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When it comes to creating a post retirement investment portfolio, you need to be extra cautious

If you are planning to retire early, chances are, as an investor, you already must have defined your investment objective/purpose and, after that, determine your periodic quantum for savings after adequately providing for any emergency/contingency fund and social security benefits such as life and medical insurance.

That said, given the investor’s short investment horizon as a result of early retirement, such periodic savings must be gradually increased in order to reach the investment goal. Such an increase might be in the form of a fixed sum, a percentage of income, or even proportionate to the increment.

In the case of early retirement, it is necessary for the investor to choose such investment products that generate higher returns within the investment horizon as follows:

Equity mutual funds including Equity Linked Savings Scheme (ELSS)

When an individual invests in equity mutual funds, he or she has the option of making indirect investments in the stock market. When compared to other steady types of investing, the returns earned by such investments may be higher.

The investor may also choose to invest in an ELSS that offers a tax deduction of up to Rs 1,50,000/- under Section 80C of the Income Tax Act, 1961 (hereinafter referred to as “the IT Act”).

“It is pertinent to note that investment in such ELSS would be subject to a lock-in period of 3 years with respect to the tax benefit availed. Further, the risk involved in investing in equity mutual funds is lower as compared to making any direct investments in the stock market,” pointed out Suresh Surana, Founder, RSM India.

If you want to retire early, don’t put all of your money into low-risk investments for post-retirement withdrawals. The rationale for this is that you will not require all of your funds at once. “It is suggested to have at least 20%-30% exposure to equity mutual funds even after retirement for growth of portfolio and remaining can be in debt products,” explained Manish P Hingar, Founder, Fintoo.

Insurance

Although investing in insurance does not create much return, it is critical for investors to provide life insurance as well as medical insurance in the event of a medical emergency.

National Savings Certificate

The National Savings Certificate (NSC) is a fixed-income, sovereign-guaranteed product. Returns on investment in NSC currently is 6.8%. In addition, compared to other sovereign-backed products, the lock-in period for such investments is short, at only 5 years. Furthermore, up to Rs 1,50,000/- of the investment value can be claimed as a tax deduction under section 80C of the IT Act.

Points to remember

In order to fulfill the investment aim, the investor must continually evaluate their portfolio and minimise allocation in products that are underperforming or do not show any possibility for generating reasonable returns.

“Investing in equities for a long term can really boost one’s retirement kitty. The secret is to ensure at least 7 years’ expenses in debt and then invest in equities so that the money invested in equity is really long term. This way even if there are market fluctuations, one is not affected,” said Shweta Jain, CFP-Founder of Investography.

If there is not much time till retirement, the investment amount should be on the higher end. As a result, the investor should reduce unnecessary spending and raise his or her savings in order to grow his or her investment. Furthermore, the investor should avoid taking on any new debt and instead pay off any current liabilities.

Having some influx of cash into the investing corpus is always a good thing. This is primarily essential to mitigate the risk of inflation since returns earned on a set amount corpus may not be able to outperform inflation over time. As a result, one can always try to increase their retirement fund from time to time.

“I personally feel one should definitely pursue some work even after retirement which he/she enjoys the most. Not only is it good for your emotional and physical well-being, but it also helps you financially to boost your retirement corpus,” explained Hingar.

Lastly, in case of early retirement, the investor might be required to increase their risk tolerance to some extent and opt for such investment products which generate higher returns in a short period of time so as to also beat inflation.

“In order to aim for much higher returns, the investor may undertake calculated risks and accordingly opt for equity instruments such as investing in stock markets, equity-linked mutual funds, etc., in their investment portfolio,” said Surana.