Most financial advisors have a thumb rule on how you should allocate your funds between debt (fds, bonds, etc) and equity (shares). They say, you should subtract your age from 100 and you should have that percentage of your wealth in equity. Which means if you have 2 crores saved up by the time you are 60, then you should have 1.2 crores (60%) in something like fixed deposits and 80 lacs (40%) in equity or equity related products.
The assumption here is that as you are nearing retirement age, you should invest less and less in products that are riskier.
It also means just around the time you are retiring, you will have most of your investments in fd like investments – returns from which are taxable and almost never beat inflation. Remember, you’ve got to live for probably 25 years more!! Looking at this formula from that point of view, it seems to be a rather lame idea.
At retirement time, the income reduces – sometimes to zero, but the spending continues, so it is important to make your money work harder for you so that it lasts longer.
Though Equity is considered risky, the risk is reduced by ‘time in the market’. Statistically, it is proved that if you make an investment with a ten year horizon, then you will rarely incur a loss. I don’t mean individual stocks – I mean a well researched portfolio of stocks or a mutual fund.
In my opinion, instead of a percentage of your investments, you should have no more than 5 – 6 years’ expenses in debt and the remainder in equity related investments or real estate. So, in the above example, if you are spending Rs.1 lac per month, you should have around 60 – 70 lacs in bonds, etc. The remainder of the wealth would possibly be earning inflation beating returns – at the very least, they will be tax free returns.
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