Make sure to transfer your equity investments to a safer avenue like bank deposits and debt mutual funds at least a few years before the goal. This will ensure that a sudden volatility in the stock market does not hit your plans.
You might have come across this standard advice in many financial planning articles, especially those dealing with long-term goals like retirement, children’s education, etc. However, many investors (and some advisors) have a vague idea about the `couple of years.’ They like to keep the money in equity schemes as long as they see good returns from them.
However, 2020 Covid-19 crisis (and 2008 financial crisis earlier) would help us understand the consequences of not taking this advice seriously.
As you know, the market started losing value quickly in a few days in mid March. Since then it has recovered marginally, but most of our mutual fund investments have lost value in the process. What does it mean to a person on the verge of retirement? Of course, the corpus would lose value sharply on the eve of the retirement. If he has liquid investments to take care of his needs for the next few years, he can continue to hold on the investments. Otherwise, he will be forced to sell at least a part of his investments at a loss.
That is why investors should put a number to “a few years earlier.” Most financial planners ask investors to follow the same rule – do not invest in equity schemes unless you have five to seven years – even while investing for retirement. That means you will automatically start investing at least the last five years of earning life in debt mutual funds and bank deposits. This money, along with your other liquid assets and retirement benefits, should be able to see you through the next five years.
Or you can sell some of your old investments and park the corpus in a safe place to take care of your expenses in the next five years.
It will also ensure that a sudden change in the market mood would not upset your retirement plans. Financial planners ask investors to make more provisions for the first five years of retired life as this is the phase when retirees actually spend more on travelling and pursuing their life long interests.
Mutual fund advisors say investors should reign in the adventurous streak in them and keep on transferring the money from their retirement corpus regularly to safer avenues, based on their short-term requirement, throughout their retired life. They say that a retired person should not have any investments in equity mutual funds at any point unless he or she doesn’t need the money for the next 10 years.