This post is in response to the several requests I have received last week asking me two questions. The first was to check whether retired people can have an MF portfolio and what should it be. The second was on the overall deployment of the retirement corpus. I am tackling the first question here.

Most of us are familiar with creating and investing in an MF portfolio during our active earning years. We start off in a small manner, keep increasing our investments as our incomes keep rising over the years and hopefully get to a stage of having sufficient corpus in hand when we retire and no longer have an active income. This post is about the aftermath – what happens when we retire and id there a way in which we can deploy the corpus through MF? 

Firstly, let us examine whether it will make sense to be invested in equity as an asset class after retirement. My view is, unless your corpus greatly exceeds your needs, you will need some amount of equity growth to take care of unexpected circumstances which can impact any of us. This can be a sudden illness, some other emergency in the family or simply having the good fortune of living longer than what you had estimated. Being invested in only debt instruments and drawing out of it, may result in a situation where you run out of money when you need it the most. I. therefore, am a big supporter of being invested in equity to the extent feasible even in the retired stage of life.

Secondly, the question arises as to how should you be invested in equity then? Well, the ideal way will be to keep having your 3 portfolios of Debt, MF and Stocks even in retirement. You start realizing money out of these portfolios in the same order so that your equity investments have the maximum chance to grow. However, as many readers will surely point out, what happens when you do not have sufficient corpus that allows you to follow this strategy? One way will be to invest in equity through MF which carries a lower risk by their hybrid nature. You are now not in a growth phase of your corpus but in the drawing down phase. At the same time, you want to ensure some decent growth as this will ensure the longevity of your corpus.

The following portfolio is again taken from Investors Guide and has been suggested by Dhirendra Kumar of VR Online. The idea is to put most of your corpus, save some emergency money, into the following funds:-

  1. FT Dynamic PE Ratio fund
  2. HDFC MIP
  3. Reliance MIP

Note that the choice of funds ensure that the risks are contained either through Debt investments for 2 and 3, or through market actions in the case of 1. Let me take an example to illustrate how this will work in real life.

  • Consider a person who will retire in the next 2-3 years and has about 1.5 crores with him. He can put 50 lacs in each of these funds.
  • For taxation issues, investments in 2 and 3 should be ideally done 3 years prior to the first year when money has to be withdrawn.
  • The growth of the portfolio will be about 10 % on an average.
  • Withdrawal rate can be about 6-8 % of the portfolio value, depending on the need.
  • In the first year this will give about 9-12 lacs which is sufficient for most of us to run their annual expenses. I am assuming here that the investor already has a home.
  • The surplus can be invested in some safe avenue or reinvested in these funds if some risk is OK.
  • In case the corpus is 1 crore, the withdrawal will be 6-8 lacs in a year.
  • Assuming a 6 % inflation, this will last about 20 years or more with a reasonable degree of comfort.

Note that depending on the corpus available, you can have more complex bucket strategies but this is probably a simple hassle free way to achieve what you need.

You can, of course, have alternate portfolios with slightly higher amounts of risk if you are having a larger corpus. In that case look at Balanced Funds and Equity Income Funds as your preferred choices. One such portfolio can be as below:-

  • ICICI Balanced Advantage Fund
  • DSP BR Equity Income Fund
  • BSL Balanced Fund
  • Reliance MIP

In this case, put about 40 % in the MIP and 20 % each in the first 3. If your overall portfolio grows at an average rate of 10 % plus and you are starting with 1.6 crores then the portfolio will allow you to withdraw 75000 Rs per month at current prices, even if you consider inflation to be at 6 %.

I hope all of the readers in retirement or shortly going there will be able to work out their appropriate MF portfolio with these guidelines. In the next posts I will look at an overall deployment of retirement corpus.