Model Mutual Fund Portfolio for Retired People — Holy Grail Part IV
Hey guys……so, we are on to our last category of investors and no prizes for guessing….it is aimed for people who have retired from active employment. But before that, let me once again thank you for such overwhelming support. This series has received viewership in thousands and I know it is only because of your support. Let me also acknowledge that it gives me immense confidence to know that I am on the right path for my aim of spreading financial awareness. I am ever so indebted to my mentor who during my internship guided me and took that extra effort in his free time to coach me. This noble act by him, has inspired me to share my knowledge and experiences with as many people as possible and in turn inspire them to start their journeys to seek financial independence. Guys, no matter where heart lies……finally it is financial independence which will enable you to break the shackles of financial slavery to pursue your life’s mission be that in the field of arts, music, sports, innovations in the field of sciences or social work. Therefore, please reach out to as many people as possible by sharing these posts. Who knows you may be the catalyst for someone like me to initiate their journeys on this path.
Ok….back to the topic. I have received few queries on the previous posts regarding absence of any mention to ‘Solution Funds’. To refresh those, who might have joined recently, solution mutual funds are nothing but long term mutual funds which might fall in equity (generally large cap but in rare cases mid cap too), hybrid or in debt classification. They generally have a lock-in period of minimum 5 years and returns vary based on asset class exposure. On maturity, taxation will be depending on the asset class but dividends are tax free. These are broadly categorised in Children’s plans or Retirement plans. But, do you notice, except for emotions there is nothing unique in them, especially if you compare them with similar equity, hybrid or debt funds. However, for most common people these are the excellent tools of investment as they are generally guided by emotions especially if they are scrounging in present for either securing their post retirement life or securing either their children’s education or marriage. The emotion makes these people to be regular and disciplined and not en-cash the savings after minimum lock-in period. Therefore, guys….go ahead and invest if you too fall in this category but a word of caution again….choose the fund wisely matching its asset class to your specific needs, and most importantly to your greed — fear matrix.
Now, on to topic of investment by retired people. But before that lets see the common traits by this group of investors as summarised below:-
- Most likely these investors would have paid all their personal, house, and car loans. In few rare cases, if loans are still outstanding it would have been for supporting their children in their studies or business ventures. Suffice to say that repayment of these loans are generally the responsibilities of those for whom these loans have been secured.
- Most people in this category would be settled in their own houses and hence would not be paying rentals.
- Similarly, in most cases, educational fees, the largest chunk of expenditure would have been replaced by regular medical expenses.
- Majority of retired office goers would have a stable pension and for many others (excluding business community) they would be benefitting by paybacks from their pension plans.
- Most greeds and wishes would have settled down translating to almost identical set of expenses months after month.
Summary — To summarise, most people in this category would have limited income but at the same time measured expenses too. With almost all mega ticket expenses taken care of (except for medicals), the priority for this group is to secure their available wealth while ensuring it is not eroded by inflation. Therefore, the mantra for this group is nil to minimum greed and maximum security and liquidity to meet urgent unplanned medical emergencies.
Before Investing Get a Safety Net First — Before I proceed any further, needless to remind my elder friends that, if till now you have somehow frowned on taking health insurance, now certainly is the time to seriously consider this. The biggest threat to your hard earned and curated wealth will be from unplanned medical emergencies either on your account or on your spouse’s account. Therefore, there has to be some safety net, it may be in the form of your erstwhile employer’s medical insurance policy or a gifted policy by your children or well-wishers. If in case you do not have any medical policy till now, please give it a thought and choose one as early as possible based on your specific needs particularly catering to your immediate health markers.
Also Get Your Finances in Order — Though it is most scoffed off suggestion to any one……. I will still dare to remind you that there is a huge pile of unclaimed cash at banks, investment agencies, insurance houses proving that the people have been reckless and unmindful of their financial duties to their families……if not convinced please do a Google search to get convinced. Therefore, please carefully go through all your papers and dig out how many bank accounts, FDs, insurances or bonds you own. The first step in organising your finances would be cutting these down to bare minimum and if possible to just one. Considering the new norm of folding banks, use services of one of the nationalised banks (Not Cooperative) nearest to you with the friendliest staff or with the one where you have a personal connection ……may be some far off cousin, a close acquaintance and if no one is there…..might invest some time in befriending some staff there. @ copyrights for this tip is courtesy my grandfather….seriously no jokes. Please also ensure that all investments and accounts have a nominee which is duly updated with latest addresses and contact details.
Let’s Invest Now — As we have seen earlier with a generic profile…..there are no mega ticket expenses planned and the focus is to retain or secure the wealth created over years. Therefore, what ever instrument is chosen it has be safer with nil to minimum risks while it should offer almost instant liquidity to meet immediate requirements. The instruments which fall under these categories are FDs, Debt Mutual funds, AAA rated or higher classified bonds and for still adventurous ones some high performing Blue Chip or Large Cap Mutual Funds. What ever we do and which ever instrument we choose, we have to be very clear that the objective of investment for this group of investors is Wealth Preservation while gaining what ever little benefits they can accrue, and for that ….the instrument must provide at least more than 6% annual returns…….which is generally taken as a bench mark of inflation in these times. Another point they must keep in mind is to compare what ever instrument of investment they have chosen with FD and only if the gains are substantial they should choose that instrument. Don’t worry FD being the least rewarding, there will be very many other instruments including mutual funds. But at the same time be cautioned…..since risk is lower in almost all the instruments……the gains will be lesser too….
Making a Model Portfolio for Retired People — Assuming majority of you as receiving pension……your saving potential will be low. Therefore, following are the guidelines which may be kept in mind while planning investment:-
- Since the biggest expenditure now will be yearly insurance premium which can either be paid as EMI (monthly) or as yearly lump-sum premium. Please choose yearly premium plans and create a MF for 11 months in any Blue Chip or Large Cap fund with a monthly SIP of the same amount you were paying as EMI for your premium. If markets are doing well….this 11 months SIP will cover the entire cost of your yearly EMIs and in worst case scenario……since yearly premium would be lesser in any case than cumulative EMI plan……you have at least saved that extra cost while loosing nothing.
- If you can at least save more than 20% of your retirement income then only plan for longer term investment tools and that too restricted to 3 to 5 years. Else, plan for shorter investment periods of 1 to 3 years.
- Maintain liquidity of at least 60%. This rule is more applicable to people beyond 60 years of age. As a thumb rule…what ever is your age should be your liquid assets in %. For example for my grandfather who is of 85 years, he should maintain at least 85% in liquid assets. By liquid assets I mean that all investments should be able to be converted in liquid cash and transferable to your bank account in less than 72 hrs ….that is including Saturdays and Sundays.
- Let’s assume if someone is 60 then for 60% liquidity he can choose MFs with direct plans under Debt category, Blue Chip funds or Bonds. But don’t asset management companies say for redemption at least 3 to 5 working days? That is correct….but if you are investing through a demat account, in all probability the money will be transferred in your account by the third day. If you are comfortable with ETFs…that would be the best bet to maintain liquidity while also ensuring that it grows with the market. Since markets are volatile never invest more than 5% of your portfolio in any one instrument even if it is a ETF. For the remaining 40% you can choose funds with longer lock-in period or where they have exit loads such as Parag Parikh.
Guys, you deserve to celebrate life……after years of hard work and toiling to fulfil all your obligations….this is your time to enjoy life. Therefore, if you receive any paybacks from policy maturing or any other lump-sum received from any other sources…..make it a point to check at least one activity from your wish list. However, if there are no such expenditures then invest wisely may be for that Goa trip in winters or a family reunion in Bali all sponsored by you. The best instruments for these will be a Debt MF with or without lock-in. Just make sure that lock-in period should not exceed the date you plan to withdraw the money.
That’s all for this post guys…..wishing our senior readers good health and many happinesses. Please reach back, if you need any specific advice, I would be happy to be of service.
Bye….see you next week….
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