It takes quite an effort to save for retirement, especially if you are between 25 and 30. And even if you do save, the question arises as to how to invest for your retirement.

Here’s how you can create a stock-bond retirement portfolio. Consider hiring an investment adviser as a coach to prevent you from taking hasty decisions during the investment horizon.

Core portfolio Your core portfolio should carry more stocks when you are 25-30 years old and more bonds when you are within five years of retirement.

Suppose you start your retirement savings at 30 with 75 per cent stock allocation and 25 per cent bond, you should reduce your stock allocation to 25 per cent when you turn 55, assuming you retire at 60. You can do so by reducing stock allocation at an increasing rate every five years between 40 and 55.

Where should you invest your core? Take bonds. You should buy tax-efficient bonds; otherwise, your interest income will suffer taxes at your marginal tax rate.

Therefore, invest in employee provident fund and public provident fund. After exhausting your investment limit, buy tax-free bonds issued by Government companies. Your last choice should be taxable bank fixed deposits. Apply the break-even rule for choosing bond maturity .

Your core equity should preferably be in index funds. Pick three-five funds of your choice and analyse their tracking error over three, five and 10 years — this metric will tell you by how much a fund’s return deviates from its benchmark return.

Pick the fund with the lowest tracking error, preferably with at least ₹100 crore as assets under management.

Satellite portfolio The satellite portfolio generates returns in the short term. This portfolio should not be more than 45 per cent of the total retirement portfolio and should typically contain equity and commodities.

For your satellite equity, you should buy mid-cap funds, small-cap funds and sector funds. And if you prefer direct investing, consider futures and shares. Whether you invest directly or through mutual funds, you should take out your profits periodically. Every year, you should create a satellite reserve from the excess returns.

Suppose you invested ₹10 lakh in satellite equity and realise ₹1.25 lakh gains. If your required return is 10 per cent, the excess returns of ₹ 25,000 should be set aside in bank fixed deposits.

You can use this reserve to increase your core equity holdings if your core equity returns are lower than the required return in any year.

You can actively trade in gold ETFs and commodity futures. Trading in commodities helps you profit from the underlying assets that cause inflation in the country.

You can generate profits in the satellite portfolio through market timing.

Book profits Another way is to set up montly SIPs with profit-loss rule. Suppose your profit rule is 10 per cent and your loss rule is 5 per cent. This means you should sell shares in your satellite equity whenever you achieve 10 per cent gains or 5 per cent loss.

Set up a core-satellite portfolio through systematic plans on core equity, satellite equity and core bonds, especially fixed deposits and provident funds.

You can and, if possible, you should transfer excess returns from satellite equity to core equity. But you should not transfer funds from core portfolio to satellite portfolio, as satellite investments are more risky.

The writer is the founder of Navera Consulting. Send your queries to >portfolio@thehindu.co.in

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