The path to investment nirvana is often riddled with misgivings and mistakes. More so if the investment goals relate primarily to retirement. In the real world of plans, products and processes, it is difficult to find a retirement strategy without flaws. A wrong estimate, a negligence or a miscalculation will undermine a retiree’s interests. This Monday, we will dedicate ourselves to mistakes that an average investor often makes; at the same time we will also aim at identifying probable solutions.

Like a saint with a sinful past, an ordinary retiree frequently fails to work out fool-proof strategies. Needless products are often acquired, poor performance is tolerated for far too long, expensive transactions are endured for want of alternatives. These mistakes, as well as several others, can compound a problem that may be already created by a delayed start, especially for one who has not invested methodically or regularly.

Ergo, needless to say, a stable retirement plan must be worked out sufficiently early — as early as possible, in fact — and executed systematically over a decent stretch of time. A late bloomer has clear disadvantages; paucity of time does not help his case. Under-performance of portfolios is rife; such an occurrence is quite common because not enough time is allotted for them to fructify fully.

Mistakes

Not fully considering inflation is among the worst flaws in a retirement plan. Wrong estimates related to the impact of rising prices can have a ruinous impact. Resources collected over a lifetime are likely to deplete faster because of inflationary pressures; withdrawal rates will have to be re-calibrated to keep up with the advancing trend. In short, mistakes with regard to inflation will prove very costly for the common man.

Miscalculating investment returns is a gross error too. I have encountered a number of people who have, somewhat strangely, estimated consistent returns of 15-18 per cent from their assets. Wild and sweeping guesses are best avoided.

Instead, investors need to be a lot more realistic and rooted to the ground. Paring one’s expectations from the market is an also important task for the individual concerned. An investor who depends largely on fund managers, for instance, must understand that past performance is not a reliable indicator of the future. No fund manager can deliver absolutely consistent returns across all cycles. All-seasons performance is a chimera – an overdose of optimism is not a positive habit to entertain.

Being ultra optimistic ranks close to being a compulsive risk taker. Often it pays to make haste slowly. An ambitious retirement plan that factors in superior returns is usually laden with risky investment products. A portfolio of mid- and smallcap stocks will not necessarily serve the retiree’s purpose. Nevertheless, it will increase his risk to a great extent. Similarly, a plateful of sector funds or commodity-themed funds may be unable to add any meaningful value to one’s holdings.

At another level, a retirement plan built on the basis of slow-moving assets also carries a tragic flaw. It may turn illiquid over a period of time. In the typical Indian context, individuals often rely too much on real estate. The latter, a perennial favourite for numerous ordinary folks in our country, generally lacks liquidity. It is not easy to offload real estate in a hurry. On the contrary, land and property (as an asset class) is often laced with intrinsic problems. There is a marked absence of transparency in many cases.

Solutions

A retiree who learns it the hard way, like a sinner with a guileless future, can find no single panacea for his ailments. In this context, a combination of factors can help the ordinary individual shape a stable retirement plan. Let me enumerate some of them.

• Identify your ideal asset allocation on the basis of your risk profile
• Choose the right assets from a basket of competing products
• Execute the transactions required to implement your plan n Monitor performance — be ready to cut deadwood, if any, if there is consistent under-performance
• Rebalance in keeping with reality; make sure all life-stage changes are acknowledged

More on life-stage changes. A retirement plan in the making must concede such alterations in order to remain realistic. Changes can come in many shapes, or caused by several major reasons.

Enhanced financial commitment to one’s family, marriage, divorce, childbirth and so on are some of the more common reasons why life-stage changes occur. A sound plan has to be finetuned in keeping with these events. In some cases, a significant revision in asset allocations is also warranted.

At any rate, many ordinary individuals tend to move towards debt (that is, fixed-income securities) with the passage of time. The most common belief in this context is that a senior investor will need to stay away from the ever-uncertain equity and commodity markets. Fixed-income, which provide relative stability and current income, is a natural destination for a retired investor, especially one who has no active income stream to fall back on.

The perfect retirement plan is as elusive as it gets; in the practical world in which we reside, such a thing is woefully absent. A good start and a planned execution should be seen as two of the most essential pursuits for all retirees. Avoiding the other common mistakes is also critical. The Indian market for retirement products is getting crowded by the day; so an ordinary individual now has a large bouquet of choices.

The trend is likely to strengthen with the passage of time. This will actually give the Average Joe an opportunity to examine many competing products. A good, hard look at their salient features will reveal what lies within – transaction charges, probable pitfalls, tax implications. Ignoring these aspects will figure among the most terrible mistakes a retiree can ever commit.

The writer is director, Wishlist Capital Advisors

Investment in PPF

What is the maximum amount that can be invested in PPF in a financial year to get income tax relief? Is there any relaxation for senior citizens?

Aloka Sarkar, email

A PPF account can be opened by a resident individual. The minimum and maximum deposit that can be made in a PPF account in a financial year is Rs 500 and Rs 1.5 lakh respectively. The amount can be deposited in multiple installments within the maximum limit of Rs 1.5 lakh. The deposits made under the PPF scheme qualify for deduction of up to Rs 1.5 lakh in a financial year under section 80C of the Income Tax Act. The interest earned is tax free under the Income Tax Act and is credited to the account at the end of the year. Remember that the PPF account has a maturity period of 15 years and is generally considered as a long term investment. While there are options of partial withdrawal and taking a loan out of the account, but being a senior citizen, you may want to consider having more liquidity.

Booking profit

I want to book some profits from investment in equity mutual funds as part of portfolio reallocation. Instead of depositing the amount in a savings account, would liquid funds be a better option?

J. Sanyal, Calcutta

Liquid funds offer better returns than savings bank accounts and would be a better option to act as a temporary space to park the funds. Since the investment is temporary, you may also consider setting up a systematic transfer plan to make investments into other funds in future. Instead of the money being deducted from the bank account like in a systematic investment plan, the amount will be transferred from the liquid fund to the desired equity/debt fund at regular intervals.

If you have any queries about investing or taxes or a high-cost purchase you are planning, mail to btgraph@abp. in or write to: Business Telegraph, 6 Prafulla Sarkar Street, Calcutta 700001