invest in stocks. Given that I work in a public sector undertaking, my post retirement life is secured with pension, provident fund and medical reimbursement.

I would like to add more mutual funds to my portfolio, towards post retirement. I think I can spare Rs 3,000 to Rs 5,000 per month. I request you to suggest some mutual funds with a horizon of five years.

Anasuya You may have obtained better results by starting your mutual fund investments a few years earlier. With about five years to retirement, it may actually be time to reduce the risk quotient of your portfolio.

Given your portfolio profile, the best way for you to do this today would be to reduce your direct investments in the stock market.

After the two bear markets of 2008 and 2011, we have been advising investors to use the mutual fund route more actively for their equity investments.

This is because it is becoming more and difficult for retail investors to select the right stocks from the listed universe and spare the time to monitor them closely.

Without close monitoring and considerable expertise, a direct investing strategy can result in much damage to wealth. In the stock market fall between November 2010 and November 2011, for instance, the Sensex fell by 23 per cent, but nearly a third of the stocks in the CNX 500 index fell by more than 50 per cent. The worst ones declined over 90 per cent.

In contrast, equity mutual funds did much better, with 7 out of every 10 funds doing better than the Sensex.

With just a few years to retirement, we urge you to shift money from your direct equity investments into balanced funds in a phased manner.

This is assuming you have at least 60 per cent of your savings already invested in safe options such as fixed deposits or bonds. Closer to retirement, you should also take advantage of any stock market rally to substantially reduce this exposure and shift into regular income earning bonds or fixed deposits.

We do not have your full financial details. However, you should not rely on your pension and provident fund alone to suffice for a comfortable retirement. With increasing longevity, do remember that your retired life may well stretch for two-and-a-half decades or more.

A pension that appears quite adequate today may turn out to be insufficient, if inflation gallops ahead at 8 per cent a year. For instance, if you incur living expenses of Rs 50,000 today, you would require Rs 2.33 lakh to maintain a similar lifestyle 20 years hence, at an 8 per cent inflation rate.

In our view, you must budget for a longer holding period than five years for your equity investments. Typically, stock market cycles in India have lasted three years.

If you invest during a market peak, it may take longer than five years to make a reasonable return on your investment. As you are investing through the SIP route, and are starting at the age of 55, you cannot hope to reap the full benefits of your investments at 60. You must prepare to wait longer for your equity investments in mutual funds to deliver returns.

However, if you are building this corpus towards your post-retirement expenses, you can commence SIPs in good balanced or diversified equity funds. We suggest HDFC Top 200, HDFC Prudence, Franklin Dynamic PE Ratio Fund and Quantum Long-term Equity Fund as some options.

These funds invest either in blue chip stocks or in a mix of stocks and bonds and may carry a much lower risk profile than plain equity investments.

An investment of Rs 5,000 per month for 60 months in equity funds earning 15 per cent per annum will leave you with a corpus of Rs 4.48 lakh at the end of five years.

The recommendations made in this column address the readers’ query, based on their risk profile and requirement. They may not be applicable to all investors. Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

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