It's all about the game called 'Personal financial Planning' !
There used to be two bank General Managers. Lot of VRS were been given in banks then. So, both of these people took VRS and moved out. Let’s define them as Mr. Deshpande and Mr. Patel. Mr. Patel invested all his retirement money of Rs 30-40 lakh into 16% bonds and in those days debentures were giving 16% return, far more than today's 9.5%. On a Rs 30 lakh kitty 16% will turnout to about Rs 5 lakh and that was good enough in 1997. Mr. Deshpande actually invested in asset allocation principal - so something he put in equity mutual fund, something he put in fixed income and something he put in real estate in Pune.
By 2000 the equity mutual funds have delivered pretty good return courtesy the technology boom and the fixed income mutual funds also delivered good return because interest rate were dropping. Mr. Deshpande kept on moving from equity into fixed income through asset allocation principal. In 2001, markets crashed, obviously Mr. Deshpande lost lot of money but because he was shifting from equity into debt he didn’t lose money on the principal side, he lost money only on the gain said.
Come 2004 when the bonds came from maturity Mr. Patel 16% became 7%, by then inflation had moved up and on Rs 30 lakh instead of earning Rs 5 lakh he was earnings Rs 210,000 whereas Mr. Deshpande who was invested in equity mutual funds could still afford to earn more money as equity market started moving on.
Today Mr. Patel is actually looking for a job. I mean he is doing a part time job in order to supplement his income. His standard of living has come down dramatically whereas Mr. Deshpande because of real estate and equity mutual funds delivered good returns is still able to enjoy retirement life. So when you want to have the safety of fixed income, do remember that it will have a impact if it doesn’t keep pace with your inflation. It’s really tough after retiring as General Manager of a bank you want to do a part time job late in your life !
It's all about the game called 'Personal financial Planning' !!
