The Mutual Fund Show: Assets You Can Pick For Your Retirement Planning
While more people are planning for retirement as average life expectancy increases and even smaller cities are witnessing a shift from joint to nuclear families, mutual funds are still not seen as the go-to option to save for the life after working years.
“Most of the traditional approaches towards retirement planning involve debt instruments—whether it is PF, PPF or insurance policies where the return on investment may be lower, though the product would be safe” Amit Trivedi, author and mutual fund expert, told BloombergQuint on the latest episode of The Mutual Fund Show.
Gaurav Mashruwala, an independent financial planner, said asset allocation is important for such planning and mutual funds can help. “One of the biggest advantages of investing in mutual funds is the option to manoeuvre across various asset classes.” And investing a small amount of about Rs 500 or 1,000 can help build a large retirement corpus in 25-20 years, he said.
Watch the full show here:
Read the edited transcript here:
Q: What do people, who are currently earning, can do for those years of their retired life? How do mutual funds help in that process?
Gaurav: Mutual funds, a lot of times people feel are an asset class. No, look at your life stage. Whether you are in your 20s or 30s or 40s or 50s, and then try and find out where would this instrument fit because this instrument is such a versatile instrument that we can fit for various needs. Now somebody who has just started, in their 20s or 30s or whatever, by simply starting a small SIP into a mutual fund and mentally saying, ‘this is for my retirement,’ that itself will help him eventually. It’s a question of developing habit. So even if the person starts with a small amount of about RS 500 or 1,000, over 25-30 years and in those years, when you are starting your career, you may not have a lot of other goals. So, you can go a little aggressive; you also during the entire working life, the ability to manoeuvre. So, if newer products come in, you can take more risk and you are giving your money more time to grow. So, this is a brilliant instrument to accumulate money for your retirement.
How do mutual funds per se help? Because traditionally, when people talk about mutual funds, that’s for wealth generation and not necessarily retirement goal planning because for that, people use a lot of other instruments. Insurance policies, and so on and so forth. Why mutual funds?
Amit: First of all, most of the traditional approaches towards retirement planning, they involve debt instruments— whether it is PF, PPF or many of the insurance policies etc where the return on investment may be lower, though the product would be safer. Whereas, because there is a long period, and if you are able to earn something more, the power of compounding would work wonders especially for a 20, 25-30-year period. That’s where the equity options within mutual funds, so equity mutual funds, can be used. Secondly, people who are working somewhere, they have a PF deduction which is equivalent to doing an SIP in a debt product. So even in order to balance that, there could be a SIP in an equity mutual fund. Thirdly, you can also look at doing some amount of SIP in a debt mutual fund even for a long horizon, just in case you want to shift from debt to equity periodically or equity to debt periodically. PF, LIC Policies etc do not allow any withdrawal. Whereas here, that re-balancing becomes possible. So mutual funds, apart from what Gaurav mentioned, have multiple options but they have multiple flexibilities also.
One of the things that people overlook about mutual funds when it comes to retirement planning, is how flexible it is to have these instruments over a longer period of time compared to maybe other annuity products. So, we are not decrying that the products are good, but we are highlighting the benefits of mutual funds. Do you want to talk about it?
Gaurav: What happens is typically, once I choose a particular product, which is not Mutual Fund, I am stuck to the underlying asset. Now, I may not want that. I may want an option to manoeuvre across various asset classes. So, today we have mutual funds in debt, we have in Gold, we have in equity. Over a period of time, we may, and we do have it currently, mutual fund investor international market and we may have some other things coming up. Now that the ability to change from one to another— the manoeuvrability is only in mutual funds. Just because it does not say retirement or for pension, does not mean it can’t be used. Second is, if my particular fund is not performing, I am very much at ease just to either take out money or not give it more money. Somewhere else, I may be just stuck. Just because I have opened a particular account or I have had some kind of a scheme, I have to contribute, whether I like it, or I don’t like it. Thirdly, what happens if I have more money coming in? I want to contribute more. This year has been good for me, whether I got a bonus or a couple of my expenses were not there, or whatever it is, and I want to contribute more. Mutual funds give me these options. So across different asset classes, across different regions, across different fund houses and the amount that I can do it.
Amit: Just to add to that, another angle, that flexibility. Look at mutual funds as something which is absolutely transparent. So, you get timely relevant information and you are also able to act on that information because of the liquidity. Now, that combination of transparency and liquidity provide that extra safety because there have been instances where something went wrong somewhere and even when I got to know, I couldn’t pull my money out. That doesn’t happen in mutual funds. So, the benefit of transparency and liquidity is an awesome combo.
A table that was shared with us spoke about how retirement planning at different age brackets. Either of you want to start off with that?
Amit: Essentially, the earlier you star, the benefit of compounding works wonders. So even if you start with a reasonably smaller amount, that can grow to a good sum at the time of retirement. Having said that, the estimation of retirement amount, may be done in such shape and form, that how much money would be required at the time of retirement. So, let’s look at the situation of different people. Somebody may have accumulated in some other form or shape. It could be a retirement benefit coming from their job, there could be retirement income in form of pension. So, these are the possibilities. Then, look at how much annually you are likely to spend in the retirement years. Based on that, the corpus can be estimated. Then, work backwards. Now, working backwards could mean that I will start SIP and if I am able to increase my SIP amount year after year, its reasonable to assume that people would have growing salaries. It’s a safe assumption and tweaking can be done along the way by reviewing and then, look at the number. So, if you are looking at roughly, Rs 6 lakh worth of annual expenses and putting some number to inflation around 5 percent or so, the retirement corpus that may be required could be something around Rs 6 crores. In order to reach there, how much do you need to invest? So, somebody would say, look at a fixed amount and if I keep that fixed amount throughout the period, roughly Rs 50,000 would be monthly SIP amount which looks huge. If you can grow that SIP amount year after year at 5 percent a year, then, roughly Rs 32,000-33,000 could be the starting amount and then you keep growing it.
On this current plate itself, when we are saying the current age is 35, 45 and 50 years, why is the corpus needed for retirement differing significantly? Wouldn’t the corpus that I need at a particular age of 60, whatever my age currently is, be the same?
Amit: The way the table was made, it is starting at the current expense level. Then you estimate the inflation because you are already at 50. 50-60, the expenses will not grow significantly. Whereas from 35 to 60, the expenses will grow significantly. So, one would have looked at different numbers because for somebody at 35, the annual expenses are likely to be less than somebody at 50. So, we could’ve looked at different numbers. We started at a particular number- whatever the age. So, there is the expense, then the calculation. So that’s why, for somebody starting at 50, the corpus required is lower in this calculation. But, on the other hand, the time available is also shorter for that person to save and because of that, the amount required to be saved goes up.
If you look at the table, while the corpuses are different, given the amount needed. In so many instances, the amount needed per month is significantly lower even though the corpus needed is more. So that’s why, the entire issue comes up that yes, lesser the years, my corpus needed is less, but I need to save. So, here on the screen, at 50 years required, Rs 2.5 crore but what you need to save per month is Rs 1,04,000 if it is going to grow by 5 percent. If you are looking at 35 years, it is Rs 6 crore is what you need but even if I am saying Rs 32,000, I am set. So, there are enough calculators on Google. If somebody wants to put a retirement calculator, there will be enough, and you can play around based on your situation and even keep reviewing it at regular intervals.
Gaurav: If you look at the table itself, there are a lot of assumptions on the table.The rate of return is an assumption, inflation is an assumption, number of years to be spent in retirement is an assumption and retirement age is also an assumption. So, it would be different for different people.
Let’s work with an assumption that these numbers stand the test of time. How do we segregate what an individual investor should do? We know the amounts. The individual investor at 30, 45 or 50, knows the amounts. Let’s assume the investor is convinced that he/she would save through mutual funds. How does he segregate what kind of funds that he saves money into at these different age brackets? Is there an ideal scenario out here?
Gaurav: There is a simple principle. At 35, you have more than 20-25 years and hence, equity is the best asset class. So, pick up an equity-based mutual fund. Even at 45, if you are looking at 60 years of retirement age, you have almost 15 years. At 50 also, you have a decade but if at 35 I can do mid and small caps, at 50 I may want to do only a large cap or an index fund. So, then you may want to modify the kind of equity fund that is there. Now, if there was an example of five years, I would’ve said either go for a blinded debt and equity fund or a pure debt fund because the number of years is less. So, depending on how many years are left, you should be able to chase and decide the asset class and even within that asset class, choose the category of fund.
The table we have right now is something that Amit Trivedi sent us. So, Gaurav, look at these numbers on the screen. For age groups of 30s 40s and 50s, these are a segregation that Amit gave. Is this an ideal breakup you would do, or would you tweak it?
Gaurav: So, I would tweak it a little bit. In 30s if you are anyway contributing towards PPF and EPF which is taking care of your debt, then don’t do a debt fund, put it in directly. Or you may anyway have to do a debt fund for your other goals in terms of housing or whatever. So, in case there are real bad times, then move it but just by nature, I am a little more aggressive. As in saying, in the earlier years, if there is an employee provident fund, public provident fund; if there is an NPS, then you need to take a call whether where is that money going? So, retirement as a corpus and within that corpus, asset allocation. The need would, and the approach would change from an advisor to advisor, but it wouldn’t be significantly different. So, if you go from one doctor to another, somebody would say, take it thrice a day- the medicine, or somebody would say, take twice a day- 5mg or 10mg. For example, if Amit is in 80-20, I may do 90-10. But the 80-20; 80 equity and 20 debt, will not go to 20 equity and 80 debt. Itna difference nahi hoga. (There would not be so much difference)
Amit, Gaurav is saying he is a bit more aggressive therefore he will remove debt. What is your rationale of why investor should follow this kind of a split between the different fund categories?
Amit: While sending this table to you, I had initially written a line that this is more suited for a conservative person; which is my type of a profile and which is similar to what Gaurav also mentioned. At the same time, in this allocation I am not considering the other savings that somebody has done. So, I am assuming that this is entirely a retirement portfolio.
So, a person doesn’t have NPF, PPF etc?
Amit: Yes, so if now you start adding that, then what Gaurav was mentioning in this would come in line. However, I would like to clarify one more thing out here. That is, if you see from 30s to 40s to 50s, the allocation to equity keeps reducing and debt and liquid is going up. Now, this can be achieved in two ways— either you periodically shift some money from equity to debt as you grow closer to the retirement age or if you are doing an SIP, your initial SIPs could be tilted more towards equity and in the later years, your SIPs could be tilted largely towards liquid and debt so that automatically, that rebalancing happens. Third, whenever we look at retirement as a goal, the retirement age is only a date when the financial situation changes but the need for money actually starts. The withdrawal starts from the month after retirement and it has to continue till one survives. So, to that extent, it is an immediate-term, short-term, medium-term, and a long-term need. Even for a retired person, though I am a conservative investor, I would say allocation to equity is necessary simply because one has to survive or rather, just plan for over those long years.