Why should a retiree invest in equity?

Abhimanyu SofatAdviseSureMost of us feel equity is a high-risk investment as one can lose the entire principal amount invested. Since one normally has a lower income in retirement the normative thinking is that one should keep money in fixed deposit (for interest income) or in real estate (for rental income). In fact, most of the investment advisors also think that equity should be recommended only in the initial years of a career. One should keep in mind the following before deciding on asset allocation for retirees:• Retirement is not an event but is usually a period of 15 to 20 years. So a retired person needs a regular income till his last breath. • Since a retiree person is aged the liquidity requirement for unforeseen expenses, like hospitalization, is high.• The biggest impediment for a retiree in retirement is inflation as normally there is no increase in income. Besides, in a high inflationary scenario, bank FDs fail to beat inflation. Thus, one should also contemplate investing in equity.Assume you did FD of Rs.100 with 8% interest on which your are frequently using the interest for meeting your expenditure. If on the interest earned you need to pay an interest of 30%, your post-tax returns will be just 5.6%. After taking into account an inflation of 6% per annual one hardly makes any returns even in the long term on the investment. In fact as seen in the table above, the value of Rs. 100 invested today in 25 years will be just Rs. 91. Recommended assets for investmentsThough for people who have not got a decent corpus it is best to invest 80% in fixed income, there are people who have a decent corpus at retirement. Assuming these people own a house of their own and have zero debt, we can say that they have attained financial freedom. Such people can look beyond the realms of debt to invest. We believe that such an individual can use a combination of liquid and balanced funds to fulfill his needs going forward. Liquid Funds:For liquidity needs, one should keep two-year expenses in a liquid fund. This money one can quickly redeem in case emergency. One can get a return of 6% on this investment. We have selected two liquid funds based on their YTM, beta and 3 years CAGR. Balanced Funds:To see if balanced funds can be the right choice we have taken in our study all equity balanced funds for last 10 years into consideration. Since the equity component in these funds is more than 65%, any returns above one year can be tax-free for the investor.Source: Advisesure Research Note: We have assumed inflation rate at 6% over long termWe have shortlisted the best mutual funds in the market i.e. ICICI Pru Balance Advantage Funds (G), HDFC Balance Fund (G) and SBI Magnum Balance Fund (G). We have selected these funds based on their 3 years performance, beta and Sortino ratio. There is no other asset class like equity which gives such a high real return in long term. Since 25% to 35% of the money in a balanced fund is invested in debt the likelihood of losing principal amount is also quite slim in the long term. Conclusion:Markets are volatile but will give returns in the long term. So by using a combination of liquid funds and balanced funds you can have a peaceful retirement. The advantage of opting for this method in retirement is that you have a fair chance that your portfolio outlives you.