scorecardresearchDisciplined investment in equity makes up for low interest rates many times over

Disciplined investment in equity makes up for low interest rates many times over

Updated: 31 Mar 2022, 03:54 PM IST
TL;DR.

To temper the impact of low interest rates on retirement corpus, investors should rely on equity & make disciplined investment 

Investors are advised to invest more in equity and make disciplined investment to build wealth slowly — but steadily.

Investors are advised to invest more in equity and make disciplined investment to build wealth slowly — but steadily.

There is a saying that slow and steady wins the race. It fits aptly in the context of personal finance. Notwithstanding the declining interest rates, investors are advised to invest more in equity and make disciplined investment to build wealth slowly — but steadily.

Recently, return of interest on employees’ provident fund (EPF) was slashed to 8.1 percent, a four-decade low.

But these reductions do not spook serious investors who have a long-term commitment to equity markets, and their hopes of earning income are pinned to non-debt fund rather than fixed-income instruments.

Financial experts assert that long term investment in equity can fetch high returns thanks to the power of compounding, which is unknown to most new investors.

"Most people are not wired to think in compounding terms. A monthly investment of 20,000 starting at the age of 25, generating a 15 percent per annum return, will be 3 crores in 20 years. Often people start late and hence have less time to compound. If a person starts at 50, it takes 1.10 lakh monthly investment to reach 3 crores in 10 years. The choice is easy, start early with less amount,” says Ankur Kapur, Founder and chief investment officer of Plutus Capital.

There is a rule of thumb that longer the number of years remaining retire, the higher the allocation to equities one can have.

But when you come closer to retirement, it is advisable to raise your allocation to debt.

“Those in the 30-45 age bracket should have an equity debt ratio is the proportion of 75:25. After this, one can transfer 10-15 per cent of corpus from equity to debt every five years until the age of 55. Then between 55 to 58, equity exposure can be reduced to 20 to 30 per cent,” says Deepak Aggarwal, chartered accountant and financial advisor.

ALSO READ: Magic of Compounding: How you can turn a monthly SIP of 5000 into 3 crore

Let us analyse the returns of some equity-based funds vis-à-vis debt funds. The significant difference in the returns is awe-inspiring and underscores the point that investors ought to rely more on equity, instead of banking upon debt instruments.

Top performing debt funds     1-year return (%)3-year return (%)5-year return (%)
Franklin India Low Duration Fund    37.8413.7011.62
Franklin India Dynamic Accrual Fund           31.9011.74   10.41
HDFC Multi - Asset Fund14.6113.6110.32
SBI Multi Asset Allocation Fund13.99   11.999.19     
Franklin India Ultra Short Bond Fund 15.25 9.239.00
Top performing equity Funds               1-year return (%)3-year return (%)5-year return (%)
Tata Digital India Fund47.3336.8532.50
ICICI Prudential Technology Fund48.3539.7832.17
Aditya Birla Sun Life Digital India Fund41.4537.2631.34
SBI Technology Opportunities Fund 43.6434.09   28.14
Franklin India Technology Fund        21.0827.1123.75

(Source: mutualfundindia.com/)

As we can see from the table above, the returns posted by debt funds range between 9 to 11.62 percent in past five years. On the other hand, returns posted by equity funds range between 23 to 32 percent.

Allocate to debt too

However, it is not advisable to make 100 percent allocation to equity. Financial experts often point out that investors should allocate a small portion to debt – even if it’s 20 percent.

Even after slashing of interest rates, EPF and PPF are still the best bets. One can take fixed-income allocation through them since they offer tax-free returns and no risk of capital at all. The rate of interest on EPF is still higher than those of other debt instruments. Investors can also invest in PPF and NPS to accumulate a retirement corpus. The investors whose EPF contribution is low may also invest via Voluntary Provident Fund (VPF).

 

First Published: 31 Mar 2022, 03:54 PM IST