I am scared of the stock market, can I manage with only 20% equity MFs for retirement?

Published: November 26, 2022 at 6:00 am

A reader asks, “Sir, I have read several of your articles and noticed that you always recommend 50-60% equity for long term goals. I am 31 and wish to retire by 60. However,  I am extremely uncomfortable with stock market investing. So can you please let me know if I can manage with not more than 20% equity mutual funds in my retirement portfolio?”

Equity or equity mutual funds are certainly not necessary for retirement planning. See, for example: How I achieved financial independence without mutual funds or stocks or How to invest without using mutual funds.

However, this usually happens when the person’s income is so big that they can compensate for lower portfolio returns with higher investment. Such is not the case with most investors; some risk is necessary to boost the possibility of higher returns.

Many prefer equity or capital market risk due to higher transparency, regulation and liquidity than, say, using chit funds or getting tangled with credit risk or real estate. Of course, the low capital required is also a big plus.

EPFO has to take on 15% equity exposure (which could increase) because they found it difficult to pay high-interest rates using government bonds alone. As PV Subramanyam of subramoney.com says, it is a case of TINA: There is no alternative.


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Let us do a ballpark retirement calculation.

Current age31
Anticipated post-retirement rate of interest (remember this is when you retire. So expect less!)5.00%
Current expenses per month (annual/12)30000
No of years you expect to work (We shall assume retirement is at 55 not 60; Most people cannot work until 60)24
Expected inflation throughout your lifetime (this includes lifestyle creep as well)6.00%
Estimated years in retirement (we should plan until age 90, just in case!)35
The average rate of interest expected from all asset classes (see explanation below)8.50%
The annual increase in the monthly investment you can manage5.00%
Amount invested so far. We assume this to be zero for simplicity). For a more elaborate calculation using the future value of current investments and multiple post-retirement income sources, use the freefincal robo advisory tool.
Monthly investment needed as % of current expenses123.89%

Before we look at the final result, how did we arrive at this 8.5% expected return?

Suppose we expect 10% from equity (post-tax). This is likely to be an overestimate at the time of retirement, but there are only so many shocks we can handle simultaneously!

Suppose we expect 7% post-tax from fixed income. Again possibly an overestimate by the time the reader turns 55.

The expected return for an asset allocation 50% equity and 50% fixed income is:

(10% x 50%) + (7% x 50%) = 8.5%

So even with as much as 50% equity in the portfolio, the investment amount required is 124% of the current monthly expenses! And this should increase by 5% a year. How many can pull this off?

Guess what happens when the equity allocation is reduced to 20%!

(10% x 20%) + (7% x 80%) = 7.6%

Monthly investment needed as % of current expenses = 166%.

You can now appreciate why PV Subramanyam says “TINA”!

So no, I don’t think you can manage with 20% equity, not when you have so much time left for retirement. However, that is good enough for a start, provided you are willing to get used to the volatility and gradually increase it.

So what should those afraid of equity investing do?

The risks a person is willing to take and the risks a person should take are often different. With small steps, we can find common ground between the two.

  • Focus on the bigger risk: The daily risk to your capital while investing in equity is significant. Although there are no guarantees, this risk is not only reasonable it is also manageable. See: Why should I invest in equity mutual funds when there is no guarantee of returns? The bigger risk is not able to handle your expenses and inflation in those expenses after retirement. This is not a manageable risk. If you do not have enough money, you must duck for cover and “adjust”! See: Why have we not seen a retirement crisis in India?
  • Be emotional about the bigger, unmanageable risk: This is how I could withstand five years of zero returns from equity mutual funds from 2008 to 2013. See Fourteen Years of Mutual Fund Investing: My Journey and lessons learned.
  • Start small and slow: Start investing a small amount in equity. Aim for an allocation of 5% in six months and 10% in a year. Keep increasing it and aim for 40-50% equity over the next 5-6 years. There is nothing that human beings can’t get used to. Slowly the volatility will become second nature to you. Thankfully you have time to do this.
  • Review your portfolio each year: No, I am not talking about gains and returns. Focus on your goals. Find out your target amounts. Check where you are on this journey. Find out your current asset allocation. Find out what is your target allocation and plan for necessary action.

It is okay to be afraid and wary of equity if you are not frozen into inaction. Take baby steps, and soon you will dash to your goals briskly!

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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