Retirment Planning Note - Darashaw &amp Co.

Darashaw & Company Private Limited – Private Client Group
RETIREMENT PLANNING & INVESTMENTS
The challenge of retirement is how to spend time without spending money – An unknown author
Life Begins at retirement – An unknown author
Both the above quotes reflect different philosophical perspectives towards retirement; yet have a
high relevance towards the preparedness of a retiree to face life afresh post retirement.
For most of us “RETIREMENT” is a 10-letter word that conjures images of sitting in the garden of
one’s house with one’s partner, playing with grandchildren, or hearing the sounds of their laughter as
one reads the morning newspaper. Retirement for many literally means departure from constant
endeavor to ensure financial stability and reaping the sweet fruits of one’s efforts during one’s
employment years. It is simply the joy of knowing that one has arrived into the heavenly state of
peaceful bliss - of financial nirvana.
We believe that one can certainly make these quotes come true for oneself and enjoy true
financial freedom, if one plans well for retirement.
Planning for Retirement:
o Identifying one’s stage in the financial life cycle and planning with a long-term perspective.
o Recognizing future obligations, providing for uncertainties, evaluating various options vis-à-
vis sources of income and investing accordingly to realize one’s goals
o Making prudent investments and provisioning for a constant standard of living.
o Periodically reviewing one’s financial needs and balancing portfolio to match them.
It is important to be financially independent and at peace when one walks into one’s sunset years.
Ideally, prudent retirement planning ensures that one does not need to dip into one’s retirement
corpus except under unforeseen contingencies.
While planning for one’s retirement during employment years, it is critical to be optimistic and add
10 to 15 years to one’s life expectancy post retirement, to ensure a prudent investment for the future.
This calls for a disciplined approach and an ability to calculate the future cash flows in a pragmatic
manner. It is extremely essential to understand an effective way of designing a retirement solution.
The Cardinal Principals of Retirement Planning
Social security systems in India have started gaining prominence with an increasing trend in
urbanization, emerging nuclear family structures, increasing life expectancy and rapidly evolving
market structure. Retirement planning in the India is however, still restricted to savings in provident
fund, post office schemes and other government-regulated options.
The material contained in this report is recommended as a source of information only. Readers must be advised that while the information herein is
expressed in good faith, it is not guaranteed. Any recommendations made in this report may not be suitable to all recipients.
Information compiled from reliable sources and primary research done by Darashaw & Co.
A person retiring today gets a decent return from his provident fund contributions along with the
other financial assets created during his working tenure. These financial assets provide a consistent
support for the remaining life span of the person post retirement. In such a context, we must bear in
the mind the importance of SLR (Safety, Liquidity and Return - in the same order) principle
before making investments for the future. .
Safety - Capital preservation is of prime importance for a retiree, as a retired person does not have
an ongoing income stream any more. Thus an investment should be such that it provides him/her
with a consistent support for the remaining life. It is important to allocate the funds to instruments,
which are highly safe, mitigating risk by proper diversification methods.
Liquidity – Post retirement, one needs to have a substantial liquidity in hand to meet medical
assistance, domestic requirements and also expenses unaccounted for. It is critical to assess the
degree of liquidity offered by a particular investment.
Return – In a country like India, where the social security is restricted in nature, it is difficult to
maintain the standard of living post retirement unless an investment option offers adequate returns.
As known, returns are function of the risk undertaken and hence assessing the right risk appetite to
maximize the returns is critical. It should be noted that evaluating TAX treatment of all available
instruments is essential to determine the level of net returns available from such instruments.
In addition to the above three factors, a comprehensive financial plan for a retiree should always
assess:
¾ Operational efficiency and Ease – It is an extremely important criterion, as a retiree grows

older.
¾ Average lifespan expectations, health profile and possible contingencies relevant to the
retiree’s finances post retirement.
¾ Current financial profile and family background of the person – existing properties and
other financial assets, which can provide support over the remaining life.
As seen, designing a retirement solution is a complex exercise, which involves assessment of a range
of financial as well non-financial criteria and thus an investor planning for a retirement solution,
would gain from expertise of a professional with a better understanding of the market.
Opportunities for investments
As Indian markets are changing there is a plethora of investment options available for a retiring
person. The following table indicates various opportunities with their salient features.
Various Investment Schemes and their snapshot

Sr.
No. Type Liquidity Safety Returns Operations % Returns
1 RBI Taxable Bonds Low High Medium Easy 8.00
Post Office-National
2 Savings Certificate VIIIs Low High Medium Difficult 8.00
3 Post Office - Sr. Citizens Low High Medium Difficult 9.00
4 Post Office - Time Deposits Low High Medium Difficult 8.00-9.00
Post Office - Monthly Income Scheme/
5 Recurring Deposits Low High Medium Difficult 8.00
6 Post Office - Savings Low High Medium Difficult 3.50
7 Bank Fixed Deposits Low Medium Medium Easy 7.00 –8.00
8 Bank Fixed Deposits - Sr. Citizens Low Medium Medium Easy 9.00
9 Corporate Debt - Taxable Bonds Low Low Medium Easy 7.80
10 Corporate Debt - Tax Free bonds Low Low Medium Easy 6.75
11 Corporate debt - Fixed Deposits Low Low Medium Easy 8.00-9.00
12 Mutual Funds - Debt High Medium Medium Easy 6.50
13 Mutual Funds - Balanced High Medium Medium Easy 10.00-11.00
Mutual Funds - Close/Equity Linked
14 Saving Scheme High Low High Easy 20.00-30.00
15 Mutual Funds - Equity High Low High Easy 20.00-30.00
16 Equities High Low High Easy 20.00-30.00
17 Derivatives High Low High Complex 20.00-30.00
RBI 8% Savings (Taxable) Bonds, 2003
¾ Assured 8% p.a. return on investment

¾ Investment Tenure of 6 years.
¾ Option of Cumulative or Half yearly interest pay out.
¾ No premature liquidation allowed
¾ Interest income taxable.
Pros
¾ Assured returns at lower risk for a longer tenure
¾ Option to choose on interest payment option
Post Office National Savings Certificate - VIII
¾ Can be subscribed by Individuals, Hindu Undivided family (HUF). It can be held

individually or jointly and can also be bought on behalf of minors.
¾ Can be bought & sold at all departmental post offices authorized to transact savings bank
business.
¾ Matures after 6 years and pays an interest @ 8.00% p.a. compounded semi-annually. The
interest is paid at the maturity.
¾ Minimum investment Rs.100 with no Maximum Limits and available in denominations of
Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000
Pros
¾ NSC certificates can be pledged with banks and lending institutions for 75% of their value
¾ Range of denomination can enable small, medium as well as big investors
Cons
¾ Post – Tax Returns lower than that offered by PPF, infrastructure bonds and certain saving
instruments.
¾ Premature withdrawals not allowed
¾ Interest Income can be claimed as a deduction under section 80C .
Senior Citizens Savings Scheme (SCSS)
¾ Dedicated investment option for senior citizens (i.e. individuals above 60 years of age; those
above 55 years also permitted subject to fulfillment of certain conditions.)
¾ The minimum investment amount is Rs 1,000 while the upper limit has been capped at Rs
1,500,000.
¾ Tenure of investment 5- years
¾ Return offered is 9.00% pa on a quarterly basis
¾ Premature encashment is permitted after 1 year from the deposit date. Liquidation before 2
years invites a deduction of 1.5% of the investment and after 2 years, 1% of the investment is
deducted
Pros
¾ High degree of safety
¾ Decent returns within the peer group.
¾ Flexibility of investment tenure
Cons
¾ Quarterly returns against monthly returns offered by other investment options
¾ Lock – in period of one year and conditional premature liquidation
¾ High penalty for pre-mature liquidation
Post Office Time Deposits (POTD)
¾ Minimum Investments allowed Rs.200 with no upper limit on deposits.

¾ Investment tenure ranging from 1 year to 5 years.
¾ Returns at the rate of 6.25% p.a. to 7.5% p.a. compounded quarterly, and paid annually
¾ Premature liquidation allowed after 6 months of holding subject to some loss of interest.
Pros
¾ Lower minimum investment criteria helps small savings segment
¾ No upper limit on investment enables quantum deposits
¾ Tenure Flexibility
¾ Shorter lock-in period of six months
Cons
¾ Lower interest returns compared to similar investment options
¾ Operational inefficiencies - inconvenient for retirees
¾ Lack of advisory/professional services at the distribution end – post offices
Post Office Monthly Income Scheme (POMIS)/ Recurring Deposits
¾ Assured Monthly Income Plan

¾ Minimum Investment – Rs. 1000 with a ceiling fixed at Rs 300,000 and Rs 600,000 for
single and joint accounts respectively
¾ Investment tenure is 6 years
¾ Return on investment is 8%
¾ Liquidation before 1 year invites a penalty of 5% of the investment while no penalty after 3
years of holding.
Pros
¾ Pan – India availability through Post offices.
¾ Fixed Income helps avoid uncertainty.
¾ Option of exiting the investment after reasonable period.
Cons
¾ Longer investment tenure, but lower returns
¾ Stringent liquidation norms – High Penalty
¾ Lack of advisory/professional services at the distribution end – post offices
Fixed Deposits with the Banks & Senior Citizen Deposits
¾ Offered by banks as savings option to their customers

¾ Customized returns also offered depending upon the tenure and credibility of the client.
¾ Interest rates offered are 0.5% above regular rates for senior citizens
¾ Premature liquidation generally allowed after a tenure of 3 months
¾ Premature liquidation subject to penalty as decided by the bank
Pros
¾ Personalized services from banks for decent deposits
¾ Range of investment options with varying tenure, interest rates and credit ratings can be
chosen from
¾ Preference to Senior citizens
Cons
¾ Capital preservation risk – Banks may default
¾ Opportunity cost – Lack of information among older retirees about better deals at competing
banks offering better returns
¾ Returns are Taxable. However, for the long term Fixed deposits (FDs) with tenures of not
less than 5 years to be included under Section 80 C for tax exemptions. Now individuals can
invest up to Rs 1 lakh in bank FDs to claim tax deduction.
It should be noted that though all the investments discussed above, assure fixed returns linked to
tenure, the returns should be calculated after the implications of tax and inflation to arrive at the
effective return rate.
Let us now have a look at the other options, which provide of market determined variable returns.
Mutual Funds
• Debt Oriented Funds: As the name suggests these funds invest their corpus in debt
instruments issued by Government institutions, Private bodies, Banks and other Financial
Institutions. These funds ensure high safety (low risk) and stable returns to the investors.
o Gilt Funds: Investments in Government Securities, Zero Default Risk.
o Income Funds: Investments in various debt instruments like Bonds, Corporate
Debentures and Government securities
o Monthly Income Plans (MIPs): 80% of the corpus in Debt and rest in Equity
ensuring higher return and risk compared to other debt schemes
o Short Term Plans (STPs): Investment horizon of 3-6 months in instruments like
Certificate of Deposits (CDs) and Commercial Papers (CPs) and Corporate
Debentures.
o Liquid Funds: Investment in money-market instruments like Treasury Bills, Inter –
bank Call Money Market, CPs and CDs primarily meant for short term cash
management having an investment horizon of 1 day to 3 months.
• Equity Funds: These funds invest the majority chunk of their portfolio in equity with the
composition varying from scheme to scheme. Equity Funds provide higher returns but at
higher risk. Depending upon the investment objective they are usually classified as
o Diversified Equity Funds
o Mid-Cap Funds
o Sector Specific Funds
o Tax Saving Funds (Equity Linked Saving Scheme - ELSS)
• Balanced Funds: These funds invest in both equity as well as fixed income securities in a
composition in line with pre-defined investment objective. It provides both the benefits viz.
Growth and stability
Mutual fund industry has grown substantially in last few years and has emerged as a good
investment option for the investors who are not market savvy. They offer a plethora of investment
options in different markets for the small investor.
¾ Investment in Mutual Funds can be selected depending on one’s risk appetite as the fund
managers invest in equity, debt, hybrid(debt-cum-equity), sector specific etc.
¾ Unassured and variable returns
¾ Ideally 15%-20% of the corpus is invested in Equity and balance in debt.
¾ Dividends are paid monthly, quarterly, half-yearly or annually.
¾ Uncertainty of dividend payout and capital preservation.
Pros
¾ Higher returns possibility compared to other investment options

¾ A large number of investment options in various markets available
¾ Highly liquid as the units can be redeemed easily
¾ Professional fund management available for your funds.
¾ Dividend is tax free in the hands of investors.
Cons
¾ No assured or guaranteed returns
¾ HIGH RISK AND HIGH RETURN product.
Equity
Though Equity is a high-risk investment class, it can help in one’s retirement planning exercise.
Although, the returns in the past three years have
Performance of Various Asset Classes 1980 to 2004 been 66% CAGR, the returns over a 20 year
15.60% period, have been more realistic and trace the
16.00%
14.00%
Indian nominal GDP growth rates.
12.00%
10.00%
10.30%
¾ Investment in direct equity is a “High Risk
8.00% 6.70%
& High Return”
6.00%
5.70%
¾ No assured returns & guarantee of capital
4.00% protection.
2.00% ¾ Uncertainty of dividend pay-out and
0.00% capital preservation.
Inflation Gold Bank FD BSE Sensex
¾ Constant track of market is required.
Indian markets have evolved over past few years and with the economy booming, equities are likely
to provide some of the best possible investment opportunities. With diligent investment decisions, a
retiree too can earn a more than decent return on investments in the equity market.
Indian Equity markets are performing well and hence it seems to be a good time to invest from
fundamental as well as technical perspective. However, a disciplined approach is called for in order
to achieve the optimum return while taking care of the SLR criteria and this is where a professional
expertise is required. We at Darashaw strongly recommend professional fund management for your
equity portfolio as it can exploit the market opportunities to the maximum possible extent while
minimizing risks involved. A professional fund manager can also provide customized solutions to
suit your risk-return needs.
Derivatives
Investment in Derivatives is in the value of an “underlying asset” and not in the physical asset itself.
The underlying asset can be securities, commodities, bullion, currency, livestock or some similar
asset. Derivative involves a forward, future, option or any other hybrid contract of pre determined
fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or
financial asset or to an index of securities. However, it should be noted that investments in derivative
instruments calls for higher liquidity to meet margin calls and expertise to track market trends on a
constant basis which may be cumbersome for a retiree and hence a professional assistance may be
sought.
Other Assets
Asset Long term
Classes Annual Average Volatility Liquidity Risk
%
Bank deposits 5-12 NIL Low Low
Debt 6-14 Low Moderate Low
Bullion 6-18 Moderate High Moderate
Real Estate 7-15 Moderate Low Moderate
Asset Classification for various investor classes.
Based on above analysis one can look at determining the sample investment portfolios for people
with different age profile, risk appetite and post retirement requirement.
The wealth profiles for different classes of people have been hypothetically studied. It is to be noted
that the profiles are illustrative and the requirements may vary from person to person based on
criterion indicated above.
A sample wealth profile for retired person – settled well with children and with very low risk
appetite
As the risk appetite is low and one looks for stability, maintain about
50% of investments in property. A decent amount of money (20%) can
be invested in equity as long-term investments irrespective the periodic
down turn in the equity market. Approximately 20% can be in
debentures and bonds for stability and constant income.
A sample wealth profile for retired couple with no kids and moderate risk profile
As the there are no dependents a smaller portion of your portfolio can be

designated towards property as compared to the above category. An
optimum mix can be 35% of investments in property, 30% dedicated to
equity and around 25% in debentures and bonds.
A sample wealth profile for unmarried retiree

As such an investor is likely to have high-risk appetite and lower liability
one can allocate 30% of your portfolio towards property and 35% of
money in equity investments. 25% can be allocated to debentures and
bonds providing stability to the portfolio.
It is to be noted that in all the categories seen above, 5% of the corpus has been in Savings
account and in gold irrespective of the category one belongs to. Gold being an international asset
priced in US Dollars, it acts as a hedge against loss of wealth when Rupee weakens.
The above samples give a fairly clear idea about various requirements and their possible retirement
solutions. We recommend an investor to consider these illustrations in one’s own perspective so as
to plan for your retirement investments.
Feel free to be in touch with us for any of the financial planning tools and portfolio management
services. We are sure that together we can work out a strategy to make the words of Gene Perret – a
reality upon your retirement ,
“I'm now as free as the breeze - with roughly the same income”
For any further queries, comments, suggestions please contact us at:
Mr.Fredy Hansotia / Mr.Mayank Shah

DARASHAW PORTFOLIO MANAGEMENT SERVICE
10th floor, Regent Chambers,
208, Nariman Point,
Mumbai - 400 021
Tel: 91 22 56314102/33
91 22 56306612/13/14
email: pcg-team@darashaw.com
Disclaimer : The readers may clearly note that Tata Power Co Ltd does not take any
responsibility, financial or otherwise, of any losses or the damages, including, without
limitation, any direct, indirect, incidental or consequential loss, that may be sustained due to
any transaction undertaking or any action done, based on the information herein. No
representation/s or warranty/ies is/are being made to the effect that the transactions or
dealings undertaken based on the information contained herein will be profitable or they will
not result in losses.

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Darashaw & Company Private Limited – Private Client Group

RETIREMENT PLANNING & INVESTMENTS

Life Begins at retirement – An unknown author

Planning for Retirement:

The Cardinal Principals of Retirement Planning

¾ Operational efficiency and Ease – It is an extremely important criterion, as a retiree grows

Opportunities for investments

Various Investment Schemes and their snapshot

RBI 8% Savings (Taxable) Bonds, 2003

¾ Assured 8% p.a. return on investment

Post Office National Savings Certificate - VIII

¾ Can be subscribed by Individuals, Hindu Undivided family (HUF). It can be held

Senior Citizens Savings Scheme (SCSS)

Post Office Time Deposits (POTD)

¾ Minimum Investments allowed Rs.200 with no upper limit on deposits.

Post Office Monthly Income Scheme (POMIS)/ Recurring Deposits

¾ Assured Monthly Income Plan

Fixed Deposits with the Banks & Senior Citizen Deposits

¾ Offered by banks as savings option to their customers

¾ Higher returns possibility compared to other investment options

Asset Classification for various investor classes.

As the there are no dependents a smaller portion of your portfolio can be

A sample wealth profile for unmarried retiree

For any further queries, comments, suggestions please contact us at:

Mr.Fredy Hansotia / Mr.Mayank Shah

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