Don’t ignore fixed income while building retirement portfolio

Retirement planning is still a developing field in India. In the older days, retirement planning was not a big concern on two accounts – first many organised jobs offered pensions post retirement, which de-risked individuals from planning themselves and secondly the presence of the family safety net. However, both these are gradually fading in importance and, hence, for individuals who are currently working, there is a pressing need to start thinking about planning for funding their post-retirement expenses.

A retirement portfolio is a function of two life stages – wealth accumulation and spending phase. During the wealth accumulation phase, active earnings (earnings from employment or business) take care of expenses and a portion of this income should be saved to build a retirement pool. The earning years are the accumulating years and proactive planning is key to harnessing the power of compounding. Given the longevity of this stage and the risk-taking ability of the individual, equities make for an ideal investment tool. However, the need for debt cannot be understated given the inherent market volatility of equities.

How debt funds help in retirement portfolio

Apart from being a relatively new field, retirement planning in India also suffers from not having a single, clearly earmarked retirement planning product that can take care of individual needs. Hence, investors need to get their hands dirty to set up their own investment policies that can take them through this stage. Given that backdrop, it is important for investors to look at all the tools available for them. Now, the role of equity as a long term investment is well understood. So its role in retirement planning becomes obvious. However, what is less obvious is the role of debt funds in a retirement portfolio.

Aggressive hybrid funds offer a one stop allocation tool for investors looking for a simplified approach to allocating between equities and debt. Since these funds are treated as equity funds for the purpose of taxation, they offer stability of debt all while maintaining tax efficiency.

Life-stage approach to asset allocation

A life-stage approach to asset allocation is a universally accepted model for retirement corpus as it caters to changing needs of investors as they progress. Retirement funds offered by Mutual Funds today offer solutions catered specifically to retirement planning. The exit load structure also aims to dissuade investors from redeeming such funds till retirement, furthering their appeal for temperamental investors. A retirement fund typically has multiple plans which vary the equity and debt component thus allowing seamless transitioning between plans as investor risk profile changes.

Suitable for pensioners with limited risk appetite

The spending phase is retirement. Passive earnings (income from your investments – that is, capital appreciation, interest and dividends) take a front seat. Some would say this is the phase where one would now enjoy the utility of the wealth they have created. Risk tolerance tends to be significantly lower as asset fluctuations are less desirable. With longer life expectancy, income generation or passive earnings have become imperative to sustain the retirement pool, to meet monthly expenses and other ancillary expenses. Passive earnings also help manage the effects of inflation to some extent. Given high real rates in India, debt funds today offer a material hedge to inflation in the current environment and hence offer an attractive investment opportunity for pensioners with limited risk appetite.

Diverse debt strategies

MF offer a diverse set of debt strategies for investors on the basis of the type of instruments they invest in and the maturity profile of funds. For investors looking for an equity kicker, conservative hybrid funds (80% debt and 20% equity) offer potential investment opportunities for capital appreciation while maintaining a predominantly stable debt portfolio. Another tool especially during the drawdown phase could be the use of an SWP (Systematic Withdrawal Plan). Just like an SIP, an SWP offers the ease of convenience for withdrawals.

Though every investor has different needs, goals and responsibilities, one should look at a long-term perspective towards their investments, as you need this money at the time of retirement. Time in the market is more important than timing the market, to get maximum benefit of compounding.

Markets do not generate wealth, responsible investing does. Be a responsible investor.