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Mutual funds for Retirement Planning – How to Select

  • Akshatha Sajumon
  • 12 Jan
  • 8 minutes

Touted as the ‘golden period of your life’, retirement is something that most working individuals look forward to – it is that time where the fruits of one’s hard work is paid. In order to ensure that one gets to enjoy that period unencumbered it is essential that adequate planning goes into from the minute one starts earning. A significant retirement corpus along with a steady source of income is indispensable to lead a comfortable life post retirement.

How do Mutual Funds fit into the grander scheme of Retirement Planning?

Some experts believe that mutual funds can form the central piece in retirement planning of an individual. This is thought so as mutual funds diversify risks of investment and place your hard-earned funds in professional fund managers who seek to earn maximum returns for the investors that have placed faith in him or her. Additionally, mutual funds are those market instruments that help one beat the vagaries of inflation. 

Some of the benefits that an individual derives out of investing in mutual funds are as follows – 

  • Flexibility of investment as there are no lock-in periods (save a few ELSS funds), restrictions on withdrawals etc. associated with mutual funds.
  • Tax efficient instruments as compared to pension funds in the long term. Long term capital gains are tax free up to a sum of Rs. 1,00,000 for equity mutual funds and 20% with indexation in the case of debt funds.
  • Transparency in investment is guaranteed in case of mutual funds for one can access all the information concerning the NAV, units allotted, the amount paid etc. easily.

What is the Right Age to Start Investing in Mutual Funds as a Part of Retirement Planning?

The answer to this question is unambiguous – one must start now. This is regardless of the current age of the individual. Investing in mutual funds requires one to reverse engineer the plan from the final corpus amount that one seeks to have at the time of retirement. 

Based on the final amount, current age, rate of inflation and the kind of instruments that one wishes to invest into, the monthly investment in mutual funds will be determined. This can be calculated with the help of numerous calculators available online. 

However, it is important to note that with advancing age and lesser time to retirement, the amount of investment that must be done on a monthly basis increases for a predetermined corpus.

A Quick Guide to Start Investing in Mutual Funds!

Kinds of mutual funds that one can opt in for

Before one jumps to this question, it is important to know all the different kinds of mutual funds that are available in the market in the first place. These would include, broadly, equity funds, debt funds, and hybrid funds, if one is to classify based on the underlying asset that the mutual fund invests in. 

  1. Equity mutual funds are those which have equities of companies traded in the stock market as its main asset class. This can be further classified as –
  • Large cap funds (at least 80% investments are in large market capitalisation companies)
  • Mid cap funds (at least 65% investment in mid cap companies)
  • Small cap funds (at least 65% investment in small cap companies)
  • Multi cap funds (which invests a minimum of 65% in equity and equity related instruments)
  • ELSS (at least 80% of the total assets is invested in equity and equity related instruments for a lock-in period of 3 years)
  1. Debt funds are those which have debt instruments as its underlying asset. This would include 16 different categories of funds, few of which are – 
  • Overnight funds (that have a maturity of just one day)
  • Liquid funds (where investments are made in the debt and money market for a period of 91 days)
  • Short duration funds (for 6-12 months)
  • Medium duration funds (for 3-4 years)
  • Long duration funds (for a period of 7 years approximately)
  1. Hybrid funds invest in both debt and equity. Some types are Balanced Hybrid Fund, Aggressive Hybrid Funds, Conservative Hybrid Funds etc.

If the classification were to happen based on investment goals, then mutual funds can be divided into growth funds, aggressive growth funds, income funds, liquid funds, tax-saving funds, capital protection funds, fixed maturity funds and pension funds.

Should one invest in Retirement Funds Only?

Retirement funds are created keeping in mind the general risk appetite and investment goals of a potential investor. However, there is no rule that one has to invest in only these mutual funds to guarantee themselves a good retirement corpus.

Some of the features of this fund are – 

  • They are less risky in nature as the plan involves investment into low-risk securities such as government bonds and the like.
  • Equity exposure is usually reduced to 40-50% of the plan.
  • Withdrawal of investment is discouraged before the retirement age.
  • The liquidity of these said funds are low.
  • They also come in with longer lock-in periods.

But the main advantages that one derives from investing in these are – 

  • Low risk investment
  • Protection against inflation
  • Tax benefits and exemptions
  • Flexibility in the investment mode as one does not have to buy an annuity like a NPS or an insurance cover.

Mode of Investment into Mutual Funds for Retirement Plans

  • One can either invest into the mutual fund as a lump sum or through Systematic Investment Plans (SIPs). Most experts prefer the later mode of investment as it inculcates good financial discipline and it allows for investment over a longer period of time, across different market conditions. Each mutual fund requires a minimum SIP amount to be invested (which can be as low as Rs. 500 in most cases) and there is no specific time period for which this must be locked-in. 
  • One even has the option of transferring/ switching between equity and debt instruments through a systematic transfer plan.

Procedure to Invest in Mutual Funds in India

  • There are two main ways by which one can invest into mutual funds in India i.e. through a direct plan or a regular plan. In case of the former, the investment is done directly with the Asset Management Company, but in case of the latter, it is done via a mutual fund distributor who charges a fee/ commission for his or her services. 
  • In order to proceed in either direction, one has to complete KYC first at a KRA (KYC Registration Agency). This is a simple process that requires a registration form to be filled and submitted online along with self attested identity proof such as PAN Card, address proof and passport size photographs.
  • There is no requirement of a demat account to undertake any mutual fund transaction.
  • If one is undertaking the direct plan route, then he or she must visit the mutual fund house’s website and follow the procedure mentioned. Or the same can be easily done through app based investment platforms like Fisdom .
  • Most websites require details to be filled out in an application form after which the type of mutual fund, its name, one’s bank account details and SIP/ lump sum account that is to be auto-debited to be filled. The first instalment, in case of an SIP, must be paid on the stipulated date and the subsequent instalments can be paid on a monthly or quarterly basis. This payment will go on till the chosen tenure period ends (as in closed ended funds) or till you chose to (as in the case of open ended funds).

Some Considerations to Keep in Mind while Investing for Retirement

  • After considering inflation and given the improvement in the standard of living, the retirement corpus needed will be quite a sum. It is important that this must be factored in while deciding the sum that is to be invested.
  • One need not invest into just a single diversified fund, but can choose from a range of funds to suit their investment horizon and risk.
  • The longer the SIP tenure, the more is the wealth creation due to the power of compounding.
  • SIPs also average out the cost of purchase by taking advantage of the market volatility. 

Some Recommendations While Investing in Mutual Funds for Retirement

  • Retirement is a long term goal and hence, one must diversify their retirement portfolio across different fund houses/ fund categories.
  • Historical data points towards equity as the best performing asset class in the long term as it has the potential to create substantial amounts of wealth for investors over a long investment horizon. Therefore, it is advisable to invest in equity for the long term.
  • The closer one is to their retirement age, it is important to de-risk his or her investment and focus on stability of returns. Therefore, it is better to invest in debt instruments or balanced funds in the latter years of one’s life in order to minimise his or her risk.
  • Use the 4% rule of retirement income – this is the rate at which one can withdraw the income. If this rule is followed then the funds will last for a substantial period of time.

Conclusion

Though you may have great plans to run second innings of your current job/profession in your retirement to supplement your income, it may not be possible at all times. So, make sure you have an adequate retirement kitty built up through your working years so that your retirement years can be spent without worries. 

 

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Akshatha Sajumon