My question is to Mr. K. Ramalingam, MBA, CFP, Chief Financial Planner.
Sir, I read with interest your suggestions regarding financial planning. In most of the answers you suggest to invest in SIP and different mutual funds, even for the retirement savings. I am a 73 years old retired person with stable Government pension and I also invest in equities (current market value is about 19 L). I also have an active PPF account which I use for saving taxes. Let me present a few facts from my experience. In the mid nineties during Harshad Meta period, the stock market went to the roof. One of my friends had a few shares of Tata Steel whose share price then was Rs. 500. Then the market crashed and in the next 15 years Tata Steel share never reached the above value. The NAV of many mutual funds crashed to Rs. 2. To present a better balance sheet, many mutual funds were closed and new ones were started. Any body who had invested before the crash would not get any return in the next 15 years and those who invested after the crash would have considerably gained. Similar things had also happened in 2008. Bank fixed deposits also will not help since we can not be sure that inflation will be in check. If tomorrow, some combination of political parties win election promising very large freebies and they try to implement them, then inflation may become as large as in our neighbouring Pakistan where few days back it was 40%. Similar things happened in the erstwhile USSR after the breakup and for most of the people, the value of their lifelong savings reduced to almost zero. Hence one can not breath easily with few crores of saving in his old age. No amount of saving will ensure a stable old age. Now the share market is booming and all the predictions may be true. But life is uncertain. Fixed assets and gold are kings. Can you kindly comment?
Ans: Your insights into the volatile nature of financial markets are spot on. The experiences of the 1990s and 2008 have indeed left many investors cautious. It’s commendable that at 73, you have a stable government pension, equity investments, and an active PPF account. Your financial prudence is evident.
Your Concerns Are Valid
Your concerns about inflation, political instability, and the erosion of savings are entirely legitimate. The unpredictability of the financial landscape makes retirement planning a complex challenge.
Balancing Risk and Reward
While I often recommend SIPs and mutual funds for long-term wealth creation, I understand that this strategy might not be suitable for everyone, especially those nearing or in retirement. Your preference for fixed assets and gold is understandable given your risk aversion.
Here's a balanced perspective:
Diversification is Key: While you've mentioned equities, PPF, and potentially fixed assets and gold, consider diversifying further. This could include other debt instruments like senior citizen bonds or fixed deposits.
Regular Income: Given your age, generating regular income is crucial. Your pension is a good start, but consider exploring annuity options to supplement your income.
Emergency Fund: Having a readily accessible cash reserve for unexpected expenses is essential.
Healthcare: As you age, healthcare costs can rise significantly. Ensure you have adequate health insurance coverage.
Estate Planning: Consider creating a will and other necessary legal documents to protect your assets and ensure a smooth transition for your heirs.
Your experiences highlight the inherent risks associated with equity investments. The stock market is indeed volatile, and past crashes like the ones in the mid-nineties and 2008 have underscored this volatility.
It's important to remember that these events were exceptional and not the norm. While they caused significant losses for many investors, the stock market has historically delivered positive returns over the long term.
Your friend's experience with Tata Steel is a prime example of how individual stock performance can vary widely. However, a diversified portfolio, which includes investments across different sectors and companies, can help mitigate such risks.
Mutual funds, too, have faced challenges, as evidenced by the NAV crashes you mentioned. However, it's crucial to distinguish between short-term fluctuations and long-term performance. Over the long run, mutual funds have generally outperformed other investment options.
While your caution is understandable, it's essential to consider the broader picture. A balanced approach that includes a mix of investments, including equities, debt, and potentially other asset classes like gold, can help manage risk while pursuing growth.
A Cautious Approach
Your approach of emphasizing stability through fixed assets and gold is prudent in the current economic climate. It’s essential to find a balance that aligns with your risk tolerance, income needs, and long-term goals.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
