Equity can be a part of retirement corpus, subject to your risk profile
Financial needs can be short term, medium term and long term. Along with the horizon of the need, your risk profile is also important
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I was on a project in the US for 5 years and have now come back to India. I accumulated over Rs2 crore (post-taxes) during my stay there. I want to use this money to build a retirement corpus and a house. I am 41 years old and will start working again in April 2017. My expenses are around Rs80,000 per month. Please help with a plan.
The corpus you have accumulated over the past 5 years needs to be invested to provide for your retirement corpus and to buy a house.
As you still have a long way ahead in your career and are still in an income generating mode, this is not the only corpus you will create for these needs.
However, what is important at your age is to understand all your financial needs, of which you have already mentioned a couple.
Financial needs can be short term, medium term and long term. Along with the horizon of the need, your risk profile is also important.
Risk appetite and risk capacity are the two parameters one should consider. How much risk you can take considering your financial health determines your risk capacity.
Risk appetite is your willingness to take risk. The investor’s age also plays an important role here as younger the investor, higher are her chances of taking risks.
There are many websites that can help you determine your risk profile, which predominantly involves assessing your reactions in various situations. For example, how will you react if an investment made for the long term corrects by 20% within 6 months? The answer to this will give an insight into your behaviour to various situations.
So, for example, if you say:
a) I will cut losses immediately and liquidate all investments, it means capital preservation is paramount, and, therefore, equity is not your asset class.
b) I will cut all losses and transfer investments to safer asset classes, it means you are risk averse
c) I would be worried, but would give the investments a little more time, means you are a moderate risk taker
d) I am okay with volatility and accept decline in portfolio value as a part of investing. I would keep the investments as they are. This may mean you understand the nature of investments and can take risk.
e) I would add to my investments to bring the average buying price lower, provided the investment as such is good to invest. I am confident about the investments and am not perturbed by notional losses. This shows a good level of knowledge and that you can invest in risk assets.
Also if you look at it carefully, what is important is your level of knowledge. Education is the key to any investment. It does not mean that you have to be an expert in investments, but having a basic understanding and more knowledge will surely help you understand your investments and help in taking a rational decision.
The next steps are to determine the asset allocation.
The retirement need is long term as it is assumed you will work till 55-60 years of age. So you have a good 15 years for the investment.
The corpus for retirement should be invested in long-term assets. Do look at equity as an asset class but the asset allocation is subject to your risk profile.
Buying a house is your other financial need and it would require a little more effort, as you need to determine when you want to buy the house and the budget for it subject to size, location and the task of finding the house.
Also critical is whether the house is meant for investment or for self-use. Whether a loan is to be taken is another aspect.
The amount you keep aside for buying the house and when you want to buy the house will decide where this corpus is to be invested in the interim period.
If it is to be bought over the next year or so, then it is a short-term need and a safe asset class like a short-term debt mutual fund can be considered.
If it is meant for the long term, then again you can consider taking some risk.
Also, the level of risk will be further determined by whether the house is meant to be for own residential purpose or as an investment.
If the house is being bought as an investment, then higher risk can be taken for the corpus versus if it is meant for self-residence, in which case the risk has to be limited.
I would advise you to go for mutual funds as an investment vehicle for debt as well as equity asset classes and the exposure to equity can be created via systematic transfer plan (STP), i.e., in a staggered manner.
Surya Bhatia is managing partner, Asset Managers.
Queries and views at firstname.lastname@example.org.