Achieving the financial goal of amassing a retirement corpus can be very challenging. Some days back, I got a call from an acquaintance, Arun, 55, who is retiring in three years and is evaluating various options to raise the requisite retirement corpus. His plan is to move the entire public provident fund (PPF) corpus accumulated over the last 30 years to a combination of equity funds, stocks and derivatives.
Arun’s reasoning is that PPF is giving 7.l% return, whereas he is hopeful of getting 12-15% returns from equities and thus grow his portfolio in the next three years. There are two flaws with this hypothesis—the first one is assuming equity returns to be stable and predictable and second is investing in equities for a three year period. Past data shows that IO- 20% intra-year draw downs are common and, in these downturns, investors tend to exit their holdings.
Further, Arun was considering investing in equity funds, stocks, and futures and options (F&O). Data from market regulator Sebi shows that 89% of individual traders in equity F&O segment incurred losses in FY22. Choosing stocks and managing them is not easy either for a lay person like Arun. With small-cap funds displaying a spectacular performance this year, Arun was veering towards investing in these funds. Arun’s action plan included all the mistakes most investors make—investing in high-risk equity products for the short term, based on recent good performance and driven by what other investors, in their circles, are doing. At best, this approach of exiting PPF for equity can work if the holding period is for long term (at least 7-10 years) and the individual can remain invested through the volatility.
Arun was also considering high yielding debt products like A/ A- rated non-convertible debentures which were yielding 11-13% per annum. Investors like Arun do not understand the credit, concentration and liquidity risks in such instruments. Such plans only expose the retirement corpus to further risk over growing it. Whenever investors have any requirement, the first investment they look at withdrawing is the employee provident fund. It looks like the 1980s Bollywood movies, where all family members’ needs were met through the pension fund, has influenced Indians ‘ minds to do so! Arun had enough corpus between his PPF and EPF to provide for monthly cash flows in retirement. However, he was planning to use the EPF corpus for his children’s higher education and marriage. This meant limited financial security for Arun in retirement.
It becomes difficult for individuals to decide the course of action when realization dawns that they do not have enough to cover upcoming large expenses. Most Indians have gold holdings which can be used to take loans rather than putting retirement at risk. Getting children involved in money decisions concerning them is important to ensure they understand the value and struggles faced by parents, apart from contributing financially once they start earning.
These days there are many high returning investment options being talked about, which blinds investors to take bad decisions. While evaluating investment strategies. keep in mind some basics. Equities do not give stable, linear returns and returns cannot be predicted. Further, it is recommended to have a holding period for at least 7-10 years for equities. For shorter periods, fixed deposits and short duration debt funds work best.
Accepting the situation and working around it is better than exposing oneself to unknown risks. Arun finally used his investment cum insurance policies and took a gold loan to fund his children’s goals, thus safeguarding his retirement. Speaking to someone who can play the devil’s advocate is always good to get a different perspective.
Many’ risks fail because they are not taken at the right time or for the right period. Remember this when taking financial decisions closer to retirement.