Jan 30, 2013, 01.27 PM IST
Retirement planning is a challenging task. In a country like India where social security is almost found missing, retirement planning is an immensely important activity to create cushion for old age.
Vivek Sharma, Financial Planner and Trainer
Retirement planning is a challenging task. In a country like India where social security is almost found missing, retirement planning is an immensely important activity to create cushion for old age. What makes retirement planning cumbersome is identifying the right corpus required for retirement. The challenge comes from the fact that it is not easy to predict inflation and hence it is very difficult to calculate inflation adjusted retirement corpus. Also changing consumption patterns and emerging new requirements of individuals from time to time make this job even more difficult. Even if the retirement corpus is identified, it is difficult to identify the right asset class where investments need to be done in order to achieve the goal. So the most important challenge is how can an investor identify the right asset class for creation of a healthy retirement kitty?
There is no denying the fact that equity is a must for creation of retirement corpus in which investment can be either made directly or through mutual funds . Selecting right stocks for retirement planning is very important. On an average, a time horizon of 15 to 20 years, need to be considered for retirement planning. So how will an investor decide which stocks will qualify for such a long time horizon? Certain basic things need to be considered for selecting stocks for such a long time horizon. One is of course the past performance or history. The next important factor is to look at the business that company is in because for a stock to perform for 15 to 20 years, the business or the sector needs to perform as well. An important aspect to look at here is that rather than selecting a mid or small cap which may bring unexpected return, it is better to try an existing stock which is a type of blue chip. Also the corporate governance practice and the approach of top management cannot be overlooked. Based on these broad parameters, here are five stocks that can help an investor build sizeable retirement corpus:
ITC : Though the business carried out by ITC is not very ethical ,as far as value addition for shareholders is concerned, the stock has performed very well during last fifteen years and has got attractive prospect for future business growth. ITC has delivered 25.7% growth in shareholders return over a period of 16 years from 1996-2012 which is too good to be part of any investment decision. Whether past performance can be continued in future is always debatable, but the fact remains that considering the increasing diversification of products and a vibrant management, this growth potential can be continued in future as well. ITC is anyways the most defensive bet for the market as a whole.
State Bank of India : This,’Sarkari’ (government) stock has not performed well during last few years due to NPA related issues. But the stock holds a great future. There is no match for SBI in terms of branch reach, customer base and product profile. The bank is bound to grow. In Jan,2001 the stock commanded a price of Rs. 182 which has gone up around 14 times now. This price does not consider other form of returns such as dividend and other corporate action that the company has announced from time to time. The most important fact to consider while investing in SBI as a stock is that financial sector is bound to see a robust growth in the years to come. As the income level of people increases, reach of banks in terms of deposits and lending products is bound to grow. SBI is going to be a major beneficiary of this. SBI carries the prospect of long term value creation for investors and hence should be part of retirement portfolio.
CRISIL : CRISIL story is linked to India growth story. Credit rating in India has grown with the liberalization. CRISIL has a credit rating institution has shown tremendous growth over a period of time. The income from business has been growing consistently and so has been the cash operating profit of the business. If India growth story has to continue, credit rating institution like CRISIL has an important role to play. As more and more businesses get established in the country and as more and more financial instruments are issues, CRISIL will continue to show good growth. As an investor, one can believe in a stock like CRISIL for long term consistent return.
Dr Reddys : Pharma has been one sector where India has done extremely well. There are many potential contender in this space which classify as a stock that can feature as a part of retirement planning stocks. Dr. Reddy is one stock . It has shown consistently good performance in terms of revenue, EBITDA and ROCE. Also considering the fact that India is likely to be global hub for pharma, Dr. Reddy is a safe bet for long term investment.
HDFC : HDFC as a stock has been all seasons stock in India. It’s performance over a period of time has shown that it is almost insulated from the crisis that real estate industry in India has faced. The growth of the company has been good and the return to the shareholders has been extremely attractive. In a country of more than 125 crore population and ever rising housing need, there cannot be a better bet than HDFC for long term investment.
There is a comprehensive list of stocks that can feature as a part of stocks that can be used for retirement planning. There are many upcoming companies which may probably give better returns than these stocks. But what has been the most important factor in selection of these stocks is the fact whether the stocks will continue to perform consistently over a long period of time. After all, retirement planning is a long term planning. In case of retirement planning, it is always better to go with known stocks rather than venturing into unknown entities.
Tags: ITC, State Bank of India, CRISIL, Dr Reddy’s, HDFC, Retirement planning, Vivek Sharma, Financial Planner and Trainer
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