Deciding the Right Balance between Risk and Returns

Sometimes, even some of the best retirement plans that you’ve worked very hard at achieving are subject to certain unforeseen risks or loss. After witnessing the 2008 financial stock market meltdown, whatever retirement savings accumulated over the years could get wiped out, high inflation rates could eat away at your hard earned savings faster than you planned, with rising life expectancy raising longevity risk, people post retirement may outlive their investments and their accumulated money may not be enough to sustain the desired lifestyle due to personal situations, health care costs which are a few of the unknown.

The one thing that is inevitable is risk – decline in value of an investment during investing. As an investor, one would need to take into consideration the different risks that one may face and how to manage it. Keeping this in mind, making wise investment choices could help diminish risk in a way that helps you reap rewards.

The aim, of course, is to decide the right balance of solutions given the risks that you may face post retirement. For some of you, reviewing and rebalancing your investment strategy may be important, for others, investing less into equities while investing more in safer instruments could be important and for the rest, investing only in safer instruments may be of utmost importance. Nonetheless, for those of you reaching your retirement life or may have already entered that phase, it is important to understand the types of risks that lie ahead and how one may overcome it by protecting their retirement kitty and letting it continue to grow.

Let us look at the different types of risks that you may come across and what solutions you can take to make sure your retirement corpus outlives you.

#1 – Inflation

Inflation can have a big impact on retirees especially those living on a fixed income. Even though various financial responsibilities such as taking care of children’s education, feeding a big family become much lesser, however, other personal duties such as food expenses, paying housing bills cannot be ignored. It is important to know that inflation can affect different commodities differently; food and fuel prices are likely to fluctuate daily, along with volatility. For example, if you have set aside Rs. 3,00,000/- per year for your retirement, you’ll still have the same amount of money – but its value will not be much due to inflation. The Rs.50 toothpaste that you buy today will cost you Rs.80 in 5 years. The value of your retirement corpus will get depleted if inflation is not taken into consideration.

#2 – Interest Rates

The interest rates of savings accounts are already touching the floor. With banks offering lower interest rates, it would be a complete dampener for those surviving on fixed-income investments. Senior citizens and retirees who depend on income from their investments are the ones who are impacted.

#3 – Unexpected Health Care Costs

Due to advances in medical science, there is a general increase in the lifespan of individuals which leads to higher medical expenses that you may not foresee well into your retirement life. The post retirement phase could be as high as 30 to 40 years. Any financial plan should assume long living phase. Unexpected health care costs are a major concern. Long-term health issues such as an accident, illness, chronic disease, cognitive impairment can drain your savings when mental or physical capabilities deteriorate. Ignoring such issues and failing to plan adequately for post-retirement phase may not allow individuals to amass sufficient funds with which one can accomplish all their dreams and enjoy a peaceful retirement life.

A Fund to select part of Asset Allocation Post Retirement

Select Multi asset – Fund of Funds scheme that invests judiciously in a mix of 3 asset classes – Equity, Debt and Gold. This unique combination brings together the volatile equity assets with other relatively less volatile asset classes in the portfolio which is called as asset allocation. Multi Asset helps those investors who are moving closer to retirement or retirees who cannot afford to take high risk investing in equities, but are ok with some amount of moderately high risk to earn an additional return over fixed income with some market risks. While investing in Multi Asset Fund, you can give maximum opportunity to your money to grow during your retirement phase as this fund invests in all 3 asset classes.

Conclusion

Post retirement, earnings come to an end. Many retirees want to follow their hobbies or travel to their dream destinations. It is important to let your regular income continue post retirement to fulfill those dreams but it is also equally important to not let that income erode due to inflation, interest rates or unexpected health costs. If you wish to grow your money and you have some amount of risk appetite, you can look at equities. Remember, asset allocation always plays an important role in the kind of returns your investments generate. Our objective of this article is to help you allocate your assets wisely by keeping risk under control and grow your investments to help you manage your post retirement financial needs. And this can be easily achieved by investing in Multi Asset Fund.

Redemption should not be tied with Markets Performance

A very simple and clear advice is to remain invested till the time your financial goal is not achieved.

Always remember that the decision of redemption should be connected to your investment objectives and not to market levels.

Fund Managers best to manage your money in such scenario

As a mutual fund investor, it is best not to worry about the market levels. Analyzing market trends and investing money accordingly is the fund manager’s job. When markets are at their peak, the need to redeem shouldn’t cross your mind. Fund managers are supposed to understand market trends better, sell the overvalued stocks and then deploy money as and when markets offer investment opportunities.

Your fund manager may have booked profits on investment and is now waiting for the next suitable opportunity for further investment. Therefore, it is probably better to hold for a while before taking the next step. Fund Managers spend most of their time in research, meeting with company promoters to understand their strategy and business plans which could have an impact on the performance of stocks or markets. In short, your fund managers are potentially in a much better position in understanding markets trends.

There is also a possibility of you not be able to reinvest your redeemed money and may lose out on opportunity which does not happen if you let the Fund Manager manage your money.

Investors who have profitable investments in hands due to recent highs in the markets and now thinking on redemption. We have a question for you! Will you able to be catch a good investment opportunity in the current market especially when interest rates on savings and fixed deposits are falling? Therefore, our advice is continuing your investments with this profit till the time you have not achieved your financial goal.

Redeem only if you have achieved your investment goal!

You may have two reasons for redemption. Either you are worried about the markets levels (markets are at all-time high so may fall down and better book some profit) or you have met your financial goal, investment objective.

If you are looking to book profits then, as we have explained earlier it is better the fund manager do that job.

In second case, if you have achieved your financial goal then you can redeem now. You can spend your profitable investment to fulfill your financial goal like higher education, marriage etc, thanks to outstanding markets performance. Now you can enjoy benefits of long term investments!

One of the best way to redeem your investment is by starting a Systematic Withdrawal Plan (SWP), by doing this you will minimize the risk of redeeming all your money on one day.

To conclude, if you have achieved your investment objective then you can set a new financial goal and start your next long term investment association with markets. If you have not achieved your financial goal, then you should continue with your investments till the time you have not achieved investment objective.

Remain a long term investor to make the most of your investment!

Top 5 Checks While Comparing Mutual Funds

It’s a challenge to choose a mutual fund scheme! The number of mutual fund schemes available in the market would drive any investor insane to zero down on a mutual fund of his/her choice. There is an endless list of checks necessary to be done before arriving at the one mutual fund scheme that meets your requirements and has potential to give decent returns.

Below are the various checks to keep in mind while comparing mutual funds:

Know your fund house:
Choosing a fund house in which you have sufficient faith to invest your money in is important before zeroing in on a scheme of your choice. Investors look for fund houses which can take care of their investments and can manage their money well. Objectives set by fund houses help investors to meet their goals thus securing their future. If the objectives are not met, investors lose faith in the fund house. A budding investor should ask these important questions like, “What are the fund houses’ investment objectives?”, and “How many schemes does the fund house offer to its investors?”, “Are the funds similar under different names?”, “Does the fund make sense to me?” It is equally important to know how the fund manager manages the funds under him/her. One needs to ascertain how schemes have performed during various market cycles managed by the fund manager. A good fund manager is not only important for the fund house but also for an investor.

Fund philosophy:
The next important check is to know the philosophy of the fund house. A set of guiding principles that inform and shape an individual’s investment decision-making process is termed as the philosophy of the fund. The fund house’s investment philosophy plays an important role in determining the performance of its funds in different market conditions. The selection of the funds, investment decisions are directly dependent on the fund philosophy.

Charges and fees:
An Asset Management Company (AMC) that spends on the upkeep of a mutual fund is measured as the expense ratio of a fund. The fees of the advisor, record-keeping, legal expenses, accounting, auditing fees etc. are what make up an expense ratio. Higher churning of portfolio leads to higher costs. It is an expense borne by the investor and is deducted from the investment. For example, if you have invested Rs. 100 and the expense ratio of the fund is 1.25, then your investment is Rs. 98.75. Lower expense ratio means that higher amount is available for investment.

Transparency:
In today’s world it is very important to maintain a good relationship with the customers, and to maintain a good relationship, there has to be a high level of transparency. This holds true even for mutual funds, as all mutual funds disclose the stocks they buy etc., through factsheets SEBI’s new rule, instituted October 1 2016, requires asset management companies to disclose all commissions paid to distributors in the Half-Yearly Consolidated Account Statements (CAS) they send to investors, all this in an effort to bring more transparency into the system.

It is only when SEBI brought the commission disclose rule that we have started paying trail commission to distributors in the Regular Plan effective April 1,2017 by letting you, our investor, know exactly where your money is going and that its serving your interests first.

So when it comes to long term wealth generation that puts the investor first, it may make sense to invest in a fund which focuses on transparency and controlling costs – rather than investing in a typical high-cost mutual fund that consciously uses big ads to attract your money!

Performance:
The last factor is return on investments. All the above factors are major drivers behind the performance of the funds. There are many other factors which have direct and indirect impact on performance of the funds; however, we have discussed the major factors above.

Moreover, it is important to understand that the performance of the funds can change over a period of time (positively as well as negatively), however, its philosophy, ethics, investment strategy are the main pillars. Don’t just only compare the performance of the fund in isolation.

To conclude, sound knowledge and research is very important before choosing a mutual fund to park your hard earned money. Following all the above steps might help you take right decision. However, you may consult your financial advisor before taking any investment related decision.