How decreasing Interest Rates on Investments impacts a well-planned retirement portfolio?

In the current market scenario where the economy is volatile and unpredictable, the add-on misery is the decisions being taken by the banking industry and the government. The current inflation rate is at 7.83% which is way higher than the rates being offered by the Banks and the NBFCs on the traditional products like saving bank accounts and the FDs. GDP figures quoted by the government are also not trust-worthy. The trending rate in Saving bank account category is averaging to 3.5%. Only few players are the ones which are offering 6-7% to increase the acquisition of the clients. FD rates offered by bank is maximum up to 6.5% and by NBFCs is 8.5%.

The question here is considering the current inflation rate movements, GDP figures being in controversy and the decisions taken related to Rate cuts during bi-monthly MPC meetings, are the conventional products which have always been preferred by our parents and the generation with the old school thoughts really leaving some amount which can be considered retirement corpus? The NPV and the FPV of the investments are in no position to serve as the corpus during their either retirement days or rainy days.

Having a quick glance on the equity-oriented investments pushed by the banks and prevailing in the financial fraternity, the capital protection is also at stake forget about the incremental growth on the investments being done.

In addition to this, post budget announcement has infused Dividend Distribution Tax problem also where the firms have been taken away from this pain area. However, the individual investors are now levied with the burden of managing their Dividend income which has to be declared and filed as tax as well. Considering the average of 40% Dividend Distribution tax deducted from the earned income of an individual of approximate Rs. 1 Crore, the left amount will not be sufficient for him to even satisfy and justify his investments. It will be like a drop in the ocean.

Assessing the above-mentioned current situation where post budget announcements are yet to get the clarity, it reflects that an individual in late 30s will drain out even before he completes his average life span of 80 Years.

Case Study:

1. Employed Individual
2. Age - 42 Years
3. Dependents – 2 Kids with 7 and 10 Years of age and a spouse. So, total 3 dependents.
4. Current obligations - Around Rs.1.50 Lacs per month including the EMIs being paid towards 2 properties and kids’ fees.
5. Planned Retirement age - 55 Years.
6. Life span considered - 85 Years.
7. Goals setting –

• Purchase of 3rd property in next 5 Years.
• Corpus creation for his 1st kid for his higher education in next 7 Years.
• Corpus creation for his 2nd kid for his higher education in next 10 Years.

Considering the above case study, basis the traditional financial planning, he will be exhausting his all investments including the properties dilution by the age of 67 Years if he continues to invest in the same traditional products of Saving Bank Accounts and FDs with a slight pinch of MF investments in Equity market.

Our suggestion in this situation would be: to invest in the products which are assuring capital protection, higher and guaranteed returns. These products will not be available in the banking industry. But the products will be available in the space of early stage companies in form of Venture Debts, Private Equities, Compulsorily Convertible Debentures, Project Financing, Non-Convertible Debentures and many more. These companies cannot afford to have even a single delay payment or single default as their credibility is at stake. Therefore, investments in the portfolios offered by this arena turns out to be more financially beneficial.

Considering the same case study, if this investor invests currently only in two products out of the whole plethora of products to the tune of Rs.30 Lacs – Rs.5 Lacs in PE and Rs. 25 Lacs VD, he will easily be meeting his goals and will not be exhausting his finances till he leaves this universe.

The bottom line is to start thinking of the investment boutique which is out of the box and out of the traditional boundaries. These are the products which give capital protection with high returns, monthly pay-outs and come with the set tenure which cannot be compromised. So, commitment on delivery on all parameters is also guaranteed.