I’m in my early 50s and have about Rs. 1, 40,00,000 in savings. I tend to stick to bank FD, and PPF accounts, as I was scammed in the past. What’s the safest way for me to invest this money? I will be retiring in 2020, is this amount sufficient? My wife is a housewife, and I have a daughter (for whose marriage I have some other FD not included in the above). Needless to say I do not have any pension and I have medical insurance.

Answer: I keep getting such questions on email, or on phone, so let me answer it once for all.

Your urge to play it safe is perfectly understandable. You already know from bitter experience that there are people out there who prey on investors by conning them outright or putting them into investments that is not suitable for their situation, and expensive to boot. Having said that, You must also learn about the risk of inflation. At age 58 when you retire, you are looking at a possibility of living till 100 – which means upwards of 40 years of potential living years.

The financial markets can be scary, even when you’re limiting yourself to perfectly legitimate investments. For example you can invest in a GILT fund (which invests only in govt securities!) and lose money when interest rate changes. ULIP plans for endowment or pension are very restrictive and the risk comes from non portability of the product. Even though the share market’s been going smooth since rebounding from the financial crisis some eight and a half years ago and has been hitting new records of late, at some point share prices will tumble big time. Why? because that is the nature of the markets.  Bonds aren’t as volatile as shares, but they too are somewhat risky in that  when interest rates go up.

But the problem is that while your approach may be safe for now in that it protects you from bad agents, expensive products, and market downturns, it can actually be somewhat risky in the long term.

The reason is that bank Fixed deposits alone might not provide the returns you’ll need in REAL TERMS i.e. after inflation and taxes to maintain your purchasing power throughout a post-career life that could last 40 years! This means that to avoid having your standard of living slip over a long retirement, you need to invest some of your savings in a diversified portfolio of equity and debt funds.

The returns on such a portfolio may not be as good as they have been in the past. Indeed, most of us are predicting that over the next decade or so, equity and fixed income returns could come in much lower than it has in the past decade. Still, investing in a portfolio of mutual funds—ideally, a low fee index fund, will improve your chances of earning returns that can stand up to inflation and taxes over the long term. You should be taking a 10 year view on the equity investments and a 5 year view on Income funds. For requirements less than that there are the short term bond funds and the ultra short term bond funds.

Let me be very clear. I am not suggesting that you abandon your bank fixed deposits totally. I would think your 29 lakhs in PPF should remain there till you are past 60 for sure, and maybe past 80 too!  You’ll still want to invest enough in such secure products to handle any outlays for emergencies and to cover, say, 5-6 years worth of living expenses.

And assuming you do decide to invest in a portfolio of equity and debt funds, you want to be sure you do so in a way that balances risk and return in a way YOU are comfortable with. You want enough equity in your portfolio to generate returns that can help you maintain the current life style, and increase the chances that your savings will last as long as you do. But you should not want to put so much of your money in shares that you spend sleepless nights about North Korea or Narendra Modi! A big equity portfolio might also scare you into bailing out of shares when it falls say 8% in one month! It can be frustrating for a beginner, and scary of course. Your portfolio should be able to eat well and sleep well too!

Most new comers who come into equity at a late age in life restrict their equity holdings to somewhere between 30% and 60% of their overall portfolio. There are others who will go for a higher or a lower percentage. Get an Adviser and decide on YOUR portfolio mix. See what works. Are you able to sleep well?