When you are employed, and salary credits land regularly in your bank account, you can afford to make quite a few investing blunders. You can punt on options or buy micro-cap stocks and if you lose capital, brush it off as tuition fees to the market. But if this happens after retirement, the capital loss can be tough to recoup. This is why you need a different approach to equities after you retire.
But first, why do retirees need equity investments at all? Can’t they just make do with safe post office schemes, fixed deposits and RBI bonds? No, most Indians will need an equity allocation in their portfolio even after retirement, for the following reasons.
Tough targets
Most Indian employees outside the government sector are likely to be under-funded for retirement because of a late start. To meet their living expenses, their investments at retirement must deliver a post-tax return that is higher than inflation. In India, unlike in the developed economies, long-term inflation rates average 6 per cent and debt returns struggle to match this on a post-tax basis. An allocation to equities thus becomes essential to boost your corpus during your non-working years.
To illustrate, the NISM retirement calculator (https://www.nism.ac.in/NISM%20Financial%20Calculators/Retirement%20Calc/index.html) tells us that if you are retiring at 60 today with annual expenses of ₹12 lakh, and earn a 6 per cent post-tax return that just matches inflation, then you will need a sum of ₹3.6 crore to fund your lifestyle until age 90. If that post-tax return can be bumped up to 10 per cent, then the sum you need to fund your retired years falls to ₹2.15 crore. Only an equity allocation can help you bump up your returns to levels well above inflation.
Sufficient horizon
Retirement farewell parties lull you into believing that at 60, you are at the fag end of your life. Terms like “sunset years” reinforce the impression. But in reality, retirement may just be the start of a glorious new chapter in your life that lasts another 25-30 years.
World Bank data tells us that an average person who reaches 60 in India can expect to live for another 18 years. Higher income folk need to budget for higher life expectancy than this average.
This means that retirees at 60, have another 25 or 30 years to invest and grow their wealth. Rolling return analysis shows that, in India, Nifty50 investors almost never made a loss if they held their portfolio for 10 plus years. Those retiring at 60 can therefore very well afford to make equity investments with a 10-year plus horizon in mind.
Wealth creation
Investments in fixed deposits or post office schemes may be good at protecting your capital and generating income. But if you dream of building real wealth in your lifetime and leaving behind a legacy, you cannot do it without an equity allocation.
Of the wealth-creating assets, real estate can deliver bumper gains, but returns are dependent on luck and location. Gold almost matches equity in returns, but is a volatile asset that performs in fits and starts. The decline in interest rates in India over the last two decades suggests that debt instruments will struggle to keep up with inflation. This underlines equities as the main asset you can rely on for wealth creation.
How to approach it
Having said this, the way you manage your equity portfolio after retirement and the instruments you choose to do this, may need to change quite a bit from your working years. Here are four things to keep in mind.
Conservative asset allocation: In equity investing, there are no guarantees. A spell of spectacular returns can be followed by a market crash that wipes out 30-40 per cent of capital. Or you can have a 10-year period, where your equity portfolio gives savings bank returns. The one way to ensure that the ups and downs in equity returns don’t hurt you too much, is to set your asset allocation conservatively.
Rolling return analyses are useful to gauge the losses you can experience in worst-case scenarios in stock markets. For instance, a rolling return analysis spanning the last two decades shows that the Nifty 100 lost 57 per cent of its value in the worst year for stock markets in this period. The Nifty Midcap 150 lost 67 per cent and the Nifty Smallcap250 tanked 70 per cent in that year.
Simple arithmetic tells us that a portfolio with a 50-50 allocation between large-cap equity and debt (assuming debt returns of 7 per cent) would have suffered a 25 per cent capital loss in the worst bear year. With mid-caps or small-caps making up the equity portion, the losses would have been 30-31 per cent. But if you had a portfolio with only 30 per cent in equity and 70 per cent in debt, you could have contained portfolio losses to just 12-15 per cent even in the worst bear year.
Funds or stocks: Many retirees take the view that as they will have time on their hands post-retirement, they should try their hand at trading or DIY investing in stocks. Unless you were already a seasoned stock-picker before you retired, the mutual fund route may serve you better. The main objective of your post-retirement equity exposure is to fetch you a good return, not to pass time or double up as a hobby. Getting a few stock picks right is a very different proposition from managing a full portfolio, which delivers market-beating returns. All this suggests that it would better to use vehicles like mutual funds for the bulk of your equity portfolio, while managing a smaller portion yourself.
Hybrid mutual funds, in fact, solve not just your stock and bond selection problem, but also help you manage asset allocation. They automatically track and rebalance your portfolio at appropriate times. This saves you a packet on the capital gains tax as well, that you would incur every time you rebalance your portfolio.
Passive funds versus active: If you find fund selection as troublesome as stock selection, there’s a large menu of passive equity funds to construct a sound long-term portfolio. A simple combination of index funds tracking the Nifty100, Nifty Midcap 150 and Nifty Smallcap250 can serve you very well for your equity exposure after retirement. Apart from low costs, the advantage of taking the passive route is that you need not frequently juggle your funds based on performance and shell out capital gains tax each time.
Risk over returns: The most important mindset change you will need post-retirement is to focus on downside protection over return maximisation. If you chose stocks or funds for their high returns during your working life, it is important that you pay more attention to risk metrics when constructing your portfolio after retirement.
There are three distinct ways to reduce the risks in your mutual fund or stock portfolio. One, you may like to take higher allocation to large-cap and mid-cap stocks over micro-caps and small-caps — as the latter come with higher earnings and stock price volatility. Two, fund strategies such as momentum and alpha which chase outperforming stocks, can deliver stellar returns in trending bull markets but suffer large losses when the tide turns. Avoiding such funds in favour of strategies such as value, dividend yield or low volatility can offer you more predictable returns with lower risk.
Three, stocks or fund portfolios with steep valuations can be more susceptible to valuation de-rating on earnings disappointments. Using valuation or dividend yield filters while selecting stocks or funds can help your portfolio deliver returns with lower downside. While filtering funds, you can use online resources such as valueresearchonline or advisorkhoj to compare each fund’s standard deviation and downside capture with the category or benchmark to filter out the riskier candidates.
Published on July 12, 2025