Financial independence or retirement – A template

I have been asked by many readers as to how they should be organizing their money in retirement so as to get a regular income that stands the test of inflation over a long period. In recent times I am also asked the same question by people who want to be financially independent at an earlier age and are keen to set up a passive income stream that will last their lifetime. The interesting aspect to be noted here is that the solutions are pretty much the same, though the amount of corpus will necessarily differ.

Let me explain this a little. The whole idea of retirement, early or at 55/60 years, is to get some cash inflow from the money you have invested in different financial instruments or in other assets such as a house etc. This cash inflow should be able to take care of the cash outflows that your aspired lifestyle requires. Assuming that most people retire at 60 and can expect to live till 85 in today’s context, their corpus needs to last them 25 years. Now if you decided to take an early retirement at 45 then your corpus will need to last you 40 years. The key to this is also whether you are earning any active income in early retirement. For example, many of us earn some income through consultancy or other means and this will help. However, for the purpose of this post, let us assume that a person takes an early retirement at 45 and expects to live till 85.

At a very basic level you need to understand the following calculation:-

  • Assume an expense of 10 lacs per year at present without accommodation and any children related expenses.
  • For a period of 40 years assume zero real rate of return – this means your corpus invested in various instruments will grow at the same rate as inflation.
  • With the above assumption in place the required corpus is simply a producr of your annual expenses and the number of years. In this particular instance it will be equal to 10 lacs x 40 or 4 crores.
  • So if you are 45 years old and have an amount more than 4 crores and are unlikely to spend more than 10 lacs annually, you can take an early retirement.

What if you do not have this amount but are still interested in retiring earlier than the normal age anyway? Well, there are a few alternatives you can consider in the above example that we are dealing with :-

  • If you work for another 5 years the amount of money needed annually will grow to 13.38 lacs due to 6 % inflation and the amount needed will be 4.68 crores for 35 years. This may sound fantastic but is true – reason is your money is growing for less years and your expenses have increased.
  • Take this futher to 10 years working. Now your expenses annually will be 17.91 lacs and corpus needed for 30 years is 5.37 crores.
  • Before you are worried with these figures let me also give you the good news. Suppose you are 45 and had a current portfolio of 3.2 crores. Now you cannot retire at 45 but decide to work 5 years more. At 10 % growth in 5 years your portfolio value will be 5.15 crores.
  • With a time period of 10 years the portfolio will amount to 8.3 crores.
  • Bottom line is you can retire quite peacefully in either 5 years or 10 years.
  • Apart from working longer there are two more strategies you can look at – one is to believe that your expenses will reduce when you retire. In my experience this is rather tough to achieve and therefore you should ideally not aim for this.
  • The final one is to generate a real rate of return for your portfolio. This will ensure you need a corpus less than 4 crores to begin with. If you deploy your money well, this should be quite possible to achieve.

Let us take the limiting condition where you do have 4 crores and need to deploy it in a fashion so as to last for 40 years. For the sake of simnplicity I will assume that expenses double on an average every decade. In effect you spend 20 lacs per year in decade 2 etc. In such a situation how should you deploy your money? But before we get there let us see the cash outflows and strategy of withdrawal.

  • You need 1 crore in the first decade – this should be largely from interest from PPF/VVY/SCSS  or capital gains from debt funds.
  • Your 2 crores in the second decade should largely be funded by redeeming your Debt investments.
  • Your 4 crores in decade 3 will be mostly through SWP from Mutual funds.
  • Your 8 crores in the final decade will be through redeeming both MF and stocks.

Finally let us talk of the allocation now :-

  • 60 lacs for you and your spouse in VVY and SCSS, 40 lacs in PPF.
  • 1 crore in Debt funds so that you get returns of roughly 8 lacs a year.
  • With the above 2 crores your first decade cash flows are assured.
  • In the second decade you can redeem the debt investments and still have enough surplus to take care of some indulgences.
  • Out of the original 4 crores, put 1.5 crores in equity MF and 50 lacs in Blue chip stocks which are likely to give stable returns.
  • Your MF portfolio will grow to 10 crores in 20 years even at 10 % returns.
  • Spend 4 crores out of this in decade 3 and let the rest be invested.
  • In decade 4 you will have much more than 8 crores in MF itself.
  • Your stocks are really a bonus – leave it as your legacy by donating it to worthy causes.

So when do you want to retire and will you have enough when you do? I think this post has provided a good template for this. Apply it to your own situation and see how it wotks out for you.


Retirement corpus structuring – A Reader query

From time to time I get queries from my Blog readers that will resonate with the larger investor community. One such query was sent by a reader recently after he read my recent posts on retirement corpus structuring. I wanted to address it as a post here.

His query was as follows:-

Taking portfolio 1 as the base, if a person retiring this year from a private firm, has a house to live and corpus of around 2 crore in the following manner –
Debt portfolio – 50 lakhs in EPF, 10 lakhs gratuity, 20 lakhs PPF, 25 lakhs from LIC (maturing in 2022, premiums paid) and 10 lakhs in liquid funds/FDs for emergencies.
equity – 60 lakhs in Mutual funds and 25 lakhs in Shares. How should the corpus be structured to provide regular income in retirement, taking care of inflation?
Let me only try to do a structuring of corpus here as I have already explained the broad principles in the earlier posts. The assumptions are a current annual expenditure of 7 lacs per year, life expectancy is another 30 years and expenditure being double and 4 times in the next 2 decades respectively.
Without further ado, let me give my suggestions now :-
  • Take the 60 lacs from PF and gratuity and put in in Vaya Vandana Yojana and Senior Citizen Saving Scheme. This will have to be done by the investor and his spouse separately. This will give 4.8 lacs per year as interest.
  • Use 20 lacs PPF to withdraw 2.2 lacs every year for the first 10 years. Along with the interest, this will take care of the 7 lacs needed in the first decade.
  • When the LIC money becomes available, invest it in equity balanced funds. This will amount to 50 lacs by 2028, assuming a return of 12 % annually.
  • In decade 2 the average expenses will be 14 lacs. This will be funded through:-
    • 4.8 lacs will be available as before.
    • 50 lacs from Balanced fund will be redeemed @ 5 lacs per year.
    • 60 lacs MF will become 1.8 crores in 10 years with a return of 12 % annually. Take 40 lacs and put it in some hybrid fund such as MIP or Equity Savings Funds. 4.2 lacs each year can be used for the remainder of 14 lac expenditure.
  • In deccade 3 the average expenses will be 28 lacs. This will be funded through:-
    • Stocks which will reach a value of 1.93 crores in 20 years
    • MF which will reach a value of 4.34 crores in 10 years from 1.4 crores base.

So at the end of 3 decades the couple will still have some amount left, which can last them a few more years. It is highly improbable that they will live beyond 95 years, so it is a very safe plan.

I hope the plan addresses the issue at hand. In case there are any queries on this, I will be happy to address the same.

Some real life portfolios in retirement

In the several posts I have written on retirement here, I have tried to give both my personal examples as well as those of others. Many readers who are considering retirement want to know if the money they have as corpus will be enough. Some think they have adequate money but are not sure of how to deploy it optimally. In this post let me give 3 examples of real life portfolios from retired people.

Before getting into the actual portfolios, it will be important to understand the pre-requisites, in order to be able to go for retirement in financial terms. These are :-

  • You should have a place to live in. This can be either your own house or a rented one where you are covering the rent from what you get as rent of your house elsewhere. This is important as rent is inflationary and must be taken care of.
  • All your major life goals should be over. Even if some goals such as children’s marriage are pending, you have separate funds for those.
  • You have an ongoing Health insurance that you will continue with. Get this before you and your wife cross 50 years, they get very expensive afterwards.
  • Your children are taking care of themselves in terms of financial expenses.
  • You may still be earning some active income through use of your time but that is not considered in these portfolios.

Portfolio # 1:

This is the simplest portfolio I have seen with hardly any real risk and yet catering to almost any future eventuality.

  • Tax free bonds of 1 crore invested in 2013 with an interest rate of 9 %. This yields an income of 9 lacs every year till 2028.
  • PPF corpus of 40 lacs and contribution of 1.5 lacs every year till 2028. This will grow to more than 1 crore in 2028.
  • Emergency funds of 10 lacs in Liquid funds.
  • MF portfolio of 20 lacs and stock portfolio of 10 lacs now.

The couple have expenses of about 7 lacs per year and stay at their own home. They put 1.5 lacs in PPF every year and pay no taxes. In 2028 they can use the money from Tax free bond principal to invest in Debt or hybrid funds. At this time they will start using the PPF amount for the next 10 years. Note that this is also tax free. By 2038 their MF and stock portfolio should grow to 2 crores plus even with a modest return of 11 % or so. With another 2 crores from Debt funds they should have enough for the last phase of their life.

Portfolio #2:

This is slightly more complex as equity and debt are both used. Let us first see the deployment here and we will then look at withdrawal.

  • 1 crore in PPF as the couple were not salaried people and invested in PPF regularly over a long period.
  • 50 lacs in various types of Debt funds at current market value.
  • 40 lacs in equity MF and 10 lacs in stocks at current market value.

Assuming 30 years of retired life and an expense of 8 lacs per year in the first decade, this is how the couple have decided to go about it.

  • Withdraw from PPF to the tune of 10 lacs for the first 10 years. This will still leave enough money after 10 years in the account.
  • The 50 lacs Debt fund will grow to about 1.1 crores in 10 years. This along with the remaining amount in PPF will serve expenses of second decade.
  • The Equity portfolio of 50 lacs will grow to 3.36 crores in 20 years. This should see the couple through the third decade, even though the expenses by now are about 32 lacs per year.

Portfolio #3:

As a final portfolio, let us look into a more complex situation. Here, the resource base is larger and the expenses are also significantly higher. 

  • Two PPF accounts of 50 lacs and 10 lacs in current value.
  • Tax free bonds of 24 lacs, maturing in 2028
  • Equity Mutual funds of 50 lacs paying dividend of 3 lacs a year
  • Equity Mutual funds of 50 lacs with growth option
  • Stock portfolio of 1 crore with annual dividend of 3 lacs
  • Debt funds of 1 crore with LTCG of 8 lacs every year

Assuming the current decade expenses will be 12 lacs at an average, 15 lacs in the next decade and 25 lacs in the last one, how should things be structured?

  • Current passive income from interest and Dividends is 8 lacs. Another 8 lacs is from LTCG of Debt funds maturing every year.
  • In the first decade the PPF accounts will be funded to the tune of 3 lacs every year.
  • In decade 2, PPF can be used for withdrawal. The two accounts will suffice for these 10 years even without any fresh contributions.
  • For the last decade stocks and MF can be redeemed to fund expenses.

So there you have it – while 1.5 crores plus is quite enough for expenses of 8-9 lacs in a year, if you want to spend more then you should look at higher corpus. But the real lesson is in the deployment of corpus and withdrawal strategies.

Will be happy to answer questions on this.

How to realign your MF portfolio

In several of my earlier blog posts, I have covered practically all aspects of MF investments and you should be in good shape if you are starting off to create a MF portfolio from scratch. However, as some readers reminded me, most of us are already having an MF portfolio and some of us are having SIP investments in several funds. Different portfolios for different goals can also lead to people holding more funds than is either necessary or desirable.

The good thing is you can realign your portfolio and get into a logical allocation quite easily. As I have covered the basic logic of my suggested portfolio structure and SIP / one time investments I will not repeat them in this post. You can read these posts here and here. In this post I will outline a simple method by which you can realign your portfolio.

Step 1 : Be clear about your intended portfolio structure:

  • For the long term you need just 4 funds – a large cap fund, a mid cap fund, a multi cap fund and a small cap fund. If you want to hedge your bets you can add an International fund, mainly US based.
  • You do not need to have any Balanced funds, Sector funds or Thematic funds.
  • Always go for Direct funds as the lower cost will enhance your returns significantly over the long run.
  • Remember you need only 1 portfolio for all your goals and not a separate one for each goal.

Step 2: Map your current portfolio to the above portfolio structure:

  • Check if the funds you hold are aligned to the above portfolio. If not then discard them logically from your portfolio.
  • For the aligned funds, check if they are suitable for your portfolio. Read about how to select funds here. If any of the funds are not suitable then discard these.
  • We will decide what to do with the discarded funds later on.

Step 3: Get to your new portfolio structure:

  • Take whatever you have got from step 2 and add other funds based on the portfolio structure and the selection method.
  • Now you have s set of 4-5 funds in your portfolio. In all of these your investment value is either zero or equal to the earlier investment, in case you are retaining any of your earlier funds.

Step 4: Decide on your investment amount per month:

  • To begin with use a SIP calculator to check what should be your monthly investment. You can take any rate of return between 10 and 15 % based on your comfort level.
  • You can start by putting equal amounts in all 4-5 funds. However, if you prefer a fund type over another then you can tweak with the monthly SIP amounts. It does not matter a great deal, as long as you have got the portfolio correct.
  • Increase the SIP amount every year based on the availability of extra money to invest.

Step 5: Redeem the discarded funds at the right time and invest into your new portfolio:

  • Redeem your discarded funds at a time when it seems right. There is no exact formula but you can observe the trends and take a call. For example, if the Nifty reaches a level between 10800 and 11000 now it will be a good time to redeem the funds that you do not want to be in any more.
  • There is no rush in this, your investments are growing even if you have discarded the funds logically from your portfolio. Once you have redeemed the funds be in cash or keep the money in a liquid fund, till it is time to buy.
  • Invest the above money through one time purchases of the funds in your new portfolio at an appropriate time.

As you can see from here realignment of the portfolio is a fairly simple exercise, once you are clear about the mechanism. If you feel that you need to do it, the right time to start is NOW. In case you are not invested in the right funds then any further investment in them is completely senseless.

In case you have any questions on realigning your portfolio, comment on this post and I will be happy to clarify.

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ICICI Value Fund Series 20 NFO is on – Should you invest?

Over the last few years and especially in 2017 many of the Fund houses have come up with a slew of close ended NFO’s. These come with a variety of themes and associated terminology. For example ICICI calls them Value Fund series, Sundaram calls them Micro cap series and Axis calls them Equity advantage series. In this post let us look at why these are in vogue now, what are the pros and cons and finally whether it is a good idea to invest in them.

The first issue is relatively simple to answer : new products get developed based on the likelihood of their success. With a lot of retail and institutional buyers pumping in money, there is always a demand for newer types of funds to invest in. For fund houses, it is an opportunity to have a specific charter which may not be possible to fulfil through their regular funds. For example, one of the ICICI value series funds only wanted to invest in Pharma and IT sectors as these were beaten down significantly over the last six months or so. Now this could be done in one of their existing funds too but for a fund manager to churn the portfolio by selling stocks that are doing well is not always an easy decision to take. Using fresh money in taking such calls is relatively simple. The trend started by end 2014 or so with ICICI and has now percolated to several others.

What are the pros and cons of such funds? Well, for one the mandates here have a lot more clarity compared to a vanilla large cap or mid cap fund. The fact that it is close ended, normally for 3 years, means that the fund manager has time at his disposal to take the calls he wants to take. On the flip side you will not have access to your money for 3 years and this is a problem unless you can definitely do without it for this time. A greater problem may be your inability to shift in case you are not happy with the performance. From my viewpoint, I do not see both these issues as a serious one. Firstly, you should be investing in equity for a much longer term than 3 years. Secondly, the Fund manager is way more qualified to deal with short term performance issues.

Let me now give some details of an investment that I made in one such fund. While the experience may not be repeated for all funds, it does offer certain insights:-

  • I purchased ICICI Prudential Value Fund series 2 on 6/12/2013. Invested amount was 2 lacs in the Dividend option.
  • The idea was to get some regular income as I planned to go for my consultancy practice sometime in 2014.
  • Though it was a 3 year fund, it has now been rolled over and will mature on 31/12/2018.
  • So far total dividends have amounted to 1.75 lacs
  • Current value of the fund is nearly 2.6 lacs

I think it can be said quite safely that this worked out quite well. In fact, I have invested in several follow up NFO from ICICI. Apart from ICICI I have also tried out Axis, Birla Sunlife, Sundaram and UTI for close ended funds. From a personal perspective it works well for me as I get tax free income and also growth from it.

You should be investing in these funds under the following situations:-

  • You have some income requirement every year. Instead of doing FD you can go for close ended funds with dividend option. Note that the dividend is not guaranteed.
  • You have a goal after 3-4 years. This is ideal for such situations. However, in such a case choose the Growth option.
  • You have come into some money and do not want to decide on allocation for 2-3 years as you may need the money then. Go for the growth option here too.
  • Make sure you understand the mandate and therefore the associated risk profile. A micro cap series from Sundaram will obviously be more risky as compared to the Value fund series of ICICI. However, the rewards will vary in a similar trend too.

If you are interested in these funds after reading this post, do consider the ICICI Prudential Value Fund – Series 20 which is open for subscription now and closes on 31st January. It is in areas where there will be definite growth and the industries they are investing in will be likely to do well for the next 5-10 years and maybe even longer. The fund is termed as Rising Bharat Opportunities Fund. The 3 themes will be Build Bharat, Finance Bharat and Rural Bharat – all of these have great potential and are likely to do well in both medium and long term. The 3 year plus close ended NFO may just be the right vehicle for any medium term goal you have. For example, I feel of you want 5 lacs after 3 years, you can just invest 3 lacs in this and wait for 3 years. It is very likely that you will be able to realise an amount close to your goals.

People having surplus money and waiting to invest in some suitable avenue should take hold of this opportunity. A disclaimer I need to make is that I am invested significantly in this series of NFO from ICICI  MF and have plans to invest in this too.

My current Debt portfolio

In the past few posts I have written about my equity portfolio, both stocks and Mutual funds and also outlined why a debt portfolio is needed for all investors. In this post I wanted to take stock of my current debt portfolio. 

Before getting into the details of my holdings, let me try and summarise my reasons for having the debt portfolio in the first place:-

  1. It gives me passive income which takes care of my regular expenses along with the dividends I get from my equity investments.
  2. It allows me to let my equity investments grow for a longer time period, thereby increasing the chances of significant gains.
  3. It ensures that even if I need a large amount of money suddenly, I will not have to redeem my equity investments if the markets are having a bad time.

Having said that, I will now outline my current Debt portfolio. Note that I am not going to explain the rationale of these instruments – if you are interested, go through my blog posts and you will find enough material there explaining most instruments.

The major components of my Debt portfolio are as follows:-

  • Tax free bonds form about 13 % of my portfolio today. I get an interest of about 9 % from these bonds and they contribute nearly 25 % of my annual expenses ( without rent and travel ).
  • PPF forms about 27 % of my portfolio today. Both my wife and I have accounts in which we invest the maximum contribution allowed. As of now we do not withdraw from it and have no plans to do it for the next few years.
  • FMP plans and other debt funds form about 40 % of my portfolio today. I use the capital gains from FMP redemption for my expenses and reinvest the principal. As for the Debt funds I just let them grow, they can be useful for any sudden expenses.
  • Infrastructure Investment Funds and POMIS from post office form about 10 % of my portfolio. Income from these are normally used for my stock investments and they are also a backup as Emergency funds.
  • The last 10 % is in a couple of FD still going on, cash in our savings bank accounts and some amounts I have kept in my parent’s and children’s bank account.

You will note from here that the above is fairly simple to manage and the cash flows are automated into my account. Investing in PPF is an annual event, investing the principal amount from FMP redemption is probably 8-10 times in a year.

Apart from all of these I also have some investments in Hybrid funds. With the declining rate cycle it makes sense to do that and my focus on these have been there in the last 3 years or so. I will write about them in another post.

I hope this post will give you an idea as to how you can create your debt portfolio – make it hassle free and it will give you a great deal of peace in your mind.

My current MF portfolio – Close ended Equity Funds

One of the interesting and fortuitous occurrence in my investment journey is how I started to invest in close ended equity funds. Till 2014 beginning, I had always avoided these funds as I wanted to have the flexibility of getting out of a fund if I wanted to. A combination of my looking for some regular income as well as a need to invest some amount one time, made me look at the ICICI Value Fund Series 2.

You would have been told by many people that close ended equity NFO are a bad idea as they operate for only 3-5 years normally and that is less time for equity investments. Is there data to support this? Yes, it is true that if you pick a 3 year period on a rolling basis, there will be enough instances of low returns or negative returns. At the same time many such periods have also given spectacular returns. So if you are in the right period and with the right fund then it makes sense to go by this route. The ICICI Value fund series also has a mandate for distributing dividends to share profits with investors. This suits me admirably as I was looking at tax free passive income from 2015 onward.

Now to cut a long story short, I have since invested in several of the series so far. The funds have mostly done well and quite a few have given fairly regular dividends. It is important to note that each fund from this series as well as the other fund houses with such schemes are focused on doing things a little differently as compared to open ended funds from the same fund houses. Some of the differences are as follows:-

  • Being close ended there are no redemption pressures and therefore the fund manager can take slightly longer calls.
  • As it is time bound the churning mechanisms are different from open ended funds.
  • Profit booking is implicit as most of them have a mandate to declare dividends.

Let us now look at my portfolio in these funds:-

  • I have started with ICICI Value Fund Series 2 and gone through to Series 19 which was running this month. Have invested in about 14 out of the 18 series.
  • The lowest XIRR has been 15 % and the highest 35 %. Most of the schemes have given an XIRR of over 25 %.
  • There has been good dividends every year from these schemes from 2015 to 2017.
  • Some of the other close ended schemes I have invested in are:
    • BSL Resurgent India fund Series 1 through Series 5
    • Axis Equity Advantage Fund Series 2
    • Sundaram Select Micro cap series 14, 15
    • Similar funds from UTI and SBI fund houses
    • HDFC Housing opportunities fund
  • My total contribution from these in my current portfolio is about 30 %.

These investments are clearly for the more experienced investors who can look at the mandate of these NFO’s and decide whether they want such coverage in their portfolio. There is an element of risk in a market downturn over 3-4 years but, in that scenario, you will do doing badly in all your MF investments through SIP too.

How do you invest in these funds? Well, be on the lookout for NFO, study the mandate carefully and put in only any surplus money you may have. Remember you should not replace your regular SIP with these. However, these can form a great medium term investment for any goals you may have in the next 3-5 years.

So if you are planning an expensive car or a family vacation outside India in 3-5 year time frame these funds may be the best ones for you.