Adding equity to your retirement kitty
Adding Equity Mutual Funds to Your Retirement Corpus
is still at a nascent stage in India for several reasons. For a long time, the traditional joint family system was seen as a canopy offering pension to senior citizens. However, with India seeing a demographic shift – thanks to nuclearisation and urbanization – the average size of families has shrunk from 5 in 2001 to 4.3 in 2011.
Even people building a retirement kitty relied heavily on physical assets like real estate, gold and fixed income avenues. Now, if we look at the returns generated, real estate seems no longer affordable for the common man. Gold prices have declined in recent years and the asset is now considered more as a means to diversify one’s portfolio, than for hoarding purposes. The fixed income category (largely bank fixed deposits) assures safety, but generates only marginal inflation-adjusted returns. This leads us to equity – ideal for those with a long-term investment horizon.
How can equity amplify your retirement nest?
Despite being prone to short-term volatility, equity has performed better in the long run. It also has the ability to generate better risk-adjusted returns. Analysis of annualized returns over 15 years, ended September 2015 shows that S&P Sensex has given 13% returns, higher than the usual 8% returns available from fixed income assets, while the average inflation (CPI Industrial workers) then stood at 6%. Unarguably, investors should add equity to their retirement corpus.
Equities enter PF money
The Employees Provident Fund of India (EPFO), has also acknowledged the importance of including equity in retirement planning. The Labour Ministry recently allowed EPFO to invest 5% of its incremental income in equity-oriented exchange traded funds (ETFs) starting 2015-16. The first set of investments took place in August 2015 via Nifty and Sensex ETFs of SBI Mutual Fund
Out in the woods? Seek professional advice
Now that equity investments in retirement planning has gained acceptance, let us look at the possible avenues. Most investors would consider direct investments in stocks. Given that several investors lack the wherewithal (in terms of time and expertise required for stock picking), this could turn complex. Let us evaluate the domestic mutual fund industry and compare its performance against the benchmarks. We used the CRISIL-AMFI Equity Fund index, which represents performance of professionally-managed equity mutual funds and helps us draw a comparison vis-à-vis appropriate benchmarks across time frames and market cycles. The result, as seen in Table 1, is that professional fund management has beaten the benchmark by a wide margin.
Table 1: CRISIL AMFI – Equity Fund Index versus benchmarks
| Index ||
5 years (%) ||
7 years (%) ||
10 years (%) ||
15 years (%) |
CRISIL - AMFI Equity Fund Performance Index ||
CNX Nifty ||
S&P BSE Sensex ||
CNX 500 ||
Annualised returns as on October 30, 2015
When an investor starts planning his retirement kitty, he should aim for capital appreciation and as he nears his retirement, he should look for stability of his portfolio. Given that retirement planning is a long-term process, it would be prudent to allocate a certain amount to equity in sync with one’s risk-return expectations.
Please consult your financial advisor for more details on Equity Funds.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.