What is the best equity-debt mix in a high-inflation for Retirement planning?

Since retirement planning is a protracted process, the earlier you begin planning and saving for retirement, the better chance you have to maximise your money and achieve your retirement goals. When determining the amount of money you will need to save in order to live your senior years, you need carefully evaluate your own financial goals, risk tolerance, investment horizon, and the usage of instruments that can create returns that can surpass inflation.

On February 8, the RBI released its most current monetary policy, which saw a 25 basis point increase in the repo rate to 6.5%. India's CPI remains above the 6% threshold despite core inflation, which the RBI continues to have difficulty managing.

India's annual consumer price inflation rate remained above the Reserve Bank of India's target range of 2-6% for a second consecutive month in February 2023, albeit it slightly decreased from 6.52% in January to 6.44% in February. Therefore, most analysts anticipated a 25 bps increase in the benchmark repo rate, which represents the rate at which the RBI loans to banks.

In today's high-inflation world, people planning for retirement should prudently arrange their funds. Individuals may make contributions to mutual funds, Unit Linked Insurance Plans (ULIP), and the National Pension System (NPS) when considering an equity-debt mix portfolio for retirement. These investments typically produce long-term returns that are higher than inflation. The normal inflation rate is 6%, thus these tools

NPS and ULIPs are the most widely used equity-debt mix instruments because NPS has provided returns of over 10% in 10 years and over 13% in 5 years, while ULIPs has provided returns of up to 18% in 10 years. These 2 instruments not only consistently surpass inflation in terms of returns but are also qualified for tax breaks under Section 80C of the Income Tax Act of 1961. Taxes could be saved by taxpayers who invest in these programmes by up to Rs 46,800 each year.

Investors with conservative risk profiles can choose from small savings plans like SCSS and PPF, as well as other fixed income securities including VPF, RBI Savings Bonds, Sovereign Gold Schemes, and fixed deposits.

The majority of bank fixed deposit interest rates are currently between 7 and 8.5% due to the repo rate's continuing increase. On the other hand, for the quarter running from April to June 2023, the government has increased interest rates on small savings plans by as much as 70 basis points. Therefore, by employing the above-recommended strategy, one is able to generate long-term returns that surpass inflation while simultaneously enjoying favourable tax treatment.

When it comes to having a mix of debt and equity in your portfolio, retirement planning can be based on your age. The phrase "asset allocation by age" therefore implies that your debt allocation could be based on your current age. Your portfolio should consist of 70% equity-oriented assets if you are 30 years old, and the remaining 30% should be split between debt funds and fixed-income instruments. To comply with this advice, start a systematic transfer plan (STP) to reduce your exposure to stocks proportionate to your advancing age and offer a suitable risk-reward ratio throughout retirement. You can also use a systematic withdrawal plan (SWP) to take out units from your debt securities to cover your expenses or satisfy any immediate needs.

Investors using an equity-debt portfolio should be aware that while debt securities provide security, carry fewer risks but lower returns than equity, and help to stabilise the portfolio in a volatile market, equity investments have higher risk and higher reward. The main distinction between equity and debt funds is risk; for instance, the risk profile of equities is higher than that of debt, which is lower to moderate. Equity exposure serves as a hedge against inflation while debt exposure provides liquidity to your portfolio and serves as capital protection. Equity funds invest primarily in shares of companies and related securities that trade on the stock market, while debt funds invest primarily in debt and money market instruments.