It is really difficult to believe that we have 43 mutual funds and 14 life insurance companies, but no Retirement solution.

Let me explain. A mutual fund could take a stand that “we make products” and it is the IFA who should provide the solution, or the client should himself come out with a solution depending on his or her needs. Or a mutual fund could take a view that my Ifa is not so well equipped, so I will come out with a solution myself.

Both views seem to be right. Dsp takes the former view, but Franklin Templeton takes both views partially. They are the only fund house where you can buy a “Franklin Templeton Family Solution”. I am not sure how popular it is.

How is a solution different from a product.

Let us say I am an IFA and I wish to come out with a Retirement solution for 3 different clients. The first is a 23 year old evolved kid who wishes to put away Rs. 5000 a month for retirement, the second is a 39 year old man who wants to create his own corpus, and is willing to put away Rs. 45000 a month for retirement and the third is a 55 year old professional.

Fairly obviously I cannot just take a “Aditya Birla Retirement Solution” and ask them to do a SIP, how much so ever I may want to do that. What if I want to pick a combination of a large cap fund, a midcap fund, a small cap fund, a ultra short bond fund, an income fund, a gilt fund, and an arbitrage fund?

Well I can find all of these products in most of the fund houses, bu what if I want to find a solution across ABSMf, Dsp, Edelweiss, and Reliance Mutual funds? How do I create a solution?

Well if I am an independent IFA I will not have a tool, and so i will have to create it myself.

Ideally I will choose just one fund for he 23 year old – a fund which is large cap + mid cap to start with. So it could be an Nifty Index fund and a Nifty Next Index fund from DSP, and let it grow. Why this combination? Just because there is just too much time – maybe another 45 years to go, and it is kind of a portfolio where you tell the kid, as and when you add more money, we will look to putting some money in other types of funds, but this combination cannot do badly even if you were to change the IFA. HOWEVER, I would have a properly drawn up path for her. It would say what would happen if she took a break, if she wanted the money, etc. In an ideal world she would not touch it till she turns 65, but in real life, there could be some pressing needs. So why am I choosing a fund and not an ETF? Simply because I know that the girl will not go on the 7th of every month and buy units of the ETF, I should automate it for her, or things will not get done.

What about the 39 year old who knows that he needs Rs. 13 crores for retirmennt, has Rs. 1.5 crores and is now willing to invest aggressively? What if I were to suggest a combination of an aggressive focused Largecap+Midcap fund, an Edelweiss arbitrage fund for temporary parking of surplus, a stp from the arbitrage fund (forget tax efficiencies, I may plan it with a one year holiday), a gilt fund, and a Dsp small cap fund? Well I will surely do a step up and not yet invest in an income fund. I have seen that he has a good provident fund in his office, so I would encourage him to put more money in that for the ‘debt’ portion as a 39 year old cannot afford to be in 100% equity.

For the 55 year old professional life gets a little more tricky…he needs a gilt fund to preserve his capital over say a 10 year period, an arbitrage fund for the temporary parking, a large cap fund, a midcap fund, and maybe a small quant fund. Depending on the size of his corpus, maybe even an international fund.

Why am I saying all this to you? Simply because I do not want the client to see the complicated back end!!

The clients annual statement SHOULD NOT CONTAIN any of these details. It should just contain the following:

Clients name, identification, target amount, the amount accumulated, and the CAGR till date.

Let us say I am talking to the 39 year old…and the discussion goes as follows…

Hello Mr. Kumar..we are in 2019, and the amount you have accumulated for your retirement is Rs. 1.9 crores, and you wish to accumulate Rs. 13 crores for your retirement.

K: Yes Subra, the journey is so boring and slow!!

S: Yes K, did you see the weighted average of the return that you have got on your portfolio for the period March ending? It is 9.3%.

K: Yes Subra I saw that figure and did not like it much!! I then saw my VPF figure of 8%, and felt that my equity had to be higher (theoretically) than my VPF at least.

S: Well remember the midcap fund? It gave up about 20% of the gains, but i guess our processes is in place.

K: Yes, yes I agree, I was just asking what can be done.

Mrs. K: Subra I remember you saying that we should expect 12% cagr on equity funds, but over the past year it is just 9.2%. However interestingly the CAGR as of now – over the past 8 years it is at 11.8% – very close to your “predicted” magic rate.

S: Well it was not a predicted rate. It just had to be a number sexy enough to entice you to invest, but not be too far away from reality. Just an educated guess. 8 years ago if I had used the word guess, you would not have liked it!!

Mrs. K: So true. I also remember you saying when the weighted average annual return is LESS than the 12% target return we should do some rebalancing.

S: Exactly why we are meeting today.

Mr. K: I like the Retirement solution Statement – which has no…jargon. I just know my target. Subra I have Rs. 48L lying in the arbitrage fund – it was my half yearly bonus – and I have kept it in a liquid fund. I wish to use Rs. 20 lakhs to repay a part of my daughter’s educational loan – it will reduce the stress for her…and the balance I wish to put in the Retirement solution. I will transfer it from the liquid fund to the arbitrage fund…and then we can decide…

Who do you think should create the solution?

the fund house, the IFA or the client himself?

does each one of them have the competence?

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  1. 1. It has to be the client. Firstly don’t yet repay part education loan unless you are close to the Retirement Target of 13 odd crores. Your child has a long working career ahead of her and can bear it for few more years. Once you are close to your target corpus, then you may decide to reduce that burden from her.

    2. If 1.90 crs remains invested in equity MF’s with an average return of 10% (I know its low but let’s be pessimistic in return expectations) in next 15 years, it should be close to 8.00 crs. And monthly SIP’s of Rs. 45,000 should be close to 1.90 crs. So in total assuming a retirement age of 55 years, he should be able to amass close to 10crs. (assuming no increase in monthly SIP amount).

    3. If he decided to step up his monthly SIP of 45,000 by 5%, he should be able to amass close to 2.40 crs with a 10% return over the same 15 year period.

    4. Here, haven’t assumed the yearly bonus he might make. So whatever yearly bonus he makes, it can and should be used to reduce the education loan burden of his daughter.

    5. He should be able to meet his retirement target easily if he wishes to work another 2-3 years or upto 60 years in auto SIP mode above. However assuming the stressful and challenging times we work in, if he is able to remain healthy after 55 and amass close to 11 crs, it worthwhile to live a more fulfilling life with his time and money other than work to earn money 🙂

    Please do share your thoughts and comments!

  2. Actually the best option would be portals like kyvera, MF utility who stand to gain from client stickiness.

  3. Pradip Chinnakonda

    I think the IFAs are best placed to create and provide the solution. Whether one is competent enough or not is for the IFAs to decide for themselves. And I don’t know if some readymade tools are available to map your investments with your goals. One size fits all sorts of solutions will not work. An IFA need to customize it for each Investor. And thinking about providing solutions to investors will create win win situation for both the investor as well as the IFA.

    Fhnd houses are least concerned about the IFAs and the investors. They will be always looking to increase their bottomline and they have the might and the resources to tweak and twist things in their favour.

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