What is the best way to beat inflation without churning?

POSTED BY bv ON February 23, 2011 2:18 pm COMMENTS (3)

What would be your advice to an early retiree who is looking to invest his life-time savings in a way that does not require a) much monitoring b) consultation with experts c) to invest/divest too many times in a year? Assuming he wants to beat inflation & participate in the market upside too, if possible in safe ways, what are the options? The answer could be a combination of financial devices, real-estate, etc. Also, are there dependable money managers who could do this for a reasonable charge?

3 replies on this article “What is the best way to beat inflation without churning?”

  1. Ankur Lakhia says:

    I think a lot depends on your understanding of equities. You have not provided much details. However, I guess you can work on following thumb rules:

    1. Your annual expenses should be limited to about 3% of your networth, excluding self occupied house.

    2. You need to have some money parked in 2-in-1 accounts of bank for covering any emergency.

    3. Of your expenses, you need to identify your essential, must provide for, expenses first. This includes monthly grocery cost, monthly utilities bill, housing society maintenance charges and any other charges that you must pay. You need to put money in bank FD such that interest amount covers such expenses. For example, if you need Rs. 15,000/- per month for essentials then you need to put 18 lacs in bank FD to earn this interest assuming 10% per annum interest rate.

    3. After securing your essentials, you can invest in equities or rental property for purpose of beating inflation. This can be achieved in two ways. One, buy shares of companies in stable sectors like FMCG / pharma which steadily increases their dividend and rate of increase in dividend is more than inflation. Glaxo pharma, Nestle & Castrol are good example of such companies. You can get about 3% dividend yield from such portfolio. Two, you can have property investment which provides you monthly rental income. This income received either from dividends or rent should go to bank FDs mentioned in point 2 above to cover essential expenses. This way you can assure that returns from your FD keeps increasing with inflation to ensure that you secure your essential expenses.

    4. After having done above, balance money should be invested in growth options of mutual fund schemes in various proportion between MIP, balance funds and diversified equity funds. You can decide once in year withdrawl from such schemes depending on their appreciation. Also, you need to take decision on rebalancing the portfolio once in year atleast. You can do this by deciding suitable asset allocation for you and sticking to the same. Any appreciation beyond a cut-off rate of say 12% can be taken off from such portfolio and spent for your non-essential wants / luxuries.

    Above is just an example which can be fine tuned based on personal situation. Hope this helps.

  2. Ramesh says:

    My opinion about what you want!!-
    1. beat inflation and participate in market upside. = largely in equity markets is a requisite. i would not reco real estate, because it requires much more information and expertise.
    2. there is no safety in equity markets. if you want to reap the benefits of market upside, you cannot escape market downturns. but this is true for short and maybe medium term (2-3 years also). but over long term, you can presume with more than 95%, that you would not be losing money.
    3. Not much monitoring = you can keep it as simple as you want, and as less churning as you want.
    4. i would not recommend you a complicated combination. why? because complication is not good in the long term.

    My suggestions:

    1. Define you aims and write them down. (most of them you have already done, which is a good thing). In brief, you want to have a combination of Income and Growth of your corpus.

    For Income-
    2. You should aim to use a maximum of 4-5% of your corpus on an annual basis. So withdraw that money and keep it in a debt fund (liquid or short term). Withdraw from it monthly or as required. You can also withdraw, say 2-3 years of money and keep it in the debt fund. Replenish as and when required – quarterly or half-yearly or whatever.
    Reco funds- Templeton short Term income retail / HDFC HI short term.

    For Growth-
    3. Keep your corpus in a predominantly equity-oriented portfolio. I would say keep it in 2 funds. Reco funds- HDFC Prudence (equity hybrid fund) and Templeton india equity income (equity fund).

    Some simple things which you can do?
    1. In case of severe market downturn – you see a lot of erosion or acute downturn in the value of your corpus. And you feel you should remove money from the “underperforming” equity funds. THEN DO the OPPOSITE or do not do anything.
    Sit tight. Since you have enough cushion for 2-3 years of income in the debt funds. do not worry.

    2. In case of great market upside, and if you feel you should PUT more money into the “greatly performing” funds, AGAIN, do the opposite. Withdraw some money to bump up your cushion of 2-3 years of Income money.

    3. You feel because of advertisements, or because of “constantly changing” ratings of individual funds on various sites (moneycontrol, valueresearchonline, morningstar, to name a few) that the funds you have are not the greatest of performers. Again, dont worry.

    Remember, you cannot get the “best” future funds, and if you have they would not remain the best performing for long.
    why i have recommended these funds only-
    – Templeton ST income and HDFC HI Short term – big corpus funds with very reasonable returns and fund management teams.
    – HDFC Prudence – a good equity hybrid fund. and since you have another HDFC fund. it will be easier to manage funds.
    – Templeton India Equity Income fund. a very good large-cap oriented multicap fund which invests internationally also. a very good management team. and again, since you have another templeton fund, easier to manage.

    Whatif, you have more money to invest? You can either use it to bump up your 2-3 year income money, or you can put money in the growth money.

    Hope this helps you.

    1. bv says:

      Thanks for your quick response Ramesh. How would you rate the Nifty BeES fund? Pl. see the rationale in http://www.shyamscolumn.com/2008/12/safe-way-to-invest-in-stock-market.html.

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