Retirement: The debt option

It takes a crisis to evoke the worst – and sometimes the best – emotions. For retirees seeking peace of mind (read: safety of principal) and capital appreciation (“hello, I need to at least beat the impact of inflation and income tax!”), the maxim becomes particularly true. And, indeed, they actually are in the thick of a crisis – a significantly high rate of inflation, absurdly low returns from fixed deposits, uncertainty in the securities market. Rarely has the average Retired Joe faced a worse predicament than now.

A solution, if there is one, is nowhere on the horizon. Nevertheless, theories to alleviate the situation abound. These range from the simple (let’s offer our seniors a special category of assured-return instruments) to the complex (let’s give them access to inflation-indexed annuities for life). None, however, can be easily worked out in practice.

The central question, thus, remains unanswered: how can an ordinary individual secure higher returns and not compromise on safety? Here, in this column, I will try to address some of the issues that are relevant in this context.

As we all know, despite all the regulatory marksmanship displayed by our intrepid central bank, inflation has soared in recent days. The Wholesale Price Index for April stood at about 10.49%, a formidable change from the previous month’s 7.39% or so. There is no guarantee that inflation will be tamed in the coming months, not when fuel prices (and prices of critical commodities) are creating waves in the international arena. Indeed, the global commodity markets are undergoing a churn, a scenario that is reflected in the Indian context as well.

The accelerating pace of inflation has rendered deposits quite meaningless for retirees. The best AAA-rated corporate deposits offer about 6-6.5% at the most. This is not enough to withstand the inflationary pressures on individual households. The other kind (sub-Triple A) is too uncertain. After all, the country has not forgotten the recent cases of rating downgrades and defaults.

What now? Get debt funds

The scenario calls for a drastic re-think; the retirement-minded investor needs to identify alternatives that will give them access to superior returns. Naturally, this is the time to tweak asset allocation strategies as well in favour of smarter, market-oriented concepts. Debt funds can be a solution.

However, debt-oriented solutions face certain unique risks. These arise from changes in interest rates and the worsening of credit profiles. Adverse changes in interest rates influence the prices of debt securities, and this has a negative impact on valuations. The creditworthiness of borrowers can also change for the worse.

Despite all this, a portfolio of well-chosen debt funds (if held in a strategic manner) is likely to beat deposits when it comes to tax-efficient returns. Here, I will urge investors to be fully conversant with relevant taxation norms.

So, at the end, allow me to take you through a set of vital points:

-Consider debt funds as an efficient alternative to traditional investment avenues
-You will need to modify your asset allocation in favour of a more contemporary investment mix
-Yes, your portfolio will be exposed to newer risks in the process – but the long term impact may well be benign
-There are practically no guarantees in the realm of investments. Assume some risk in order to optimise returns
-With higher risk comes greater potential return – a motto that you should internalise. Make it your constant mantra

(The writer is director, Wishlist Capital, a Kolkata-based advisory firm. Views expressed are personal.)