DEBT funds or DIversified funds for Retirement

April 9, 2009

Question – 

Hi,
If we see returns of Diversified equity funds for last three years mostly are in red and few are sitting on marginal gains whereas debt funds have given return of 40% over 3 years. Looking at scenario, if i want to invet for my retirement(for 20 Years from now) what is your openinon where should i invest. If you say to invet in Equity MF how should i select for 20 years? If you say Debt funds what are good options available?


Rohit


Answer – Dear rohit, When u r talking for ur retirement, u should n`t compare the past 3 years` returns for ur future 20 years.

Just for ur info, Eq. is the only asset class which `ll provide inflation adjusted best returns over such long 20 years.

Now look at the following No.

On 31st of march 1989 (i.e. 20 years back) the SENSEX level was 713.60 & on 31st March 2009 the sensex level was 9708.50.

The above Nos. tell the CAGR of Sensex for past 20 years = 13.94% or almost 14%. Even if u adjust 7% inflation rate for all these 20 years, still u r getting 7% positive return over the inflation.

In my view u should invest in 3 large cap funds thru SIP. Check the performance of ur funds once in a year. If the performance is in line with over all market performance it`s ok to continue ur SIP, if the performance lags continuously for 3-4 quarters, switch ur SIP to a better performing fund. After 14-15 years, Stop fresh SIP in large cap funds. Divert SIP amount to balanced funds & gradually shift ur money from Eq. funds to Debt funds when ur retirement is closer to u. 

After 20 years, when u r retired, u should n`t have more than 15-20% money in Eq. funds.

Thanks

Ashal …