I would like to discuss a case of an old friend who was also a client, whom we were assisting (him and his spouse) in conducting a comprehensive review of all their assets, liabilities, insurance policies, goals as well as a detailed financial plan to achieve their financial goals.
The said client is an NRI couple who had intuitively made several good moves. They owned a house in Mumbai, had no liabilities and had enough life and health insurance. Moreover, they had also accumulated reasonable amount of savings over the years. Being a childless couple, their only goal was to build a substantial kitty for their post retirement. My friend being only 46 years old, his retirement was still a good 12 years away.
The only issue in their case was that all their savings were invested in fixed deposits. They were continuing to save a reasonable amount every month which he was willing to invest through a monthly SIP in an equity mutual fund. I pointed out to him that this clearly was not going to be enough and their existing savings needed to provide better returns if they were to meet their retirement needs fully.
One of our recommendations was to systematically shift a substantial portion of the bank fixed deposit into balanced mutual funds. My friend was very uncomfortable with this recommendation. He liked the safety that the bank fixed deposits offered even though a large part of the interest was being deducted as TDS which he had to claim back as a refund by filing tax returns in India. I explained to him that balanced mutual funds provide a mix of debt and equity instruments with returns being completely tax-free. Of course it carried larger risks especially on the 70-80 per cent equity component but I shared our research which showed that a systematic monthly investment in equities over 10 years started at any time in the last 16 years had yielded a return of not less than 9.02 per cent p.a. He was still uncomfortable so I decided to use an analogy drawn from cricket