For investors nearing retirement, deciding where to deploy a large cash surplus can be challenging. The investment strategy needs to balance long-term wealth creation with the need to protect money earmarked for retirement and other financial goals. This becomes even more important when the investor has children’s education expenses and plans to retire within the next few years.
A 51-year-old investor, who has an aggressive risk profile, reached out to ETMutualFunds as he is currently looking to deploy Rs 1.31 crore in cash. He plans to continue working for another four to seven years before retiring from the corporate world and potentially starting a small restaurant. He wants to maintain at least 50% allocation to equity while also ensuring that his family’s financial goals remain on track.
He lives in a family of five. He works in the UK, while his wife is employed in India. The family owns its house and an additional property that is being used by his sister. They also own a car and have no liabilities.
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The family has Rs 5 lakh of basic medical insurance along with a Rs 20 lakh super top-up covering the investor, his wife and younger daughter. His elder daughter is not eligible for medical insurance for medical reasons, while his mother is covered under his wife’s corporate health insurance.
The mutual fund investments owned by the family includes Parag Parikh Flexi Cap Fund, HDFC Small Cap Fund, Mirae Asset Midcap Fund, Quant Large & Midcap Fund, SBI Small Cap Fund, WhiteOak Capital Flexi Cap Fund, UTI BSE Low Volatility Index Fund, UTI Nifty200 Momentum 30 Index Fund, Invesco India Arbitrage Fund, and HDFC Balanced Advantage Fund.
Separate insurance and investment needs
Shivam Pathak, CFP and Founder of Asset Elixir analysed the portfolio, other requirements and shared with ETMutualFunds that it is better to first review the family’s insurance protection before focusing on investments.
The existing HDFC Sanchay policy has a sum assured of around Rs 60 lakh. However, the expert said insurance and investment objectives should ideally be kept separate. Instead of relying on savings-linked insurance products for both protection and wealth creation, the investor can consider adequate term insurance and keep investments separately for long-term goals.
Considering the investor's income and family responsibilities, the expert suggested evaluating an additional term insurance cover of at least Rs 3 crore, with the premium-paying term aligned with his working years.
Existing investments: What should he do?
The investor already has a reasonable allocation towards fixed-income instruments through FDs, NSC and post-office investments. The expert noted that, considering his wife’s tax bracket, post-tax returns from some of these investments may not be as attractive compared with an arbitrage fund.
For money that is not required for near-term goals, arbitrage funds could therefore be considered as an alternative.
On direct equity investments, the expert said that the investor can continue if he is comfortable managing the portfolio and satisfied with its performance. However, as retirement approaches, gradually consolidating the direct equity portfolio and reducing unnecessary complexity could be considered.
The existing mutual fund portfolio already provides meaningful equity exposure across categories. Since there is currently no meaningful gold allocation, around 10% exposure to gold could be considered for diversification.
For fresh small-cap allocation, the expert suggested considering Bandhan Small Cap Fund based on its performance and key risk-adjusted ratios. However, there is no need to exit the existing HDFC Small Cap Fund solely for this change without considering tax and exit implications.
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How should Rs 1.31 crore cash be deployed?
For the Rs 1.31 crore cash surplus, the suggested allocation is spread across equity, hybrid, arbitrage and gold-oriented investments rather than putting the entire amount into equity.
