This certainly is one of the most frequently asked questions post retirement. There used to be a time when retirees were asked to refrain from investing in equity funds. This has seen a considerable change over the years.
Equity investments have always been associated with a high-risk behaviour usually associated with youngsters and older people are still cynical about investing in equity. However, with improved medical and health care facilities, the average life expectancy has increased. This has made equity an integral part of the investment plan post-retirement.
Why should you invest in equity if you will be living longer?
Sounds illogical, doesn’t it? Let’s look at the term deposit option as an example.
Inflation: If you are getting 7 percent interest on your term deposit when the inflation rate is 9 percent then you are in effect making a loss. In a little over a decade, your retirement savings can start diminishing.
Investing in Equity funds that match your risk appetite along with a balanced investment with lesser risk can help achieve the objective of a sustained post-retirement life.
How much should you invest in equity?
Experts recommend that around 70 per cent of the retirement corpus should be invested in traditional investment options like bank deposits. This will help generate income and take care of their daily expenses. Additional funds, if any, should then be diverted towards equity funds. Let’s understand this with an example.
Raj has a retirement corpus of 1,00,00,000. He has kept all his retirement funds in term deposits with banks. He is earning an interest of 10 per cent per annum (hypothetically). So, his annual interest income is 10,00,000 which translates to around 83,000 per month. His monthly expenses are around 50,000. The extra 33,000 interest he receives just keeps getting plugged back into deposits.
He invests 30,00,000 in equity funds and leaves 70,00,000 in bank deposits. Now he earns 7,00,000 per annum (58,000 per month) while the funds invested in equity help him tide over the inflation.
An important thing to note here is that investment in equity should be done with a clear objective of growth after your regular expenses are taken care of.
Why equity funds?
Individual stocks have the dual risk of the market and the company associated with them. Equity funds, on the other hand, invest in different companies across various sectors and if a company goes bankrupt, your investment may not see a negative impact.
In a nutshell, the ‘mantra’ of investment post retirement is to ensure that your funds grow while they provide for your daily needs. The risk must be calculated well since any loss at this stage can be detrimental to your lifestyle. However, with equity funds, diversification can help reduce the exposure of your investment from unwanted market risks. You can find a fund that shares your risk profile and then make an informed decision to invest. If you have planned your retirement savings well enough, then this option can add to your effort.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.