As stock markets undergo violent gyrations, the efficacy of equity investment as being part of retirement planning is doubted by those approaching retirement, particularly if they do not enjoy the cushion of a sizable pension, as value of shares and diversified equity mutual funds suffer frequent value erosion whereas retirees look for stable cash flow.
The doubts would gather further steam when the new Direct Taxes Code (DTC) comes in force probably from April next year that could change the present favourable treatment of long-terms capital gains in case of equities and equity-oriented mutual funds and may bring dividend payments under tax.
While the post office monthly income scheme or the Senior Citizens Savings Scheme could form a major source of monthly and quarterly income, respectively, the disadvantage of this strategy is the poor return they offer. Right now, the two schemes offer returns of 8 and 9 per cent respectively which adjusted to inflation are actually negative.
A better choice would be for retirees to split their investments and put amounts equivalent to annual living expenses for 1 and 2 years in FDs for corresponding term and put the balance amount in long-term FDs where, because of the compounding effect, the returns would be higher to beat inflation. The split into shorter deposit terms would bring some more interest income than MIPs.
While equity investment plays a crucial part in retirement planning, this plan should preferably be never put in place using the retirement corpus.
For those who are not averse to investing in equity, the best equity investment strategy for retirement is to begin investing in equities at least 10 years before retirement. This gives them sufficient time to build an equity corpus large enough to provide cushion against inflation and exposure to different market cycles prior to retirement would also provide the investors an insight into the working of the equity markets.
Rebalancing portfolio
With many share broking outfits now offering Equity SIPs on the lines of mutual fund SIPs, it is possible for investors to accumulate blue-chip stocks over a period of time, benefiting from cost averaging too.
Many investment gurus advice investors to rebalance their portfolio in favour of debt closer to retirement for the sake of safety. While this may be needed for those who do not have substantial terminal benefits, like PF and gratuity, others with a large retirement kitty could have a higher equity exposure which should be independent of fixed income investments,
Where investors could show caution is in accumulating of blue-chip stocks with sound management, better brand visibility and who are market leaders in their respective segments and focus on a handful of stocks that they could better manage.
Adopting a dual strategy of drawing from a part of the equity corpus when the markets are buoyant and relying more on fixed income during downturn would help the retirees in maintaining a better post-retirement lifestyle.
This also helps them to benefit from any corporate action such as rights and bonus issue that would stretch the corpus for a longer period. They could also replenish their equity bank during market meltdown to the extent possible. A similar strategy could be adopted in investment in diversified mutual funds too.
Many events of the past two decades have changed the way retirement planning is made. With the advent of nuclear families, the retirees are made largely to fend for themselves in their golden years and had to stretch their savings so that they last for their post-retirement life.