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Are Balanced Mutual Funds And Superannuation Good For Retirement?

In this blog post, I share with you a couple of investment queries received from my blog readers... with retirement as the common thread... and my solution to the same.

These pertain to two investment alternatives viz. Balanced Mutual Funds and Superannuation Fund.

Since numerous people face similar issues, I am sure these would add value to your day-to-day money management.

Query 1
I am now retired. I have Rs.40 lakhs corpus for my retirement. XYZ Consultants have advised me to invest Rs.20 lakhs each in HDFC Prudence Fund - Monthly Dividend option and and ICICI Balanced Fund - Monthly Dividend option. As per them, this will give me around Rs.45,000 / 50,000 per month.

Please inform if it is Ok. Otherwise, please advise the best possible way, to get the above amount per month with the capital intact.

Reply 1

This is a clear case of misinformation, misguidance and mis-selling.

Both the recommended mutual funds are Balanced Funds. As you are aware, these type of mutual fund schemes invest around 65-75% of the corpus in the equity markets and the balance in debt markets.

Now, you very well understand that equity as an asset class is highly volatile. So, unless the person has high risk appetite and long investment time frame, equity is NOT the right product. Since you are retired and cannot take the risk of capital loss, your equity exposure has to be very selective and very limited if at all.

Secondly, equity is definitely NOT the asset class to earn regular income like fixed deposits. When the markets are down, these funds will not be able to declare dividends. 

[By the way, there is NO SUCH THING as dividends in mutual funds. The term ‘dividend’ is wrong. It is merely part distribution of the corpus. But, for the moment, you can ignore this point. Let’s not complicate the matter. If interested, read Growth or Dividend : Mutual fund option perfect for you?]

So, on both counts — capital preservation and regular income — Balanced Funds and Equity Funds are obviously the WRONG choice.

Make sure you choose the RIGHT INVESTMENT for each financial objective.

Moreover, the amount of Rs.45-50,000 per month income indicated by XYZ Consultants is a bit aggressive call. It works out to a return of around Rs.13.5-15% p.a., which is realistically possible only in 100% equity-based funds and that too over at least 5-7 years time horizon (preferably more). As regards Balanced Mutual Funds, 11-12% p.a. would be a more reasonable expectation; that too over at least 3-5 years of time horizon (preferably more).

Your purpose would be best served by three products : Post Office Monthly Savings Scheme, Senior Citizen Savings Scheme and Debt Mutual Funds. You can suitably divide your available corpus across these three schemes. Going by the present interest rates, this would give you about Rs.25-30,000 per month. Expecting anything more than this — with capital protected — is unrealistic and unreasonable.

Query 2
I am working in a software firm in Bangalore. My company used to contribute 10% of my basic towards a Group Superannuation Fund managed by LIC. This year they have given one-time option to opt out or decrease the amount. Now I was in a dilemma whether to continue at the same rate or decrease to 5% or opt out. I am in 30% income tax bracket.

Finally, I have opted out. So the superannuation amount, which was not shown in salary earlier, will now come along with salary. But there will a deduction of 30% tax. This amount was earlier covered under section 10(13) by the employer. 

1. Is it worthy to invest this money in equity MF instead? Will it beat the 30% tax exemption which otherwise I could get by continuing in SAF?
2. Let it continue in SAF as the tax exemption of 30% itself will compensate the gain in equity.

Can you please help me?

Reply 2
Assuming I receive Rs.100 as Superannuation and there are 10 years to retirement. Then, my corpus after 10 years would be around Rs.1450 (assuming Superannuation gives 8% returns).

Instead, if I receive Rs.70 after paying 30% tax and equity gives 15% returns, my corpus after 10 years would be around Rs.1425.

So yes, it’s possible to have a similar corpus even after paying 30% tax.

Plus, Superannuation (or for that matter any kind of pension plan including the NPS), has serious disadvantages:
a) My capital is locked forever. I cannot access it at all. Hence, I lose the flexibility to utilize the money as per my needs from time to time.
b) The returns are fixed forever. Instead, if I had flexibility I could have looked for better investments from time to time.
c) Pension received is taxable. Whereas if say on retirement I invest the own corpus in tax-free bonds or debt MFs, I could earn returns with nil or minimal tax.

So one can say that you did the right thing by opting out.

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