Money Sense
1.
Retirement
is the most distant financial goal requiring most savings. How can one start to
have a process where one keeps investing adequate amounts for retirement
without compromising on the most immediate goals?
To
invest for retirement while not compromising on other investment goals requires
early start. The cardinal rule of retirement planning is to start as early as
possible. Early investors usually have higher risk appetite and therefore can
take exposure in high risk-high return assets like smallcaps. Thus an early
allocation into a smallcap fund provides potential for a far larger gain will
lesser SIP. This way an investor can invest for other investment needs as well.
As the delay in retirement occurs, the SIP amount needed to save the same
retirement amount goes up. It is this that leads to compromises.
2.
Most
salaried people have provident fund. Why does one need additional retirement
investments?
Provident
fund primarily is a debt investment product with a relatively lower return
accrual. Thus, to build up a substantially large retirement corpus via PF, an
investor would need to allocate relatively larger amounts to fulfil the
retirement requirement. To work around this situation, an investor can
invest into equities fund through SIP. Given the return potential of equities
over long term, an investor can potentially end up building a much higher
corpus. Moreover, given the critical nature of retirement, the backup
investment plan via equities gives a strong buffer and helps ease the old age
retirement.
3.
How
can one plan for retirement savings keeping PF contributions in mind?
Retirement
and the whole list of investment objectives must be seen in its entity. Only
then can an investor identify how much contributions are required for each
objective; what is the level asset allocation needed; the timeline, and the SIP
amount required to achieve those objectives. Having said that, assuming you
have only one objective: ie retirement; and that you know your final retirement
amount; you will have to calculate whether PF can generate that sum by the time
of retirement. If there is any gap, then it means you will have to invest into
other plans to fulfil that gap.
4.
Can
there be a strategy wherein one can harness tax saving investments for the
purpose of retirement savings?
An
investor can utilise the ELSS growth option to avail the tax saving while also buildup
capital by utilising in the growth potential of equity. The ELSS options gives
the investor a potential avenue to save tax upto 1.5 lakh a year. Other than that, the investor can also invest in NPS which
provides additional tax deduction of Rs 50,000. Through the NPS option the
investor can allocate in various asset categories and simultaneously build
capital in that plan as well.
5.
Popular
tax saving and long investments are low risk investments. Can sticking to them
and PF savings be enough for retirement?
We
are humans. It’s never enough. Having said that, if an investor wants to live
on a tight monthly budget then perhaps a debt centric investment plan may
suffice. But to generate a surplus and substantial corpus, equities will need
to come into the asset mix. Top global pension and retirement funds are basing
their investment and payout strategy around equities - there must be some reason to do that.
6.
What
are the first steps of starting retirement investments?
To
plan for retirement, one must know how much income will a person need, so as to
stay comfortably well from month to month in retirement. Then the investor may
need calculate how much corpus must one must have that will generate this
monthly income as annuity. Once you have that corpus amount, you know the goal
and the time you have at hand to build up that retirement fund.
This
process will give you the retirement strategy, the rate of return required and
the funds needed each month for investment.
7.
What
should be the strategy to pick retirement investments?
The approach should be that our
investments must over achieve the target. That, the corpus should get built
with as little risk as possible without compromising the return potential - And
that, the investment for retirement must not elbow out other more immediate
investment objectives.
8.
Can
you outline steps required to build an investment portfolio for ample
retirement savings?
The
retirement portfolio of an individual varies from person to person and is
dependent on the nature of their income, the time left for retirement, the size
of corpus needed, and the competing investment objectives. Having said that,
ELSS, NPS, real estate, all have a role in ensuring a comfortable retirement
9.
With
the recent changes in taxation has NPS become an attractive component of any
retirement portfolio?
The
attraction quotient has certainly increased with fresh tax incentives. NPS is
eligible for a tax deduction under Section 80CCD of the Act. While 10% of the
salary contributed in NPS is eligible for a tax deduction of up to INR 1.5
lakh, this deduction is capped under the overall limit of Section 80C. But in
addition to this, you can claim an extra deduction of ₹50,000 under Section
80CCD (1b) of the Act taking your total deduction limit from INR 1.5 lakh to
INR 2 lakh. So you could either put INR 2 lakh in NPS to claim full deduction
benefits or put just INR 50,000 in NPS to claim the extra deduction under
Section 80CCD (1b). Moreover, the tax
impact at the time of withdrawal and annuity purchase too have been relaxed. This
has improved the wealth creating potential and the tax efficiency of the
option.
10.
What
are the essential steps one needs to take while tracking the progress of one’s
retirement investment portfolio?
The first important step is to have a plan and stick to it.
Once you have a plan and its roadmap, then an investor can benchmark the real
performance against it. This will help the investor understand any deviation
from the plan and would be better able to take corrective action.
11.
When
and how does one rebalance the portfolio?
As
mentioned earlier, the portfolio must be monitored at periodic interval and not
on frequent basis. The swift frequency will create emotional churn within the
investor and will more often than not lead to off-roading from the plan. The
rebalancing can happen when the actual performance is deviating majorly from
the planned path. Other than that, the asset rebalancing may happen when the
investor is transitioning from one life stage to another. Due to this stage transition,
the investor would have to change the asset allocation profile from risky, to
lesser and lesser risk profile as the age progresses.
12.
What
are some of the most common mistakes people make while making retirement
investments?
There
are many investment mistakes that investors commit while planning for retirement.
The first of which is of course not planning for retirement early. This leads
to higher investment outflow later and elbows out other investments at later
date. Other than that investors tend to under-invest in growth assets which
limits the potential size of the eventual corpus. Other than that some common
mistakes are not sticking to asset allocation plan; to under-allocate, to move
assets on market sentiments and to not be mindful of tax impact.
- Ms. Laxmi Iyer, CIO, Debt and Head: Products: Kotak Mahindra MF.
