The Mutual Fund Show: Retirement Planning With Mutual Funds

Radhika Gupta: We did a survey about retirement planning with a group that ranges from the millennial to the old. Most people know that they have to retire but they are clueless about what it means to retire. A lot of people ask this question, and I think there are three answers to it.

One, the years you are going to spend in retirement are going up. When my father retired, he retired at 60 and life expectancy was 80-85. So, he is spending 25 years (in retirement). The average millennial wants to retire at 45-50, he is probably going to live till 90. So, he has 40 years of retirement life.

Two, we in India are moving from a joint family to a nuclear family. So, 70 percent of people say that my kids will support me in retirement, and 30 percent kids actually do. So, that reliance on someone else is going down.

Finally, inflation is a big deal. Thirty years ago, cost of most things was one-sixth of what it is. Amul Butter is 20 times as expensive as it was 30 years ago. It is not just basic inflation. As you get older, you want comfort. So, that whole element of lifestyle inflation creeps in.

So, these three things coming together tell you that retirement planning is something which you need to look at, because you are going to spend 35-40 years in retirement.

PV Subramanyam: For planned medical expenses, you get yourself insured. Given the Indian conditions, you don’t have long-term care insurance. If you are going to stay in senior citizen homes, you are going to pay for adult diapers, daily nursing, etc. We don’t even estimate those costs.

I don’t think any millennial will even think about old-age support cost, and those are inflating far higher than 3-4 percent which you read in the press. Children’s education is getting expensive, and people want branded education, which is expensive.

And where are you going to stay in your old age? Senior citizen homes, gated communities? All (of this) costs money.

We have no surveys and we have done nothing to estimate these costs.

Radhika Gupta: We took Rs 40,000 per month and said, conservatively, as you become older some of your spending on gadgets, etc., comes down, but it is compensated by healthcare.

So, we took that 80 percent number, and 7 percent as the basic rate of inflation. You add lifestyle, medical and education—7 percent then is a conservative estimate. And 10 percent is long-term return on an equity-plus-debt mutual fund portfolio. Then, at Rs 40,000 a month, when you see Rs 5 crore, it becomes a staggering number.

Radhika Gupta: Yes. You will have to assume 25-30 years in retirement, plus inflation.

PV Subramanyam: I call it the retirement time bomb. This Rs 40,000 does not include even a vacation to Goa. It does not include foreign vacations. You add one of those things, put in education, then this Rs 40,000 goes for a toss.

Secondly, your house, which may have a life of 25-30 years. Assuming you buy a house at 45, then at 75 you may have to buy another house. What happens if you live till 110 instead of 90? So, you have to provide for the extra.

So, Rs 5 crore is conservative. Put in a figure like say $1 million (about Rs 7 crore), with house. This Rs 5 crore does not include house. This is just the cash asset you have. This does not include your golf kit, cricket kit, etc. This is cash that you are working to pay for the expenses—the money in the bank, the mutual funds, equities... That money has to be Rs 5 crore.

Radhika Gupta: In our survey, we found out that people don’t know what they should do—debt or equity—or even what is asset allocation. The term is thrown around a lot, but awareness is limited.

When you are 30, or early in life, you can take more risk—which means you can hold more equity in your mutual fund portfolio. You are 30 and planning for an outcome at 60. So, you can enjoy 30 years of equity compounding. As you age and come into your 60s, then the amount of fixed income you hold needs to be much higher because your time horizon is condensed so much.

So, ideally, the journey between 30 and 60 needs to be equity falling and debt rising. That is essentially age-based asset allocation, which is critical. It will ensure that you will have a smooth journey without any heart attacks. You’ll have liquidity at 60, when you need to start taking that money home. But you earn that return, which will beat inflation, and that’s the core objective.

PV Subramanyam: Absolutely. It is more about training them in behaviour.

They might say, ‘oh, my father lost all his money in the Harshad Mehta scam’. So, they are very scared to invest. Someone has to handhold them, make them put money (in equities), see how it works and then you can bump up. The mutual funds allow you to increase (your investment) at 10 percent every year. So, first start with Rs 5000; next year, you start with Rs 5,500. You can slowly bump up and see what is the impact.

If a person enters the market and the market falls 30 percent, it will take a long time for him to come back. Just pray for a good time when you start. If you start at 25 and at 35 there is a bad market, then they will say ‘I have seen in 10 years what has happened’. But when you start at 25 and the market is bad, then you get scared by the market.

PV Subramanyam: The last 25-30 years have spoilt us into believing in 18 percent kind of returns, and that is what has happened. That is sheer luck. To continue expecting that kind of returns is wrong. Your expectation should be 12-13 percent. If you do better than that, great. But if you don’t do well, it means that you need to put in more money.

Your ultimate aim is to generate that Rs 5 crore retirement corpus. So, if your return expectation is 12 percent instead of 18 percent, then you have to pump in more money. You have no choice on your goal. The goal is Rs 5 crore—the bare minimum. If you think that you will get 18 percent, then you become overconfident and put less money. After three-four years, you find that you have got 12 percent return, you need to bump up the money rather than shouting at your (financial) adviser.

So, you have to ask them to hold on. Do an SIP. Even if the market is high over the three-four years, just hold on and things will improve.

Radhika Gupta: We’ve launched an SIP feature, and we call it ‘the retirement plan’. There are two options: auto and custom. In the auto option, you pick an equity or debt fund. At 30, it will be 80-20—aggressive equity and conservative debt. As you grow older, the mutual fund SIPs will gradually shift towards being more debt-oriented. By the time you are 60, you are at 50-50-based allocation and, in between, the portfolio will rebalance. After 60, it will let you do auto withdrawals. You can choose the amount.

In the custom option, you can start with 60-40 and end with, say, 20-80. The idea is to do age-based asset allocation and to let someone do so automatically because, as he (Subramanyam) said, behaviour kicks in and that prevents us from doing things that probably are good for us.

Radhika Gupta: See, your income will also increase. You hope that with life, your income increases. Most of us get increments that are 5-15 percent every year. So, it seems staggering to increase it by 10 percent a year, but it is not actually.

PV Subramanyam: In fact, I am finding that girls are getting smarter in investing. A girl is happy taking money from father’s purse, whatever she wants. Let’s say she starts earning, she gets married then she takes a break for two-three years to have a kid. She is not at all comfortable taking money from her husband. She needs her own bucket.

I keep telling them retirement does not happen in only one stage. That three-year break is a retirement. Those are the times you need money. So, women need the retirement bucket much earlier. They can keep withdrawing a little and then have a lumpsum left for 60-65. Girls are thinking of it, and investing is happening that way.

Radhika Gupta: I recently tweeted that if the Rs 2,000 that you spent on restaurants every weekend, if you put that much money into your savings, then the amount you get between equity and debt mutual funds is in crores. A lot of millennials told me, ‘Are you advocating that we stop eating out?’

See, retirement is going to happen. It’s inevitable. You have to live those 30 years. If you can just take away that Rs 2,000 and you have started early. If you delay the problem for 15 years, then instead of putting Rs 2,000 you will end up putting Rs 20,000. And that’s when the problem becomes gigantic.

PV Subramanyam: Retail therapy is a way to fool women into shopping. Men are not told about retail therapy. Men are bought Lego blocks and asked to build. Women are given Barbie dolls, asked to hold handbags and go shopping. These examples are wrong as women are not encouraged to build right from the childhood. That should stop.

In my book I said Invest Rs 40 a day. If you go to a 24-year-old and say put away Rs 10,000 a month for retirement, then he will say that he has priorities like buying a car or a motorcycle. But Rs 40 a day is less, it is less than what you pay for coffee. By the time he is at 60, he has Rs 4 crore. It is not bad at all as he started at 24. If you ask him to bump it up by 10 percent, then he will have Rs 13 crore.

It is not a matter of discipline but a matter of habit. Investing is a habit.

PV Subramanyam: Effectively, you can do a mutual fund with Rs 1,200 SIP, which is not very difficult. Pick any fund but start. If you sit in a place wondering which road to take, then you will reach nowhere. You start with index fund and then you will know how to invest. Then you take large cap, midcap or debt fund...but at least start.

Radhika Gupta: I agree that you have 20 years and you have to do equity. But the reality is we are human, and we have equity market correction. When you are 20-30 years of age, your tolerance for heart attacks and roller coasters is higher, which is why your portfolio has to be equity lopsided.

But retirement is a process and it’s not something you start at 30. As you get older, you will have cash flow needs. In your 40s, you may want to upgrade your house. You need to pay for kids’ education. So, you need capital for the short term. Your appetite to take severe drawdowns will come down, and this is where fixed income plays a role.

No matter how much of an equity bull you are, both (equity and debt) complement each other, both have to be part of your mutual fund portfolio. Which is why we are recommending lifestyle-based allocation. It has some equity, some fixed income. As you get older, fixed income becomes bigger.

PV Subramanyam: Absolutely. As Radhika said, out of Rs 100, you should put Rs 20-30 in debt. The 20 is already met by EPF. Then you can go 100 percent equity here. Overall, your portfolio will still be 80-20.

In a retirement plan, consult with an adviser and maybe you outgrow the adviser in five years. But don’t go bull-headed without an adviser. It sometimes become difficult. Start with an adviser and don’t make a mess of it. Suppose you put all your money in it and you need money for a wedding after three years, then that would be bad asset allocation.

PV Subramanyam: Make a judicious mix. 50 in small cap, 30 in midcap and 20 in large cap also works. As time goes by, keep correcting if you want corrective option.

Radhika Gupta: Basic multi-cap mutual fund. Allocate between all three and take advantage of it. It is just enough for most people.