Adding muscle

Stocks are not out of bounds for those who are near retirement. Let's see how they can use equities to shore up returns.
Rahul Oberoi/Money Today        Print Edition: October 2014
Persons near retirement age can invest in stocks
(Photo: Reuters)

It is believed that stocks, due to their unpredictable nature, are only for the young and daring. The old, it is said, should do their best to stay away from this risky asset.

This belief, like many others, is not without its set of challengers. Stocks, say several financial planners, are indispensable for every investor, young or old, as they are the only asset that can beat inflation over long periods.

Suze Orman, an American author, financial advisor, motivational speaker and television host, is once reported to have said, "Cash-in savings accounts, short-term CDs or money market deposits-is great for an emergency fund. But to fulfill a long-term investment goal like funding your retirement, consider buying stocks. The more distant your financial target, the longer inflation will gnaw at the purchasing power of your money."

"A retired person, considering that his liquidity needs have to be met from investments, should invest in debt instruments an amount equal to three years of living expenses plus planned expenditures and ongoing and expected medical expenses. The instruments can be bank fixed deposits or short-term funds. The remaining money can be invested in equities," says Feroze Azeez, director, investment products, Anand Rathi Private Wealth.

WHERE TO INVEST?

An individual near retirement, due to less time and low risk appetite, should invest in companies that grow consistently and have quality managements. There are many such companies in fast moving consumer goods, or FMCG, pharmaceutical and information technology sectors whose earnings grow at a fast pace and which are not impacted much by market trends. Also, a good dividend payment (for regular income) and growth history should be considered.

DK Aggarwal, chairman and managing director, SMC Investment and Advisors, says, "A person who is about to retire can consider large-cap stocks as most blue-chip companies pay high dividends and outperform the stock market. Defensive sectors such as pharma and FMCG should have more weight in the ideal portfolio of a person nearing retirement."

FACTORS TO WATCH

Ideal retirement stocks
Ideal retirement stocks
Unlike the young, who can bet on new and emerging businesses as they can wait for years for their investments to grow, the retired should look at mature companies run by quality managements, score high on corporate governance, have delivered consistent returns and have a history of paying high dividends.

Azeez of Anand Rathi Private Wealth says, "Companies that have proven themselves and have gained market share over the years will need less funds for expansion and so will have a sizeable surplus that they can distribute as dividends. These will be beneficial for retired individuals (who want regular income). Such companies can be either in large-cap or mid-cap space."

Dipen Shah, head, private client group research, Kotak Securities, says, "If someone is near retirement or has already retired, he should invest only in large and stable companies with credible managements, strong balance sheets and good dividendpaying record. Small companies should be avoided."

DIRECT OR INDIRECT EXPOSURE?

What is the ideal way to take exposure to stocks in old age? Considering the recent changes in tax laws, which extended the holding period for short-term capital gains from debt funds from 12 to 36 months, the retired can look at balanced funds. These invest more than 65% money in stocks and so are considered equity funds for taxation. This means gains from an investment held for more than one year are not taxed. Plus, they give investors exposure to debt, which provides stability to the portfolio, as well.

At present, short-term gains from debt funds are added to the income and taxed according to the person's tax slab. Long-term gains, if the units are held for more than three years, are taxed at 20% with indexation. Indexation involves adjusting the purchase price with inflation. It lowers gains and, hence, the tax burden.

Azeez of Anand Rathi Private Wealth says, "Indirect exposure through mutual funds is better since these are well-regulated and managed by professionals. This saves investors the hassle of personally tracking companies. There are a number of mutual funds whose mandate is investing in growth companies. They also provide a dividend payout option." Dividends can be a good source of regular income for the retired.

Tushar Pendharkar, equity strategist, Right Horizons, says anyone can take exposure to stocks, either directly or through mutual funds. A thumb rule says that equity exposure should be 100 minus age. So, if the person's age is 55, he should invest 45% funds in equities. Therefore, it is recommended that one should reduce exposure to stocks with age.

For those who would like to take direct exposure to stocks, we talked to market experts and tried to find out stocks they can buy in the present market from their retirement funds. Hiren Dhakan, associate fund manager, Bonanza Portfolio, suggests stocks with consistent history of paying high dividends such as Colgate-Palmolive, Hawkins Cookers, Emami, HDFC and Hindustan Uniliver.

Aggarwal of SMC says, "Emami and Godrej Industries are good options for retirement planning." Emami has a robust portfolio of more than 300 products and good operational track record. Godrej Industries is part of a leading business group that is seeing robust growth in all its verticals.

Emami has given 47% annualised return to investors in the past ten years. Godrej Industries, Hawkins Cooker, Hindustan Unilever, HDFC and Colgate Palmolive have returned 43.25%, 64.56%, 19.82%, 23.70% and 26.64% a year, respectively, during the period. All these companies also have a record of paying dividends regularly.


SADHANA GADRE / 65

Sadhna Gadre
Sadhna Gadre
Q: When did you retire?
Ans: 2009

Q: Do you invest in stocks and equity mutual funds?
Ans: Yes

Q: What percentage of your wealth is in equities?
Ans: I have around 10% exposure to stocks.

Q: Which stocks are you holding? When did you invest in them?
Ans: I trade regularly and book profit every three-six months. At present, I am holding ICICI Bank, Infosys, Tata Motors, Glenmark and Ranbaxy. I also have some money in gold ETFs and hybrid funds.

Q: How are your stock investments doing?
Ans: I started investing in stocks after retirement. In the beginning, I faced some challenges. Now, my overall portfolio is doing well and I am making profits. I don't invest more than Rs 2 lakh in shares.

Q: Who helps you in stock selection?
Ans: I do my own research. Sometimes, I take help from my daughter and nephew.

Q: Which other instruments are good for retirement planning?
Ans: Deposits with banks, mutual funds and insurance

NAGENDRA PRASAD / 72

Nagendra Prasad
Nagendra Prasad
Q: When did you retire?
Ans: 2002

Q: Do you invest in stocks?
Ans: Yes

Q: What percentage of your money is in equities?
Ans: I have 80% exposure to stocks and 20% to fixed deposits and national savings certificates.

Q: Which stocks do you hold? When did you invest in them?
Ans: I bought Unitech, IVRCL, HCC, Punj Lloyd, GVK, Lanco, Nagarjuna Constructions, JP Associates and PTC in 2008 and 2009.

Q: How are your investments doing?
Ans: At present, most of them are under pressure.

Q: How much should a person invest in stocks for retirement?
Ans: One must invest 10-15% funds in equities.

Q: Who advises you on stock investments?
Ans: My broker

Q: Why should people buy shares even after retirement?
Ans: For capital appreciation and regular dividends.

Q: Which other instruments are good for retirement planning?
Ans: Real estate, monthly income plans and fixed deposits.

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