Estimating how much you need for retirement is hard enough. But even if you are able to do that, getting there is a tough task. In the second part on the series of retirement planning, Debashis Basu, editor Moneylife, focussed on the right way to invest
There is a maze of retirement products available in the market promising a secure retirement, but most of these products do not deliver, leave alone creating a sufficient corpus for retirement. In the second part of Moneylife Foundation’s two-part seminar on retirement planning, Debashis Basu, editor Moneylife, focused on how one can save efficiently to avoid the risk of underinvestment. Along with this, what steps one could take to protect his/her corpus post-retirement and if there is a shortfall what are the different options available were also explained.
“Retirement planning is very complicated because there are too many variables, many of which need to be assumed”, cautioned Mr Basu. There are too many unknowns before retirement, as well as post-retirement. Many are unaware of how much their expenses would rise after retiring. Once you have accumulated your corpus, where would you invest it? There are several other questions one needs to address while planning for retirement. One has to separate the set of factors that one can control and those that one can’t. One can control how much one saves and invests.
Even if you seek professional help, when investing for retirement you must understand the difference between quality advice and a sales pitch. Most of the unscrupulous relationship advisers and so-called wealth managers are often looking to build their own retirement corpus. “The least you can do is invest in products that grow to beat inflation” explained Mr Basu. For investing safely, one needs to understand the different products available and the risk & return associated. One of the benefits of starting early is that you can make the power of compounding work for your benefit.
Lack of a well-planned savings plan can leave you with much less money to spend on yourself when you have no income. The basic purpose of investing for any goal and especially retirement is to be able to beat inflation. Stocks and equity funds over the long run of 5-10 years have more often than not beaten inflation. Other products like bank fixed deposits and other fixed income products may not deliver high returns but offer safety of capital.
The main factor that determines how you should go about saving for your retirement is your age. Mr Basu explained how over different age groups from 21 to 60 one can invest in a mix of products, taking into account the number of years to retirement.
“One needs to use the same judgement for investments pre-and post-retirement”, said Mr Basu. Post-retirement one’s main focus is to protect the corpus. Here people have the option of immediate annuities, Senior Citizens Savings Scheme (SCSS) and MIP schemes, but none of these are great choices, said Mr Basu. In the post-retirement period, it is important to choose safe assets, for which bank fixed deposits are the best. However, the main issue here is, one does not know the future returns and how long one would live. Investing in fixed income products for the very long term may turn out to be imprudent because they don’t beat inflation. Retirees may like to invest some amount of money in equity mutual funds.
Since a lot of savers today have large home loans, they may end up saving less for retirement. They will have the bulk of their investment in real estate. Mr Basu said, “Reverse mortgage is an option for them, but it has failed as a product in India and may pick up in near future”
The session was followed by an engaging Q&A session which addressed topics such as investing in property, NPS as a retirement product and whether equity mutual funds are the best way to create long-term retirement corpus.
In an informative two-hour session, Sucheta Dalal explained the financial mistakes one should avoid
Just a few weeks ago, a scam run by West Bengal-based Saradha group was exposed. Chain-money schemes like Saradha are flourishing in our country. Hundreds of crores of rupees have been looted in this manner. Apart from these, there are Internet-based scams, phishing scams, identity...
The very first step to smart investment is to understand various investment classes, the risks that they carry and how to decide what suits your needs, income level and your personal risk profile. Debashis Basu, in a session titled “Invest Smartly” explained these concepts and how to use various investment classes successfully over different time horizons
The best investment lesson is to be cautious and avoid making mistakes and losing capital. However, too many investors are lured by the image of big financial brands or glib talk of sales staff hawking their products. In order to get to there, Debashis Basu, editor and publisher of Moneylife magazine started by explaining various asset classes and the risks that they carry. These included stocks, mutual funds, gold and realty. He explained the difference between investment products and speculative investments and then took the audience through a clear understanding of the impact of inflation on their savings and how it erodes the value of their nest egg.
Planning one’s long term investment requires you to select smartly and find products that will give positive returns, adjusted for inflation. In order to do that, investors need to understand the best and worst returns that a chosen asset class has given over an extended period of time. This requires a little work to obtain historical date spanning over a decade or access to the kind of analysis that is done at Moneylife. For instance, Mr Basu pointed out that capital markets and gold are both investment classes where price data is available for an extended period; on the other hand, there is no proper data available for the realty sector and the little that is collated by housing institutions already shows glaring inaccuracies. This makes the assessment of risk very difficult. Mr Basu said that one you are clear about how much you can possibly expect from a certain asset class, it was important to work out a mix of investment that would be safe, but beat inflation and give you a positive return.
A key to smart investment is to “start early and save as much as possible” said Mr Basu, explaining how the magic of compounding helps multiply the savings and wealth for early birds who have the benefit of financial literacy.
On gold, Mr Basu said that the metal is a precious but speculative investment and it cannot be valued since it does not pay interest or dividend. The price of gold is only derived by what others are willing to pay for it on a given day. If you buy gold betting on guaranteed returns based on previous price trends, you may be in for a nasty surprise. This has been Moneylife’s stand for over three years and the recent crash in gold prices demonstrated the risk it carries.
Mr Basu spoke at length about real estate and how easy it was to extrapolate the price experience in a certain area to the entire country. He also pointed out that all talk about realty returns were based on anecdotes rather than hard data, which is simply not available in a uniform, standardised form over a long period. Mr Basu said that people must differentiate between a house that one buys to live in (which can also appreciate significantly) and realty as an investment, which will be bought and sold. Realty carries high transaction costs in terms of stamp duty, transfer charges and taxes. This leads to significant erosion in returns. And most important of all, there is no regulator.
On insurance, Mr Basu said, it should be used primarily for its main purpose—to guard against risk. He warned against mixing investment with insurance through products like unit linked insurance plans (ULIPs). These investments involve huge costs and there is no long-term data readily available on the fund management performance. However, there are better investment products available at lower costs that can be used for investment.
Stocks and equity funds are the best assets available for creating long-term wealth. The best way to invest in stocks is through equity funds. Stocks and mutual funds are risky. However, he cautioned the participants on the hoards of different funds available and how one should pick and choose the right fund. One should focus on defined goals and invest in limited products. As these investments are volatile one should invest systematically to use the volatility to his/her benefit.
Before ending the session Mr Basu gave the participants a list of investment products which one should avoid as these products require deep research and understanding. This was followed by an interactive question and answer session.