There is one question that generates heaps of investment sales literature. It is – How to invest for early retirement in India?
Some answer this question by producing a list of best investment options for early retirement in India.
Some others point towards a super-star fund manager who can foretell the future and pick the best individual stocks to guarantee you an early retirement.
And finally, some wily salesperson is happy to sell you a horrible financial product just because it has retirement in its name.
The question you are faced with remains unresolved:
How should I invest to retire early in India and is there a one size fits all solution?
How to Invest for Retiring Early in India at 45 or 50
Investing for early retirement requires you to follow the expedited life cycle investing approach.
Early retirement investing means that your retirement investing goals and timelines will be compressed.
Your investing time horizon will be much shorter than someone aiming for a regular retirement.
You aim to achieve an investment outcome by age 45 or 50 what someone else may only reach at age 60.
The main impact in investing for early retirement comes from how much and how frequently you invest your savings.
You need to invest at least 2X to 3X times compared to a person with a similar profile who is saving for a regular retirement.
You need to aim for a savings rate of more than 50%.
The earning pillar and spending pillar of financial independence will help you boost your savings rate.
It will require some astute planning, some short-term sacrifices and deferring some gratification to your future self.
A high savings rate will let you invest a larger part of your take home salary every month.
The returns generated by the broad financial markets will be the same irrespective of whether you are saving for early retirement or a regular retirement.
The difference in the investment outcomes will come from the higher contribution you will be making each month to your early retirement corpus.
The more you can invest each month, the faster you can reach your early retirement date.
Best Investment for Retiring Early in India
The best investment for retiring early in India is a low cost, broad market equity index fund.
You can do this as a direct investment via equity ETFs or through mutual fund equity index schemes.
You can combine this index fund with the safety ballast of fixed income options.
This includes options such as employee provident fund, liquid funds and government backed small savings schemes like PPF.
The fixed income portion of your portfolio is also referred to as debt investments.
The equity portion of your early retirement investment portfolio should be geared for growth and risk taking.
The debt portion of your portfolio is to give you the cushion to handle equity market volatility.
Never use the debt portion of your investment portfolio for risk taking or enhancing your overall investment returns.
Stick to liquid funds and government backed schemes for the debt part of your portfolio.
Investing for early retirement assumes you have already addressed other aspects of your personal financial plan adequately.
Real Estate as an Early Retirement Investment Option
A big section of the early retirement community in the west favour real estate as an alternative investment to reach your early retirement goals.
In the Indian context though, real estate has some inherent challenges. This makes it an inferior alternative to financial investments.
These include lack of transparency, inadequate liquidity, and potential litigation risk.
Real estate by its very nature requires large lumpsum upfront investment. This makes it incompatible with the monthly cash flow of a salaried professional.
You cannot make a SIP or dollar cost average into a real estate investment.
Similarly real estate investment into a sole property causes extreme concentration risk. Unlike an equity index fund, you cannot spread your risk across multiple properties.
You will be on the hook if something goes wrong with your specific property, area, or city.
Moreover, real estate requires a lot of monitoring and maintenance which can become a hassle for someone working in a full-time career.
In addition, due to significant differences between government rates and market rates for property, it can lend itself to some shady practices.
For the reasons outlined above, investment for early retirement in India is better accomplished by investing in financial assets.
Features of Investing for Early Retirement in India
There are 3 key features when investing for early retirement. These are simplicity, flexibility, and low costs.
Let us look at each of these features in more detail and why they are important.
It is said that investing is simple but not easy. Following the basic principles of investing does not require you to be a math genius.
You get the maximum benefit of investing by keeping things simple.
Simplicity in your early retirement investing style will make it easier to monitor the progress of your investments.
It will also allow you to focus more on your corporate job, upskill yourself and grow your income.
Simplicity will let you continue your investing journey without any complicated products or schemes bogging you down.
Automate your investing process so that the money directly goes out of your bank account without any manual intervention.
The lesser the manual intervention, the lower the chances of your investment compounding being disrupted.
Simple is good. Simple is powerful.
A key requirement on the path of early retirement is flexibility. This applies to investing as well as other aspects of planning an early retirement.
Being flexible will let you capture opportunities as and when they come along.
Whether it is moving cities or organisations you should be laser focused on your goal of early retirement.
Similarly, the investment landscape keeps shifting as the years go by. There will be better and lower cost financial products that will be on offer.
If you are not locked into any long-term financial products, you can benefit from these new investment choices.
Flexibility allows you to tap into investment opportunities when they show up along the way.
Investing for early retirement is a personal finance project that lasts for a decade or two.
The costs you incur when making any investment act as an invisible drag on your long-term investment returns.
These costs are the commissions and sales charges associated with the investments you are making.
These commissions are baked into the investments themselves making it difficult to understand.
Over a 10–20-year period these costs can become a sizable portion of your total investment returns.
Choose low-cost products like broad market passive funds as the core of your early retirement investment portfolio.
This will ensure that the maximum portion of the money you are investing each month goes towards securing your early retirement dreams.
Mistakes to Avoid When Investing for Early Retirement
There are some common investment mistakes you need to be wary of when investing for early retirement.
Do Not Overcompensate
The sooner you start investing in life the more powerful the results will be due to the power of compounding.
It is easier said than done though.
In your teens and twenties, you are more likely to spend your time thinking about your looks, hair style and your overall coolness quotient.
Normal folks do not spend their teenage years thinking about index funds and investing.
Most of us start our investing journey in our late 20s or 30s.
That is fine.
It is ok to use your 20s to figure out what you want out of life. There is more to life than just investing for early retirement.
Of course, this also means that you will not benefit from the compounding that would happen had you started investing on your 21st birthday.
Do not try to overcompensate for this delay.
Do not get more aggressive in your asset allocation or take undue risk to compensate for this lost time.
The market does not know if you started late in investing for early retirement or you are now trying to make up time.
The market will do what it does best. It will always humble anyone who forgets the basic tenets of investing.
Getting to early retirement is not a race. Everyone has their own unique journey.
Some things just take time.
Trying to over-compensate your delayed investing start is a recipe for financial disaster. Be wary of that.
Respect the markets and give them the time they need to deliver the returns you desire.
If you started your investing journey 10 years late, it is ok to reach the destination 10 years late too.
Do not risk everything by trying to rush the timeline and taking undue risks.
Know Your Risk Tolerance
When was the first time you came across the term risk tolerance?
It was likely during a visit to your bank branch.
There was soothing music in the air, the airconditioned air was perfect and there was whiff of a freshly brewed cappuccino.
You were feeling great.
An attractive bank salesperson was taking you through a questionnaire about your investing style and risk tolerance.
“How would you describe your investing style sir?”
“I am an aggressive investor” you smirked. The equivalent of the guy atop a bike on a long desert highway with air blowing back your hair.
“And sir, what would you do if the markets went down by 25%?”
“I will not panic. I will invest even more.” There was no way in hell you were going to come across as a sissy.
And this is how your risk tolerance was decided.
The magical bank software advised you that you should be investing your money in small cap stocks for maximum returns.
Well for most of us that is our first exposure to the concept of “risk tolerance.”
The time when you find out about your real risk tolerance will come some years later.
Your Real Risk Tolerance
The broad markets are down by 30%. Your portfolio of small cap stocks is down more than 50%.
Your spouse is yelling at you for your investment choices.
A close friend just lost this job. Your boss just informed you of a companywide hiring freeze and spending cuts.
The media is filled with news of people losing their homes and cars because they cannot pay their monthly installments.
It feels like the world is crashing around you.
That is when you will find out what your real risk tolerance is. You find out about your risk tolerance when the going gets tough.
Make sure when you invest for early retirement, your portfolio reflects your actual risk tolerance.
Investing for early retirement requires you to play the long game.
The only way to succeed at this long game is to ensure your investment portfolio is aligned with your risk tolerance.
Focus on Yourself. Not the Markets.
No investment can match the return that you can generate by investing in your human capital.
Instead of trying to find the best stock, currency, or ETF you should focus on investing in yourself.
The returns you can generate by investing in your skills, knowledge and network will easily bypass the best financial investment that you can find.
Once you have identified your asset allocation, all you need is some low-cost broad market index fund for your early retirement journey.
There is nothing more that needs to be done. There is no need to keep analysing the markets for days on end.
The markets will deliver what they will deliver.
The broad market returns that you can expect over the next 10-20 years will not change just because you spent hours looking at some technical charts.
Spend this time instead on boosting your human capital.
The more you can earn from your salary & bonuses, the more you can invest in the markets.
You can only control how much you invest in the markets. Focus on that.
You can do nothing about what returns the markets will eventually deliver. Do not waste your time trying to predict market returns.
Following the points outlined above will help you to successfully invest for early retirement in India.
Dushyant Choudhary is the founder of dushyantnomics, an early retirement blog for professionals. Dushyant retired early from his 9-5 corporate life after a successful international career. He brings his knowledge and experience to his current role where he’s dedicated to helping professionals achieve a fulfilling retirement.