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Smart Retirement Planning with Mutual Funds

Monday, December 03, 2018

Abhinav Angirish, Founder,

When your bones are weary with age, you deserve a comfortable and happy life. Hence, it is important that you start planning for your retirement at an early age.

Retirement planning is essential because if you don’t save enough, you would be left with little or no money at all to enjoy your old aged days. For many working individuals, the plan of action involves holding an EFP or PPF account, however, these investment tools don’t really offer you more returns in comparison to mutual funds.

Investing in mutual funds helps you diversify your investment portfolio by giving you an option to invest in funds that are best suited for your financial goals. You can enjoy the long-term investment benefits by investing in mutual funds at an early age. The best thing about investing in mutual funds is that it caters to investment need of every kind. From investing in low-risk funds to mid-cap equity funds, an investor can choose everything in between the two.

What are the best mutual funds for retirement?
For each individual, retirement looks different due to several factors such as age, income, lifestyle, a life expectancy that play a huge role in determining the money that one would require to continue living as per the current lifestyle. Therefore, the best mutual funds for retirement are those that can help an investor strike a fine balance between risk as well as returns.

Mutual Funds are flexible investment products

Unlike pension plans, mutual funds do not require you to make regular premium payments. You can discontinue or make partial withdrawals with no penalties or any restrictions at all.

Mutual Funds give you tax benefits
Investing in ELSS mutual funds give an investor a tax benefit of up to Rs. 1.5 lakhs. Investment in ELSS mutual funds can be made through SIPS as well as lump sum payment options. These types of funds have a lock-in period of 3 years and are considered one of the best tax saving tools in India. Also, withdrawals in mutual funds through SWPs are eligible for redemptions and are taxed as per the applicable slab rates for the first three years. For long-term capital gains, the funds are taxed at 10% without indexation and at 20% with indexation. This makes mutual fund investment better than pension plans as the pension is treated as income and taxed at the applicable slab rate. The effective tax payable on capital gains (short and long-term) tends to be lower than the tax payable on pension plans.

Mutual Funds are transparent and investor-friendly
You can invest in different types of mutual funds depending on your financial goals. Also, mutual funds have a variety of schemes catering to all types of investors. There are different online mutual fund investment websites that provide you complete details about fund manager, investment objective, strategies, past returns, risks associated etc. which help you plan your mutual fund investment in a better way.

Gives regular income
Investment made in mutual funds allows you to enjoy the returns by allowing you to automatically withdraw a specific amount of money or units on a monthly, quarterly, half yearly or a yearly basis. Thus, mutual funds provide you with a regular source of income even after retirement.

Start with investing early in equities and then shift the focus on debt funds:

While starting to invest for retirement, ensure that you have a reasonable exposure to equities and slowly move to debt funds. This is because volatility and risk are comparatively higher in equity markets in comparison to debt funds. Generally, young people should invest in equities as they offer high returns, however for the elderly debt funds are the most suitable as the risk of losing the principal amount is relatively lesser than equities. If you have been investing in equity for over 15-20 years, then you can switch to debt funds, 5 years before you retire. Investing in equity mutual funds for the longtime negates the possibility of you receiving negative returns, while the debt funds ensure that you do not lose out on the principal amount.

Rebalance your fund portfolio each year
This simply means that you should move around the proportion of investments in debt, equity and gold portfolio regularly. This helps you build a diversified portfolio with different asset categories such as EPF, PPF and others.

Start with SIP
Investing money through SIP could well turn out to the key for enjoying a happy retirement life. Today, one of the preferred ways of investing in mutual funds is to opt for SIP. Through SIP, an individual invests an amount as low as Rs. 500. In a failing market, SIP allows an investor to buy funds at lower cost, while in a rising market, it provides the investor with increased returns. SIP also helps an investor achieve financial discipline and invest regularly without getting influenced by the market conditions.

Few things to keep in mind while planning for retirement
Make an estimate of the healthcare cost because as the person ages, health problems increase.

  • To ensure that you are no longer bound by loans or other financial liabilities, pay off all your debts before retirement. With a limited source of income in hand, you would not be able to pay debts easily.
  • Keep a track on your savings
  • Without ignoring the impact of inflation on your retirement budget, make an estimate of it including all your big and small expenses.
  • Keep aside at least 10% of your salary every month because starting to save early is the key.
  • Do not consume all your savings recklessly.

A key difference between life before and after retirement is that you won't have a regular source of income when you retire. Hence, it is important for you to build a good retirement portfolio with mutual funds as they give you a regular source of income as well as diversify the risk factor.

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