Q. I am 43. I am shifting from a corporate job to the education field. I want to invest about ₹28 lakh of my PF money in a security that will provide me with a regular income (on a quarterly basis).
Can you advise me on the right option to invest in? I need the least risky one.
Lakshmi
A. Since you have stated that you need the least risky option, you can look at a combination of bank deposits and post office schemes. Split the deposit with 2-3 banks and make sure you are with at least one systemically important bank (SBI, HDFC Bank, ICICI Bank). You can consider Post Office National Savings Time Deposit. This will ensure that you do not compromise on safety. However, it needs to be said that it is not very tax efficient. If you are in the 20% tax bracket or less, then this is just about ok. Else, this will generate post-tax returns of less than 5%. But that is the price one pays for safety.
If you are in the highest tax bracket and are game for some risk, then you can invest a small amount in liquid mutual funds and do a systematic withdrawal plan. This will be more tax efficient but comes with uncertainty of returns (no guarantee) and marginally higher risk than deposits.
Q. I am 32 years old and would like to invest over a period of 25 years to save for my retirement. My goal is to achieve a minimum corpus of ₹8 crore after 25 years. I can invest in SIP at ₹30,000 a month. Please let me know about safe investments. My adviser told me to invest in three different funds, but I prefer your advice. I fear all my investments can go bust if markets collapse after 20 or 25 years. So, please let me know how to proceed.
Patrick Olivera
A. Safety and high returns do not go together. If you are unwilling to take some risks, then only deposits will fit your requirement. But, they won’t get you to where you want unless you have a very high saving rate. For example, let us assume over this period, your average return on deposits is 6%. For you to get to ₹8 crore in 25 years, you will need to step up your monthly savings by ₹10,000 every year. That is ₹30,000 a month in the first year, ₹40,000 in the second year and so on. That will be an average of 10% increase over these 25 years but with significant hikes in early years (since a ₹10,000 per month increase amounts to a 33% jump in savings and then a 25% and so on, given the low base). This is not easy if you have EMI commitments. Use PF, post office schemes and bank deposits, without fear of market collapse. But this is not without nil risk. We had 10-12% interest in the 90s but have steadily declined since. In another 20-25 years, as we become a developed economy, rates can further fall.
The other route is to have an asset- allocated approach to investing, with equity and debt. For example, start with a 50% allocation for post office time deposits, PF, NSC and bank recurring deposits. For the equity part, consider a simple equity index fund and a multi-cap fund. This will ensure, as a portfolio, you are not too hurt by hits such as the present one caused by the COVID-19 pandemic since your debt component will protect you. But here again, you need to step up your monthly investments by at least ₹5,000 every year to make sure you reach your target. As you get comfortable with mutual funds, make it 60% in equity funds and add a mid-cap fund later. The present market fall provides opportunities to enter. But, think long term. Markets can fall from here in the next few months. Test waters now to see if you can handle the volatility. If you do, you know you will survive equity investing. Else, go back to the first option.
(The author is co-founder, Primeinvestor.in)
