How to get retirement portfolio on track
Abhijit is due to retire in seven years. He has been trying diligently to maximise contributions to his retirement portfolio and has earmarked a portion of his regular savings to PPF, fixed deposits and a few longterm bonds. He wants to make sure that his retirement corpus is on target. However, he finds that his corpus has not grown as much as he expected it to in the 10 years that he has been saving and worries that it may not be sufficient. He would like advice on what could be causing this under-performance.Abhijit’s portfolio may be suffering from being too conservative and not adequately diversified as most of his retirement savings seem to be in debt-oriented investments. He needs to review his portfolio’s asset allocation to correct this. As his retirement is a few years away, he should ensure that a substantial portion of his portfolio is in investments that give higher returns, such as equity. He has time on his side, which is important when investing in assets whose return are volatile since the risk reduces as the holding period increases.
Abhijit’s employment retiral benefits, PPF and other investments are all debt-oriented with low returns. This has also limited diversification benefits as his portfolio is not positioned to participate in rallies in equity, gold or real estate. He should recast his asset allocation so that his retirement portfolio is growth-oriented. The best way to do this would be to increase allocation to non-debt investments through periodic investments as well as any fresh lump sum amounts so that over time the asset allocation is more in tune to what is suitable. Another aspect that Abhijit needs to watch out for is under-performing assets, if any. This will pull down the returns of his overall portfolio. To avoid this, he must review the performance of each of his investments periodically and exit those that are consistently under-performing their benchmark and peer group investments. He must limit his portfolio review to once a year for his core investments because over-managing the portfolio is as harmful as under-managing it.
Abhijit must also review his portfolio from the perspective of tax efficiency and investment costs as both will have a significant impact on the returns of a long-term retiral portfolio. A product with higher cost must justify its inclusion with better returns. He must keep his investments simple and automated so that he is not required to make frequent decisions.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
