Safety First Investing, and Sustainable Withdrawal Rates – I am not sure how many of us have heard of these two words.
Safety First Investing – means you have to have created such a size of the corpus that there is no need to take equity market risk. How does this work?
Well, let us say the expenses of Mr. Raju is Rs. 10,00,000 per annum at the age of 60. Mathematically speaking he needs about Rs. 3 crores (30x his annual expenses) for his retirement. However, on an assumption that inflation is 6%, the TOTAL amount that he needs (by just adding up all his expenses over 30 years) that amount is Rs 4 crores. So if he just put Rs. 4 crores in an ultra-short bond fund portfolio – say 4 funds -in 2 names. Mr. Raju and Mrs. Raju. As a couple, they can withdraw Rs. 5L each (tax-free) and not worry AT ALL about market fluctuation.
What if they have Rs. 10 crores to invest? Well put Rs. 4 cr in Ultra-short bond fund and the remaining in Equities, Debt, and say Gold. Honestly, that money is going to be inherited by your children. Let them have a say, but there is no need to give it away when you are 60. However, when you are 80, your Liquid fund will be booming – you may have drawn less, or it would have earned a good rate of interest. At this stage you can look at the second bucket and decide to distribute a little. Remember the first bucket may be more than enough even if you live to 100 years of life!
THIS IS what is called “safety first investing”. I have another version of “Safety First Investing” – by creating a direct equity portfolio where Mr R’s dividend is Rs 10L at the age of 60 years. On an assumption that the portfolio is well managed, dividends will take care of inflation, and excess if any, will be invested in a Liquid fund.
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