scorecardresearchSaving to retire early? Can conservative investors rely only on safe assets?

Saving to retire early? Can conservative investors rely only on safe assets?

Updated: 20 Nov 2022, 10:22 AM IST

Having a conservative approach of investing in debt and/or real estate to save enough for retirement can turn out to be a damp squib. We explain why it’s indispensable to keep sufficient equity in the portfolio while you save for retirement.

For those who want to borrow money to buy property have to pay an extra 9-10 percent and the eventual returns are marginal.

For those who want to borrow money to buy property have to pay an extra 9-10 percent and the eventual returns are marginal.

Nurturing a desire to retire early could be a new ‘fad’ among millennials but not many are fortunate enough to do so. The major hiccup they face, or would face, is the lack of sufficient savings to make that happen.

Investors are, therefore, advised to follow a proper strategy and stick to a balanced portfolio to accumulate sufficient amount of savings.

This entails keeping a higher allocation to equity while you are young, and whittle it down gradually in favour of debt as the time rolls on. And when the age advances, would-be retirees are recommended to take a complete shift to fixed income instruments.

But some conservative investors who swear by the time-tested potential of real estate argue that investing in a  fixed asset is more assuring than investing in risk-prone equity assets.

Upon seeing the data closely, it is not difficult to realise that having too much faith in the growth of realty is being too insulated from the reality.

The latest RBI’s All India House Price Index in the 10 Indian cities shows that average return from owning real estate over the last decade has been 11.6 percent per year.

Relying heavily on realty & debt

Sohail Qureshi, a practising psychiatrist in his 50s, owns two houses and he plans to dispose off one of them for his retirement corpus. “I do not have any retirement savings or any special investment to help me go through the phase of retirement. I am relying on one property which I acquired through sheer hard work and disciplined savings over a number of years,” says Qureshi.

Although he is happy with his decision so far but there is one hitch: the bird is still in the bush. The property may have risen in value all these years but it has yet to find a buyer. On the top of it, he will be liable to pay tax on capital gains which will accrue.

Also, with fixed deposit interest rates hovering around 7.5 percent, some investors have a renewed faith in fixed income instruments. So, should conservative investors rely on more reliable assets when it comes to saving for retirement?

“Well, not really!” advise wealth advisors.

S Sridharan, founder and principal officer, Wealth Ladder Direct says, “If you factor in tax and inflation, debt gives negative return on capital. And real estate has liquidity risk, among others. There are other concerns such as forgery, etc that can happen in real estate deals. On the top of it, when you invest all your savings in one property, there is a concentration risk also. Also, real estate is cyclical and if you look at the past 8-10 years, it has not grown that much which one would like to believe.”

Ravi Saraogi, CFA, and co-founder of Samasthiti Advisors, echoes similar sentiments, “Debt and real estate investments can, at best, deliver returns of only a few percentage points over inflation, and at worst, the returns will fall short of inflation. Not only this, debt and real estate investments attract significantly higher taxation than equity. So, when the post-tax returns is taken into consideration, the returns from debt investments can significantly lag inflation.”

RBI’s All India House Price Index shows that average return from owning real estate over the last decade has been 11.6 percent per year.

“It is also to be seen that real estate growth is particular to specific pockets. In some cases, it increases by 5 percent whereas in some, it increases by 15-20 percent while there are cases where it doesn’t increase at all,” adds Sridharan.

For those who want to borrow money to buy property have to cough up an extra 9-10 percent and the eventual returns turn out to be marginal.

Investing in equity 

Investment advisors recommend buying equity mandatorily to save for retirement. “Investing in equity is indispensable for retirement planning. Interest from debt securities and rental income from real estate is taxed at slab rates, and long-term capital gains taxation on debt/real estate is higher than 10 percent long term capital gains tax on equities,” said Ravi Saraogi.

“Equity gives opportunity to earn higher income and the entry barriers are lower unlike in real estate. When it comes to mutual funds, you can start even with as little as 1,000,” said Mr Sridharan.

At the same time, Abhishek Dev Co-Founder and CEO Epsilon Money Mart says that investing in equity is important to inject diversity in portfolio.

“While equity has helped quite well in beating inflation in the long run, a balanced view (for example 60 percent in equity, 20 percent in debt & 20 percent in alternative investments) could be a viable option for longer term portfolio (minimum 5 years) and help you plan for your retirement,” said Dev.

A balanced view

So, it is rational to say that investors should try and maintain a balanced portfolio by investing in equity, debt and alternative assets.

“We believe asset allocation plays the most important role in wealth creation. Investing in only one asset class or getting all out on a particular strategy only invites more volatility and uncertainty in meetings goals,” Dev added.

Having said this, real estate is one asset class which holds both sentimental as well as financial value for us as Indians, he adds.

“Realty has been able to generate decent returns in the long run, though it comes with its own set of risks and complications. If you have ready cash in lumpsum, you can buy a house directly. This way you have a permanent roof over your head and the money which would have gone in paying EMIs could be diverted towards long term investments including equity funds,” said Dev.

“We do not suggest that investors should not have debt or real estate investments, just that such investments have to be balanced by equity investments,” Mr Saraogi said.

If you are raising a home loan, never fail to do exhaustive research before giving a final go-ahead.
First Published: 20 Nov 2022, 10:22 AM IST