How to dabble in equity linked instruments post retirement - Part 1

As much as having a sound investment strategy for retirement years is important, following a judicious investment routine post retirement is equally important. While the majority of the literature on the subject of retirement investing is dominated by the steps that investors should take in their pre-retirement years for having a solid financial safety net for when they retire. However, the retirement investment game doesn’t simply stop when you get off the nine to five grind but it needs to be continued all your life.

Perceptions about post –retirement investing tend to be heavily coloured by the convictions and preferences they may have had in their pre-retirement years. As such, many people struggle to wean away from old investment habits after they retire and may also give in to myths and fallacious claims easily. One such example is the belief that retirees should stay eons away from equity investments. Yes, it is a fact that equities as an asset class carry high risks and may need to be viewed with extra caution when you do not have an active income, the notion that equities should be avoided completely is a misguided one.

Sandeep Chatterjee, a 63-year-old resident of Kolkata who used to work as a railway engineer, narrates, “I only started dabbling in equity investments in the penultimate decade of my career. My ideas about equity investments were negatively coloured as was the case with most people of our generation – we clung on to the belief that gold, real estate and fixed income were the only pathways to financial security. When the curtain of misconceptions fell away, I realised an equity element is indispensable in the long term especially when you take inflation into the picture.”

Chatterjee recalls that with professional guidance he was able to foray into equity investments. “I started off by investing in equity mutual funds first because plunging into stocks seemed like a risky proposition. Over the years, with the knowledge and expertise I gleaned from my experiences, I could also gain the confidence to get into stocks. But after retirement I have gravitated towards mutual funds entirely because for the retired coterie of investors who have reduced risk appetites, mutual funds are the safest way to tap into the earning potential of equities.”

The systematic investment plan allows investors to invest fixed amounts of money at regular intervals irrespective of the market conditions. This allows you to buy more units when the markets are low and less units when the markets are high and thus helps you mitigate the impacts of market volatility to some extent. “This approach is very useful for retired people like me who simply cannot take the risk of timing the market because of reduced risk-taking abilities. Through SIPs I have been able to maintain the desired asset allocation in my portfolio without having to forego the equity component after retirement.”

Preeti Zende, founder of Apna Dhan Financial Services, says, “Investment in the equity asset class is always related to market risk. No one can predict what is going to happen tomorrow in the share market. But this doesn't mean that this riskier asset class should be completely ignored by the conservative investors or the retirees. Because this is the only asset class which is having the potential to generate long-term inflation hedged returns.”

Concurrent market scenarios can also lead many retirees to either postpone equity investments or make hurried investments. However, Zende explains that this approach can be detrimental to their wealth creating objectives. “Because of the current volatility, many retirees feel uncomfortable investing in equity MFs. But if they make decisions based on this short-term volatility then they end up eroding their wealth in the long term. Retirees should have equity asset class exposure in 15 to 30% of their overall portfolio or the investible surplus. Normally people say that allocation towards equity depends upon the age of the investor but actually, it depends on your current net worth and risk taking ability based on your future need.”

In the post-pandemic world when interest rates of fixed income instruments have paled considerably, the importance of having equity allocation in the portfolio of retirees has assumed a new definition. To put things into context, the Employees’ Provident Fund (EPF) interest rate for 2021-22 has touched a 40-year-low of 8.1 percent. Also, from this year, taxation of interest income from contributions above ₹2.5 lakh will be levied. The return offered by the Public Provident Fund (PPF) has fallen to 8 per cent in 2018-2019 to present-day 7.1 per cent. All these investment avenues are relied on by retirees for maintaining their financial reservoir after they cross the retirement threshold. Considering that real inflation in the economy now hovers around the same range, returns after accounting for taxes and inflation would be nominal.

Equity investments have the potency to deliver inflation plus returns. They are also a necessity in the portfolio of retirees because leaning on real estate and gold post-retirement may not be a wise option. Investing in real estate at this stage of life may bring with it a fresh set of troubles not to mention the high volume of lump sum capital that will have to be pumped for investment and the expenses for maintaining the property. Also, with advancing age, it may become a challenge to look after the estate. Gold can be added to the portfolio for hedging inflation and for an element of safety but gold poses liquidity and storage problems and in the long run equities exhibit better inflation-adjusted returns than gold.

Elaborating on how retired investors who have little to no experience can figure out equity investments in the easiest way, Zende says, “If a retiree’s net worth is 2X, when their actual requirement is X then, he can invest other X in the equity asset class to build sizable wealth without cutting corners and leaving something for the next generation. So basically how much allocation you should do depends on your risk taking ability but in any case retirees should have a minimum of 20% of portfolio in equity asset class so that they can make sure that their retirement kitty is not eroding at a high speed. Allocation towards equity asset class is essential to make sure your later years of retirement go comfortably in a similar lifestyle which you have today. For long-term financial goals if any which is 10+ years away for that as well allocation of equity makes sense so that initial capital investment reduces.”

Key Takeaways

- Speak to a financial advisor to get a clearer picture of the percentage of your portfolio that you can comfortably put into equities.

- Before picking a fund, a research exercise on the fund’s past performance in different market cycles, the existing size of the fund’s subscriber base and the asset management company can ensure your money does not get pumped into a fund with red flags galore.

- Allocation towards equity asset class is essential to make sure your later years of retirement go comfortably in a similar lifestyle which you have today.

- Equity investments have the potency to deliver inflation plus returns. They are also a necessity in the portfolio of retirees because leaning on real estate and gold post-retirement may not be a wise option.

- Retirees should have equity asset class exposure in 15 to 30% of their overall portfolio or the investible surplus. Normally people say that allocation towards equity depends upon the age of the investor but actually, it depends on your current net worth and risk taking ability based on your future need.

While Part 1 of the article introduces the concept of investing in equity linked instruments for retirees, part 2 will do a deep dive into each asset class and a comparative analysis of them. This will be published next week.

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.