Your Fund Portfolio

I am a retiree aged about 62 years. I would like to invest in mutual funds.

The purpose of my investment is to beat inflation five years from now to meet the living expenses of self and wife.

I can invest about ₹7,000 a month through the SIP route.

My time horizon is 5-7 years. Please suggest suitable investments.

Gautam Niyogi

From your query, it is inferred that your current living expenses are taken care of by your employer’s pension or other source of monthly income.

Apart from a regular pension, you must also have an adequate health insurance cover to take care of medical emergencies and an emergency fund consisting of 6-9 months’ living expenses, which is parked in a bank deposit.

If you meet the above conditions, you can consider investing in mutual funds. The kind of mutual fund you should add to your portfolio (equity or debt) will depend on your ability to handle volatility in returns and even capital losses in some years.

Provided you are willing to risk capital losses for the possibility of high returns, you can consider hybrid equity oriented funds for your portfolio.

Given that the stock markets have soared in the last three years and are today poised at high valuations, we believe that more conservative hybrid funds with a lower equity allocation will be your best bet.

ICICI Pru Balanced Advantage Fund, HDFC Equity Savings Fund and Franklin India Dynamic PE Ratio Fund are good options to get to near double-digit return without very high equity risks.

The first two funds invest in equity and equity arbitrage to the extent of 65 per cent of the portfolio and park the remaining portion in pure debt instruments. The equity arbitrage portion also carries low risk similar to debt instruments.

The tax treatment is similar to an equity fund.

Franklin Dynamic PE ratio allocates money between Franklin India’s equity and debt funds based on stock market levels.

As this fund reduces equity allocation in an expensive market, your downside is reduced. This fund gets the same tax treatment as a debt scheme.

But do note that if inflation continues to hover at low levels of 4 per cent or so as it does today, it isn’t necessary for you to take on equity risk to beat inflation. Select schemes targeted at senior citizens offer inflation-beating returns with complete safety of your capital.

The post office Senior Citizens Savings Scheme, which presently offers an annual return of 8.3 per cent (taxable) with a five-year lock in period, is an excellent option if you are looking for inflation beating returns. You can invest up to ₹15 lakh in this scheme, either in a lumpsum or in instalments.

The interest rates on this scheme get reset every quarter by the Central government, and the rate for the October-December quarter will be announced shortly. But you can count on this scheme to offer better interest rates than those prevailing on bank deposits.

From your query, it is not clear if you are opting for SIPs because you do not have lumpsum money at your disposal, or because you believe they protect your capital values better. SIPs are usually recommended only for schemes with an equity component.

The logic of using a SIP is that you get to spread out your investment over an extended period, so that you do not end up committing a big portion of your savings at an equity market high.

Besides, do note that the flip side of using SIPs is that they stretch out the holding period of your investment over which you hope to earn returns.

If you assume a five-year holding period for equity investments to pay off, do note that with a SIP spread out over the next 5-7 years, every instalment will have to complete a five-year holding period. Essentially you will need 10-14 years cumulatively to earn a good return.

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