PERSONAL FINANCE: CONTRARIAN
Safety? Never?

If you aren't the retiring type, invest in capital-appreciation.

By Prem Khatrig

Safety, when it comes to your investment strategy, should never be first.

Sure, almost every advisor will tell you that it is the most critical credo since you are investing for your retirement, sagely pointing at bank fixed deposits and fixed income instruments as your safest options. These two, they will all nod, should always comprise the bulk of your portfolio.

I don't agree.

If you ask me, the safety theme is good only if you have just five years to your retirement. But, if you aren't 53 years old, bank deposits should actually be anathema to you.

Instead, you should invest in assets where there is bound to be capital-appreciation.

Risky it may sound but, let me assure you, that diminishes over time. For instance, a well-diversified portfolio of shares will rarely, if ever, decline in value if held for 10 years. And it will yield much higher returns than any fixed-return instrument.

So, your best option is, probably, an open-ended, equity-based growth scheme managed by a mutual fund. Let me tell you why:

• The growth funds, typically, invest a large proportion of their funds in equity. Studies suggest that stocks are the best bet for capital appreciation in the long run.
• The growth funds, typically, diversify their risks by investing in groups of well-managed companies.
• The growth funds, being open-ended, allow you to invest or withdraw from them at any point of time at net asset value-related prices.

Therefore, it shouldn't come as a surprise that, in the US, 15-20 per cent of the $4.20 trillion of assets that the mutual funds manage is accounted for by Defined Contribution Retirement Plans. Under them, employees invest in the fund-schemes of their choice through deductions from their pay, with the employer, often, matching their contributions.

But how do you go pick a good scheme from the array of open-ended ones available? My own rules:

• Compare a scheme's performance with those of the others in the same category, and against a suitable benchmark, like the BSE Sensitivity Index or the crisil-500.
• Calculate a scheme's consistency of performance over distinct periods of time. For example, its performance since inception, the last three years, the last one year, etc..
• Check for the special features of a scheme, which will provide you with greater convenience and ease in effecting transactions.

One temptation you should never yield to is timing the investment. Because it is not the timing, but the time that you give your investment that matters. My research shows that the difference between investing at the peak and the bottom of the stockmarket is negligible if your time-horizon is long enough.

One way to avoid this danger is to invest a fixed amount of money on a regular basis over a period of time. That will enable you to average your costs since you will buy more units when the price is low and less when the price is high.

If you remember, I actually began by talking about your retirement. That's because I believe you should plan for your retirement right away -- even if you aren't 40 years old yet, even if you haven't reached the top of your profession yet, even if you aren't spending all that you earn If you don't believe me, consider this:

• Unlike our grandparents, we cannot assume that our children will take care of us in our old age.
• Unlike our parents, rising life-expectancy means that we will have to provide for ourselves long after our employment ends.
• Unlike our counterparts in the West, we do not dole out any welfare for our senior citizens.

If you still aren't convinced, perhaps you should calculate your post-retirement monetary needs.

First, estimate the amount of money that you will need every month to maintain your lifestyle for 20 years after your retirement -- including accommodation. Add to it the major outgos: your medical expenses, your children's education, their wedding expenses, etc.. And don't forget to factor in inflation at, say, 10 per cent per annum.

Then, estimate the amount of money you will have on your retirement at the present level of your savings. Add to it the bulk receipts: your Provident Fund, your Gratuity, your Pension, etc..

After you calculate the difference between the two, can you still tell me that you can safely afford to invest only in bank deposits for the rest of your life?

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