When it is about longevity, the factors leading to success are different and unintuitive. Pioneering world political reformers for decades together are not the ones who had the best ideas of reform. Rather they are those few world leaders who continued to remain strong-willed and carried out reform without losing energy beyond two decades. Those leaders worked towards private earnestness and were not complacent with just public charisma. This is what helped in a journey that long. South Korea, Singapore, Taiwan are examples of few ‘miracle’ economies.
The people who run the farthest are the ones who love running, more than the goal or the / destination. Additionally, the key to long distance running is pacing. Successful marathoners don’t run their fastest, they run just below the critical threshold that their body can sustain to run for hours.
Path to wealth creation for retirement - Build-ups and breakthroughs
In most pursuits success is a mixture of build-ups and breakthroughs. Build-up is something which steadily accumulates and is easy to see quarter on quarter, month on month. Breakthrough is something like puzzle solving. There’s a lot of effort, which does nothing for sometime, but every once in a while there is an insight that results in a discontinuous spurt
- Scott H Young
Very long period wealth creation mindset is assisted by two things
- Conviction that the investors are having a long horizon with high discipline and are not sensitive to 6 months and 1 year returns. Thus, apart from holding stocks having predictability of earnings, stocks going through cycles also can continue to be held through their thick and thin. This is as long as the larger conviction of the FM is in place in the company as well as larger trends.
- Breakthrough stocks are the ones where you show a lot of patience while small improvements and changes in the company keep happening but the stock does nothing for sometime. While the portfolio manager is patient with his breakthrough holdings, equally important is to totally avoid ruin and start forming exposures only once there is reasonable surety.
‘Businesses remaining relevant for longer’ is critical for stocks from where stability of returns is expected. ‘Avoiding ruin, survival and being in the game for longer’ is critical for stocks from where breakthroughs or Alpha creation is expected. This is the thought process for Tata Retirement Savings Fund
Solution oriented mutual funds - an option
The path to creating a corpus for retirement has an equity route and / or debt route. The risk return profile of options like PPF / EPF / VPF are debt oriented with very high lock-in periods, though some conditional withdrawal window is available. Uptill Rs 2.5 lakh contribution by employee, interest payouts of EPF / VPF are tax-free. In case of PPF, maximum contribution can be Rs 1.5 lakh to avail tax benefits under Sec 80 C. PPF offers attractive interest rate, is a great debt instrument for the long term, can help save tax, and assures protection of savings.
Tata Retirement Savings Fund – Progressive Plan is one equity-oriented avenue for the purpose of creating retirement corpus having 100% equity allocation. Mandatory lock-in of 5 years offers the benefit of some longevity to the fund manager, while it is not too long a lock-in period to act as a deterrent for commitment towards large amounts of investment. Tax impact comes in only on redemption in the form of capital gains.
Pre-stitched glide path – With 3 plans available under Tata Retirement Savings fund – Progressive, Moderate and Conservative, the investor can opt for an auto switch facility to glide to options with lower equity allocations as he ages. This glide path is pre-stitched for him to take care of the asset allocation over a very long period. A systematic withdrawal facility can be attached to the fund for a fixed amount or a set percentage of the Corpus
Final word
The bent of mind in Tata Retirement Savings Fund- Progressive plan is to manage money from a very long period perspective. This fund would capture larger and long-term trends like increase in per capita income, inherent long runway of businesses, changing consumer preferences, consumers becoming more aspirational, macro-economic shifts etc. The key is to look at 10 year rolling returns and volatility numbers. Probability of better risk adjusted returns seems higher with holding both sets of companies- ones with stability of returns and the other set creating alpha but very well within the realm of longer term sustainability.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The views expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the schemes of Tata mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.