Use mutual fund to plan your retirement in the smartest way possible

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In the young days, people generally remain care free and spend a lot without having any sound financial plan in place to deal with the rising expenses after the retirement. During the post-retirement period, you may not be having funds in proportion to the spiralling inflation and thus your life can become extremely miserable. Plus, there is no guarantee that your kids will take care of you after your retirement. Also when you talk about the retirement planning, you must know that it should start at a very young age. The reason being less liabilities and the ability to take more risk during this period compared to when you get older. Talking about the saving instrument post retirement, most of us would only be aware of the Employees Provident Fund (EPF) or Public Provident Fund (PPF). These saving tools have become increasingly outdated with time and are insufficient to take care of your expenses after the retirement. So, there is a need to generate sufficient wealth to meet the expenses that will come post retirement. And this can be done via mutual funds, which have been used by over 75% of the households in developed nations, such as the US, to generate income after retirement. The same is not seen in India, but should pick up given the advantages mutual fund has for the retired people. But first check out the types of mutual funds that can be beneficial for a sound retirement plan.

Diversified Equity Funds

Diversified equity funds offer high returns but at the same time can be quite risky. But since equities perform well in the long-term, it’s worth getting started with such funds at the young age.

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Thematic/Sector Funds

Like equity funds, these funds are also quite risky, and are ideally suited for aggressive investors. Influenced by economic parameters, thematic/ sector funds always have a new player emerging as a top performer each year.

Asset Allocation Funds

Asset Allocation funds mean the investment portfolio is spread across a wide range of investments such as stocks and bonds of domestic and international markets, realty stocks, gold bullion and government securities. While some of these funds keep a constant distribution among varied sectors, others change the investment mix as per market conditions.

Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP) is a mechanism by which you can invest in mutual fund schemes. As per the SIP, an individual is required to pay a fixed amount monthly, quarterly or annually for a certain time period. But make sure you invest on a monthly or quarterly basis as paying the lump sum yearly can pinch your pocket  dearly. Suppose if you have taken an SIP of Rs 6,000 for 1 year, you can easily pay Rs 6,000 per month rather than paying Rs 72,000 at one go annually.

SIP is aimed to convert small investment into a big one over a period of time. As the amount is constant and invested regularly, you get extra units in the declining market and lesser units when the value remains high. SIP helps you deal with the market uncertainties and thus proves to be an affordable option for the investors.

ELSS Funds

Equity Linked Saving Scheme (ELSS) Funds are specially designed for tax savings and long-term investments. These equity funds, which have a lock-in period of only three years, gain tax exemption. Dividends and capital gain are tax-free under section 80C of the Income Tax Act. Being equity linked, these funds offer enhanced returns along with tax saving benefits to the investors. Advantages of mutual fund with respect to retirement planning are illustrated below.

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Benefits

  • While making investments for retirement, ensure you keep a significant amount in equities during the initial years, and then move towards debt funds or other traditional saving tools. You can shift the investment from equity to debt five years before the retirement if the investment period is about 15-20 years. Also, the chance of negative returns from the stock market is minimum on such long-term investment.
  • Make sure you rebalance your fund portfolio every year by regularly moving around the proportion of equity, debt and gold in your investment mix. A diverse portfolio eliminates risks such as interest rate fluctuation, sudden fall in the market, etc.
  • The mutual fund for retirement plan can exist even without a popular sector or a specific theme. But if you want to get exposed to such theme, then limit the same to 10% and make an exit from the theme few years prior to your retirement.
  • Don’t rely solely on mutual funds for dividends for monthly income post retirement. Use the Systematic Withdrawal Plan (SWP) to make your own annuity plan.