Pensioners look out towards the Baltic Sea at the beachfront in Sellin, Ruegen Island, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

#BQMutualFundShow: How To Invest For A 25-30 Year Retirement

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Wealth preservation is critical when a person is approaching retirement, especially since the span of retired life for an average person has gone up to 25-30 years.

That’s the word from the mutual fund expert Suresh Sadagopan, founder of Ladder7 Financial Advisories. Allowing for differences in the ability to absorb risk, a retirement portfolio should have about 40 percent invested in equity, Sadagopan said on BloombergQuint’s weekly series, The Mutual Fund Show. “It also depends on the kind of person, and also the expenses and goals on retirement,” he added.

According to independent investment adviser Harsh Roongta, it is very important to allocate to a ‘fun fund’ or a ‘buy an iPhone fund’. “Planners have the reputation that they don’t spend anything now and save. That’s not the purpose,” he said.

Here are edited excerpts from the interview.

Do you advise clients according to their age group?

Harsh Roongta: So, the type of funds, according to me, is not defined based on age, but on goals and risk appetite. So, different people at different points of time can have different goals and different risk appetite.

Generally, for someone young, you talk about equity, and for somebody old you talk less equity.

So, you think of a young person who needs money two years down the line for his marriage. Would I advise equity to him? No. Again, you think of an older person who has a requirement to pass on his inheritance to children after 15 years. Would I advise him lot of debt fund? No. So, it is very goal-based.

Are there some generic rules which apply age-wise or risk profile?

Roongta: I would put a metrics and will apply it differently. So, there are two parts to the metrics—the period for the goal and risk profile. And in each of the boxes you will fit somewhere.

Let’s talk about the metrics where the risk profile is aggressive, goal period is short of 1-2 years. Then that would be debt. For 2-4 years, again aggressive, then it probably could be equity-savings kind of product. For 4-9 years, it could be a balanced fund which could be aggressive or dynamic asset allocation or equity fund. For more than 9 years, it could be equity. For long term, aggressive funds.

So, this is one column. You can have different columns depending on the risk profile. That would be a broad metrics.

As a general rule, are there some specifics which people should keep in mind?

Suresh Sadagopan: [All investors] are not the same. Their goals, risk appetite, what they want to achieve in life are different. So, what we are going to suggest for client A and client B will be different. Having said that, there are very broad rules. Somebody who is starting in life, like the people who have 2-3 years of experience, have lot of aspirations.

For the first time, they will be seeing some money and they would want to do a lot of things with that money. It may be a vacation or a fancy mobile phone. So, it is all going to take a lot of money. I would say for a 23-25-year-old, we have to put in a pool of funds from which they can dip into. So, this is looking counter-intuitive.

The first bedrock of funds we have to create will be liquid and maybe short-term or ultra-short-term debt funds from where they can dip in. So, their requirements for gifting, marriage or maybe a vehicle can be met from that pool.

Once we have put that basic bedrock in place the equity component or long-term investment can come in. So, when we are looking at putting an equity component for such a person then that equity component, most probably, can be reasonably aggressive. But the risk appetite for a 25-year-old may not be the same. There can be an extremely conservative or an extremely aggressive individual of the same age.

So, if I have an extremely aggressive 25-year-old, I will have to tailor the investment according to it. But let me go with the average. For an average 25-year-old, we don’t know the risk appetite but there is risk capacity. Because this person will work for the next 35 years. So, risk-taking capacity is there.

Going by that may be a large-cap-oriented fund can be given, may be a fair amount of mid-cap or multi-cap can also be given. Large-cap being the bedrock and multi- and mid-cap, if he is an aggressive investor, can come in.

For an average typical 25-year-old investor, with a reasonably good risk appetite, they can go 65-80 percent in equity and rest of it should be in debt.

If somebody is a middle-age investor, what kind of investments should he choose and avoid, if there is a categorisation like that?

Amol Joshi: The advice is generic. Somebody who is middle age, one who knows that the home loan down payment, wedding thing is taken care of, is likely to be planning for long-term goals. There could be short-term goals too, but that person’s attention will be on long-term goals like children’s education, retirement. For somebody, who has a long-term horizon, we know that for a 7-10 plus years you will do yourself lot of good if you have some kind of equity in it.

I can bifurcate in two ways. Any cash flow which is definite and which we want to put away in investments, in simple terms, mutual fund SIPs. SIPs can be in equity funds where large- and multi-caps are a good choice.

Any cash flow which you get lumpsum like salary arrears, coupled with a bonus once in a year kind of product, those funds you can invest in balanced funds and dynamic asset allocation funds. This is specifically for mid-age investors.

Plan your long-term goals via equity, specifically SIPs and any large lumpsum inflow which you get. You can deploy it in dynamic asset allocation fund or a balanced fund.

For people who are close to retirement, are there things the person has to keep in mind when they are starting fresh or investing new money maybe through STPs or otherwise?

Sadagopan: The time of retirement is very critical. The way people have been investing till that point is the accumulation phase, and after that it is the withdrawal phase. Till that time they have been putting away money – maybe in equity or other instruments.

The risk profile for an average person shows that over a period of time, the risk-taking ability slowly comes down. We have to look at the fact that when a person is close to retirement, wealth preservation is very important.

We also have to be conscious that today people are living into retirement by 25-35 years. So, there is going to be an element of equity which is inevitable and necessary. A typical person who is retiring, in general, about 40 percent in equity will be ideal, but it also depends on the kind of person, and also the expenses and goals on retirement.

Another factor is how much risk they are willing to take as somebody may say 40 percent risk is too much. In that case, we will make it 20-25 percent and see whether it works for them. So, it is a give-and-take exercise which we do with our clients and see the optimal thing from their point of view.

You have given a kind of categorisation about the kind of funds people should choose based on time horizons they have. What are the general rules that people should keep in mind?

Roongta: It is a metric of time horizon versus risk appetite. Before you do any allocation, it is very important to have an allocation for a ‘have fun’ fund or a ‘buy an iPhone’ fund, whatever fund constitutes for them. Planners have the reputation that they don’t spend anything now and save. That’s not the purpose.

The purpose of planning is to enjoy what you spend. When you have planned for your fund, you know that this is the amount I have kept, and it does not in any way impinge on what I am planning for my child’s education or retirement.

Now, imagine the fund am going to have when I go for an Alaska tour or buy an iphone. You won’t have the guilty twinge that you typically get when you go unplanned. There must be an allocation for a ‘have fun fund. And you just dip into it whenever you want.

As your horizon increases, your ability to have more equity increases, irrespective of what your risk appetite is. Now, the percentage of equity will depend on your risk appetite. I don’t think it is dependent on age. I would not decide based on the age of the person, I would decide on the time to go.

So, for a 10-plus year horizon, go all out equity?

Roongta: For an aggressive person. And for a conservative person, I would put a balanced fund. Even for a 10-plus year, I may put dynamic asset allocation fund which changes the allocation to equity and debt depending on a particular formula of the market. If he is super conservative, I might even consider equity-savings fund.

So, some bit of equity for sure. Last time, you were here you said if you have a 14-year time horizon then don’t think and go for equities.

Roongta: If there is such a conservative person, that he wants equity-savings fund for 10-plus-year horizon, I would try and change his risk profile and try and educate him to start taking more risks.

Watch the full interview here.

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