Mr. Bond is back - but this time, he's not talking about bonds. Sunil says the biggest mistake that senior citizens make is putting their retirement kitty into "safe" bank deposits. They appear safe - but actually carry the biggest risk of eroding the investor's purchasing power over his golden years and thus compromising his standard of living. Sunil argues that investing in what he refers to as "strategized" equity oriented funds helps protect purchasing power, delivers regular cash flows through SWPs, creates a corpus that the senior citizen can happily bequeath to his heirs after his time and also eases eventual distribution of wealth. As he normally does, Mr. Bond establishes his point with telling facts and figures.

As soon as someone retires, first choice of investment is Fixed Deposits. Argument in favor of this investment vehicle is a) safety of principal & b) generation of regular cash flows.

However, what the retired person fails to take into account is the impact of inflation on their principal amount & reinvestment risk (every time FD matures & gets repriced at interest rates prevailing at that time). Like currently, post rate cut (& prospective rate cuts in future) Bank FDs will be generating lower & lower returns to the investors & hence has reinvestment risk attached to it.

Also, if these investments are supposed to pass onto the beneficiary (either wife or kids) post the death of the investor, he/she is leaving behind corpus of a much lower value (inflation adjusted) as is shown below:

Hence, assuming a person retires at 60 years of age & lives till 85 years (normal life expectancy has gone up to 80-85 years); value of his original Rs.1 crore in FDs is only RS.23.30 lacs after 25 years (adjusted for inflation @6% p.a.). Which means that even during his/her lifetime; value of investment has eroded in purchasing power & also the investor is leaving behind a fraction of the original investment behind for his/her family.

Let's first analyze what senior citizens hope to achieve from their investment

1. Safety of principal

2. Regular Cash Flow

3. Funds for emergency

Let's take each point separately

1. Safety of Principal

   As long as the second point of regular cash flow is satisfied, a senior citizen should not be unduly worried if for some reason value of his original investment comes down. Risk of principal is in fact going to be borne by his/her beneficiary as at the time of demise of the retired person; he would have left behind a corpus which may have either appreciated or depreciated. Hence, as long as their regular cash flow requirement is fulfilled; he/she is passing risk of principal to his/her beneficiaries

2. Regular Cash flows

   Though fixed deposits give regular interest (cash flows) on monthly/quarterly basis; it is the most tax inefficient way of generating cash flows. Even after accounting for benefits accorded to senior citizens under the IT Act, they still end up paying 15-20% tax on interest they receive from FDs (based on their individual tax brackets). However, if the same cash flow was generated through Systematic Withdrawals from Equity kind of schemes; tax outflow is practically NIL; thereby generating extra cash flows due to savings on tax

3. Funds for Emergencies

   The way they can dip into their FDs for any emergencies; same can happen with investments in Equity Related mutual funds by giving redemption request from the investments

   Over & above the benefits mentioned above; investment in Strategised Equity schemes (some examples are shared below) & opting for SWP from the same can have additional benefits (both for the investors as well as their beneficiaries)

4. Capital Appreciation

   As everyone is aware, only equities can beat inflation on long term basis & create wealth. Assuming that the investor has life expectancy between 10-25 years post retirement; investment in strategized equity schemes (which are conservative schemes following some formula to rebalance between debt & equity on a daily basis) can besides being tax efficient; capable of generating regular cash flows through SWP & also create long term wealth. This way, the investors during their life time enjoy the benefits derived by generating long term wealth & also leave behind a sizeable wealth for their beneficiaries (post inflation adjustment)

5. Allocation Between Beneficiaries in Advance

   Let's assume that the retired person wishes to leave behind his/her wealth in certain proportion for the beneficiaries. Let's further assume that beneficiary has two kids & wishes to divide his assets in equal proportion post his demise. All that the investor has to do is to divide the corpus in equal half, invest the same under two folios by maintaining his name first in both folios & adding kid's name as second holder on either/survivor basis. In such a situation, it become a smooth transition of investments in the name of the beneficiaries by only transmission of units in the name of the second holder viz. the beneficiary. This way, the investor is taking care of what he/she would have left behind through the WILL

What should be the way forward?

Now let us take actual examples of some these schemes & how they have performed vis a vis FDs over the same period & for same amount of cash flow generation & tax implications.

I have chosen following schemes for this purpose due to the fact that they follow certain strategies of BUYING LOW & SELLING based on market PE/PB/Dividend Yield, etc. & rebalance between debt & equity on daily basis. One of the schemes manages volatility by shorting NIFTY & using other strategies. These schemes are conservative schemes & protects downside in falling markets at the same time participating in equity upsides in equal measure:

1. ICICI Prudential Balanced Advantage Fund

2. ICICI Prudential Dynamic Fund

3. Edelweiss Absolute Returns Fund

Observations

1. As is evident from above, longer period in ICICI Prudential Dynamic has created long term wealth for the investors over 12 years inspite of 10% withdrawal every year

2. Current value of ICICI Prudential Dynamic is Rs.13.46 crores v/s Rs.1 crore in FD

3. Tax outflow under SWP has been only Rs.30,000 v/s Rs.36.40 lacs under FD

4. Similar observations are seen in other schemes. As data is only since 2010 (since inception of respective schemes) inspite of SWP @10% p.a.; their respective values are higher than original value of Rs.1 crore

5. Even on tax outflows, under SWP under both schemes is only Rs.10,000 over past 4 years v/s almost 14-15 lacs under FD

6. Hence, if senior citizens wish to invest their retirement corpus, they should invest in such strategized equity schemes (v/s FDs); opt for SWP of a reasonable amount (say not more than 8-10% p.a. Otherwise they may start dipping into their principal investments) every year & create tax efficient cash flow with the possibility of long term wealth creation - both for themselves as well as for their beneficiaries

7. More importantly, after beating inflation & creating wealth, senior citizens can enjoy their lives with more funds in their hands during their lifetime

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