Guaranteed 8.5% or volatility of Emerging market stocks

[DesiGirl]

Currently we are contributing INR 30,000 to Provident Fund (Current rate 8.5% guaranteed by Indian Govt , it has continued for last 6 years, always stays higher than market interset rates) and INR 25,000 into diversified Stocks (through 3 Mutual Funds) for our retirement folio. We have another INR 30,000 freeing up in 1 month, I'm not sure how should distribute this among 2 categories. Indian stock market return could be very high but volatility is extreme, here is some historical data (quarter wise for last 12 years) :

Q1Q2Q3Q4

20100.18 -- -- --

20090.18 48.99 18.34 1.90

2008-23.35 -13.63 -3.85 -25.89

2007-5.15 12.25 17.85 16.87

200620.15 -5.62 17.55 10.51

2005-1.52 11.46 20.16 8.50

2004-4.68 -13.62 17.08 17.64

2003-9.85 18.95 24.43 30.90

20026.01 -6.66 -6.82 13.27

2001-9.88 -3.35 -17.98 16.30

2000-0.07 -6.32 -14.59 -2.85

199922.03 11.72 16.78 2.26

1998-- -- -- --

If I put 30K in guaranteed returns would I be a chicken loosing on high returns (specially since I'll be cost averaging the money in) or if I tilt towards market would it be taking unnecessary risk ?

Our personal inflation rate is controlled at 5-6% and tentative retirement year is 2014-15.

I know it depends on personal risk tolerance but please do share ur thoughts.

Thanks a bunch,
DesiGirl

 

[MasterBlaster]

I haven't researched your holdings but have the following general comments.

I suspect that the Indian government guarantees the payout in the local currency. They may have significantly higher inflation. So if that's the case then when you convert back to dollars some years later the realized gain can potentially be significantly less than the 8.5% you quote. Unspoken here is the risk of a devaluation.

As a fun assignment, perhaps you should read (for free on Amazon - search inside option) the opening pages of Andrew Tobias Book " The only investment Guide You will Ever need". http://www.amazon.com/Only-Investment-Guide-Youll-Ever/dp/0156029634#reader_0156029634. He starts off the book explaining how he lost big in Mexican peso's and how he got burned big time in the devaluation. The book is a bit dated having been originally published in 1978. Yet the advice is timeless and really applicable to you here. The question shouldn't be "Are Indian Interest rate contracts any good ?" You should ask yourself... "Should I even be in that game at all ?"

Per the risk thing... Are you betting the farm on this one security or are you holding a diverse portfolio ? My advice is to get rich slowly by investing in a boring portfolio. Perhaps you could have a few wild holdings, but limit it to maybe 5 or 10 percent of the portfolio.

 

[DesiGirl]

Sorry for posting garbled up table guys.

Thanks for your response MasterBlaster.

Talk to me about the roller-coaster journey of $-INR rate, it has swinged > 20% in last 3-4 years. But we are based in India , INR is our local currency (Even though we do have an option of investing in $s). So we'll be consuming in Indian Rupees only and not in $s.

Unfortunately we do not even have good data for last 30-40 years for India's main stock index (forget about mid caps or small stocks). No real bond market, No COLA annuity, no TIPS. If you search for "Early Retirement in India" my profile thread in this forum is first one to come so Early Retirement and depending on Portfolio for living is such an alien concept here. So I have been heavily depending on this forum for both knowledge and motivation. I try to take the concepts from here (and other sites) and try to fit into Indian environment. I'm not even very sure that 3-4% SWR is suitable for Indian conditions (8-9% cash/bond returns , average Equity returns 20% in last 20-30 years but extreemely volatile, double digit inflation in many years).

So based on this information do share ur thoughts. This 8.5% rate is also tax-free while stock market returns will be taxed 20% (Indexed to inflation, which is officially running 15+% BTW :-( )

Thanks,
DesiGirl

 

[walkinwood]

If I remember correctly, you live in India & plan to retire there.

I have no way of knowing what the right asset allocation for your situation is, but you should figure that out first. Most books I've read have used the US markets as the testing ground for their asset allocations. Once you get your asset allocation, then it is easy to determine where new money goes.

Do you have access to investment vehicles (index ETFs & Mutual Funds) like we do in the US? Can you invest in global equities (developed markets & emerging markets) or are you limited to the Indian stock market? Is there a corporate bond market in India or are you limited to government backed accounts like you mention?

You may get better investment advice on a forum dedicated to investing for Indian residents, but I don't know if one exists.

 

[Spanky]

My initial thought was that 8.5% tax-free rate sounds great. However, if inflation is 15% (India Inflation Rate), the 8.5% rate is not attractive at all.

 

[DesiGirl]

Thanks for responses.

Walkinwood , in India we do have ETFs , Mutual Funds etc., Bond Market does not have much depth though. Indian Investment forums also exist bu they are very focussed on short term trading and not Long term or Retirement centric portfolio creation. Asset Allocation is not really a popular idea.

Spanky yes 8.5% (even though tax exempt - No tax during growth or withdrawl, even contributions are tax-free upto certain limit which we have crossed) is not great with 15% inflation but that is mainly food inflation (which is 10% or less of our budget), inflation index is more geared towards lower consumption people and its also very old so things have changed. Its not really fun but it is possible to keep personal inflation at 6-7% (with a little of life-style slide down and replacement etc. ).

I'll try agin to show the data about Indian Market (top 30 index Sensex) and the volatility involved :

So should I be trying to go after returns or stick to safety when difference in retirement date would be 2-3 years atmost.

Here are main categories of our retirement folio :

* Rental house which will roughly generate 1/3 of REtirement income and will be 1/3 of the total retirement asset base. (Already funded)
* 10% will be in cash for Emergency and remaining split evenly between 8% govt backed bonds and stocks.

* Currently we have 25% of retirement folio funded (apart from the rental house) which is evenly split in stocks and PF (guranteed 8.5%).

* Currently we are contributing 360K annual to 8.5% returns , 300K annual to Mutual funds, 600K coming in as Megacorp stock (which we are diversifying as and when we can) 360K is freeing up (30-35K per month) for which we are trying to decide.

Thanks Everybody,
DesiGirl

 

[kcowan]

If 2015 remains your retirement date, I would go with the 8% return. With the volatility in the markets, 5 years is not long enough to recover from a drop. Take the sure thing and froget about it.