Give your retirement kitty the equity boost

Using equities for retirement planning may come as a shocking proposition to many of us, given the volatility associated with them, but the asset class has its merits and is pretty popular in the developed world.

Over a long term, equities have consistently generated better returns than the asset classes traditionally associated with retirement planning – be it physical (mainly real estate and gold) or financial (mainly fixed deposits and small savings).

As such, less than half of incremental household savings in India get into financial instruments. Even the provident and pension funds in India have been debt-focused, resulting in sub-optimal payouts at maturity.

Does equity pay?

Equity investments yield the best returns in the long term (considering the current median age of Indians, which is below 30, the investment horizon would be around 30 years). The asset class, as represented by the S&P BSE Sensex, has given on average 16.4% and a minimum of 14.5% 30-year rolling period returns since 1979. Compare this with 9.74% average returns on fixed deposits in that period.

Let us take a hypothetical case for ease of understanding. We have restricted exposure to equity at 30% to maintain minority share.

The case for equities is therefore a strong one. Long-term, even volatility isn't such as scare.

Leave your worries to professionals

The merits notwithstanding, a direct engagement in equities can be beyond the common investor, both in terms of risk and wherewithal. Here professional fund managers such as mutual funds, NPS, insurance help, obviating the need to track individual stocks and associated factors, and act accordingly.

To analyse the importance of fund management and fund manager, we evaluated the domestic mutual fund industry and compared its performance against the benchmarks. We used the Crisil-Amfi Equity Fund index as it represents the performance of professionally-managed equity mutual funds in the country and enables their comparison with appropriate benchmarks across time frames and market cycles.

The writer is director - funds and fixed income research, Crisil Ltd