AMC Speak

Most Ignored Life Goal

Ashok Kanawala, VP Products & Business Development, HDFC AMC

"The opinions expressed in this article are those of the author alone and not of HDFC AMC, and should not be regarded as investment advice. Investors should obtain their own independent advice before taking a decision to invest in any securities."

Ever wondered, out of all the goals in our life like completing education, having a stable career, spending time with our loved ones, maintaining a fit body, and so on, most of us often ignore a very important goal, retirement planning. Most youngsters think retirement is an event expected at a very distant future, so why bother about it now. In the process, saving for this purpose takes a backseat. What they don’t realise is that for a person living till 80 years of age, one needs to spend around 1/4th of life without any regular income. That’s 20 long years of vulnerable health conditions with rising medical costs and a likelihood of no support from family members. Retirement is inevitable and one needs to plan to face it.

Huge Need for Retirement Planning in Young India

Over 34% of Indians fall within the age group of 15 – 34*, and hence, it won’t be wrong to call India as a nation of youngsters. This fact needs to be seen in light two undeniable trends for the future. Firstly, the average years of working is likely to decrease and the years of retired life is likely to increase. Secondly, with the rapid advancement in technology many jobs would become redundant. Disruption in many industries might lead their eventual extinction. There would be no such thing as job security in tomorrow’s world. To what degree these two trends would play out remains to be seen, but it is the responsibility of each individual to plan for retirement. In the Indian context, this argument is even more valid as there is no social security provided by the government, while the improved medicines have increased the average life expectancy. However, the improved medical facilities will come at a cost, most likely to be even steeper than today.

* Source: MOSPI / World Bank data for 2011 and projection for 2021

Starting Early Makes an Impact

The power of compounding in investing is not new to us. The formula for compounding has three variables, money invested regularly, the rate of compounding and time period. The first variable of regular investing can be brought about by the simple tool of SIP. The second variable of rate of compounding depends where the money is invested, the selection of which depends on the risk appetite of the investor. The third, but the most crucial variable of time for which the money is invested lies in the hands of the investor. Here only one rule applies, the earlier the better. The below illustration is to showcase cost of delaying to plan for retirement. There are three assumed scenarios, an investor starting a monthly SIP from age 25, age 35 and age 45.

As you delay your retirement saving you need to invest larger sums and this costs you in the long run. The % change is reflected over the previous start age. The calculations are done assuming a rate of return of 12% p.a. A delay in 10 years cuts your retirement corpus by more than 50% at every step even though you may invest the same amount over time.

Note: Calculations are based on assumed rates of return, and actual returns on your investment may be more, or less. This illustration is not intended to be indicative of the performance of any specific investment and does not represent a guarantee of returns in the Scheme(s) of Mutual Fund. The above is only a tool that may help you to know benefit of early investment to reach your goal of retirement saving but it should not be construed as providing any kind of investment advice or as a substitute for any kind of financial planning.

Deepens Distributor – Client Relationship

The concept of retirement planning is probably the longest running financial planning goal, starting immediately as a person starts a career and runs till age 60 for most people. Throughout this journey, it is the job of the financial advisor to make sure the client is on track for building sufficient corpus for retirement. The investment horizon a client undertakes while investing in a retirement savings fund is probably the longest among all investment products. In other words, retirement planning helps build the longest possible distributor – client relationship. For an IFA, an SIP into a Retirement Savings Fund is a great way to establish a 30+ years’ relationship with a client.

The Need for Dedicated Retirement Savings Funds

Our experience with goal oriented products suggest that investors tend to hold on to their investments for a long period of time, and do not give in to temptations of spending the money allocated for a particular goal on other material things like buying a car or a going for a vacation, etc. Committing to save for a goal brings in an inherent discipline along with it. When we attach a goal with an investment, the concept of “Mental Accounting” kicks in. For an investor with a goal, that money simply does not exist for spending on ‘nicer things’ now. This is especially true for Retirement Savings Funds. Considering the investor behavioural psyche, withdrawing from a normal Equity Diversified Fund for spending on a vacation may not trigger any kind of guilt in the mind of an investor. On the other hand, if the money is invested in a Retirement Savings Fund, it is too ‘sacred’ to be touched for any other purpose.

HDFC Retirement Savings Fund – What does it offer?

HDFC Retirement Savings Fund is a mutual fund vehicle targeting to build retirement corpus for an investor. The Fund offers 3 different investment plans suitable for investors of different age groups and risk profile. They are:

• Equity Plan: Suitable for younger investors a relatively higher risk appetite with equity exposure between 80% to 100%.
• Hybrid Equity Plan: Suitable for middle-aged investors with moderate risk appetite having equity exposure between 60% to 80% and the rest invested in debt and money market instruments.
• Hybrid Debt Plan: Suitable for investors nearing retirement or investors with relatively low risk appetite. The exposure to debt and money market instruments is expected to be 70% to 95% and the equity exposure is expected to be between 5% to 30%.

The fund has a lock-in period of 5 years, during which the units cannot be redeemed or switched out. After completion of 5 years from the date of allotment, the units can be switched out with an exit of 1% till the age of 60. No Exit Load is payable if Units are redeemed /switched-out on or after attainment of 60 years of age. For switching of units between plans post the initial 5 year lock-in period, there will be no exit loads. The investments are eligible for tax benefits under section 80C of the Income-tax Act, 1961.

A Lot More Than Just Tax Savings

CBDT Notified Retirement mutual fund schemes offer tax benefit under section 80C of the income-tax act which makes it an even more attractive proposition. But one needs to remember that the tax savings is just an additional benefit. The main reason why one should invest in retirement savings funds is to build a sizeable corpus at the time of retirement. The amount invested every month into these funds should not be decided on the basis of tax savings. One needs to make sure the standard of living is either maintained or improved post retirement and save accordingly.

To Conclude

An encouraging trend that we have witnessed over the past three years has been the acceptance of SIP as a primary way of investment savings by a large number of investors. In light of this, one needs to decide which is better, “SIP with no goal” or “SIP for retirement”. With a clear goal of saving for retirement, even a small progress towards it would reward the investor with a kind of satisfaction motivating enough to stay on course for long term.

For complete details, refer SID/KIM - available on the website www.hdfcfund.com or with your Distributor

DISCLAIMER: The views expressed are author’s own views and not necessarily those of HDFC Asset Management Company Limited (HDFC AMC). The views are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations and are for illustrative purposes based on assumed figures, meant as guidelines only, which you must confirm before relying on them and does not represent a guarantee of returns. The information contained in this document is for general purposes only but it should not be construed as providing any kind of investment advice or as a substitute for any kind of financial planning. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on the current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Investors are requested to note that HDFC Retirement Savings Fund should not be construed as financial planning done / a complete solution for retirement planning done/ recommended by the Fund/AMC. Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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