Portfolio rebalancing holds key to building a sizeable nest egg

Mar 07 2014, 03:21 IST
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SummaryIf you are planning for retirement, itís important to look at inflation, longevity and investment risks.

If you are planning for retirement, itís important to look at inflation, longevity and investment risks. It is also crucial to periodically rebalance the portfolio with the changing market dynamics. This will ensure that the investments are made according to the life-cycle needs.

Since only 10% of Indiaís working population has any form of social security ó and as the average life expectancy of an urban Indian may touch 80 years by 2020 ó early retirement planning is important to maintain your living standard.

Without smart investment, the corpus wonít be enough to sustain the desired lifestyle. Risks from volatile markets and fluctuating interest rates can impact retirement savings. It is important to inflation-proof investments as rising prices erode the value of money.

A retirement portfolio should have three components ó equity, debt and gold. While gratuity, provident fund and Employeeís Pension Scheme are established retirement investment building tools, there are insurance products, mutual funds, Public Provident Fund, personal annuity and National Pension Scheme to choose from as well. Analysts say oneís post-retirement portfolio should be built on the basis of the current risk-tolerance levels.

Mutual funds offer monthly payouts where the fund house invests a major portion in debt instruments across tenures. However, a retired investor must be conscious of his risks as the investments are market-linked.

Similar is the case with fixed-maturity plans, which are closed-ended MF schemes with indicated yields. If you are looking for regular cash flow from your investments in MFs, a systematic withdrawal plan (SWP) will help you automatically redeem a predefined amount of your investment at regular intervals.

Asset management companies cater to two types of investors ó one who withdraws a fixed amount every month and the other who withdraws only the capital that has appreciated and not the initial amount.

NPS is a defined contributory pension scheme, mandatory for all Central and most state government employees from January 2004. From 2009, it was opened to all citizens and the funds are invested in equities, corporate and government bonds. However, the maximum investment ceiling in equities is 50% of the funds.

PPF is a funded and defined contribution scheme with an administered rate of return. It is offered to individual investors without restrictions and one can invest up to R1 lakh every financial year. The minimum investment is R500 a year.

The accumulated amount, which includes the principal and the interest

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