Mutual Funds for Retirement Needs
Written on Monday, December 7, 2015
By Sanjeev Puri
The veracity of using equity mutual funds to meet long term goals have been proven time and again and therefore are best suited when it comes to saving for retirement needs. For beginners and even for a late starter, equity mutual fund is a smart solution to save for retirement as they have the potential to deliver high returns that can offset the impact of inflation in the long run. Once begun, stay invested to reap the long term benefits.
Use the Systematic Investment Plan (SIP) approach to create wealth. SIP’s involve investing a fixed amount of money at regular intervals. In doing so, the race to capture the highs and lows of the market is avoided. In effect, the cost of your investment is averaged over a period of time. The essence of SIP is that when the markets fall, you acquire more units and vice versa. Importantly, choose MF schemes that are 100 percent in equities especially during accumulation phase and give you option to move into debt fund over time. Nearing retirement, shift equity accumulations towards debt fund to preserve capital. Once retired, start withdrawing required amount from the fund and let the balance continue to participate in market growth.
If you are starting out young, your fund portfolio could be 80 per cent in equity funds. Aggressive investors can also look to invest 30 per cent of their equity funds portfolio in mid-cap and small-cap funds. For a salaried employee, EPF representing the debt asset should be enough and no further debt product be used for retirement needs. Debt funds should only be used during re-risking prices when one is nearing retirement and shifting funds from equity to debt.
With time on your side, your retirement portfolio can be little more dynamic. Build the base with 2-3 well-performing diversified equity mutual funds schemes. Needless to say, SIP’s should be the approach. Add large-cap focused funds as income and savings increases further. With few years down the road, add mid-caps funds to portfolio. This brings a tad more kickers to overall returns. For those nearing retirement or not having a longer tenure to save, being a little less aggressive on equities could be better. Remember, periodic reviews would be necessary to take corrective action.
In addition to diversified equity mutual funds, one may make use of equity linked savings scheme (ELSS) for retirement needs. ELSS is a mutual fund variant, which similar to any diversified equity mutual fund routes investments into the equity market but in addition provides tax benefit. The amount invested in ELSS qualifies for deduction under section 80C up to a maximum of Rs 1.5 lakh a year with a lock-in of three years. Instead of a single ELSS scheme, diversify across different ELSS funds as you end up giving money to different fund managers to manage. Consider investing in consistently performing ELSS schemes and diversify across schemes that have small-mid and large cap exposure are some of the factors that can be considered. Considering the returns and factoring in the tax advantage, ELSS is a double-edged weaponry in your armoury for the creation of wealth in the long term. After the lock-in period ends, roll over the proceeds to another ELSS schemes else keep the funds in the existing ELSS. Earmark such funds for retirement.
An early beginning in investing in equity MF also inculcates a disciplined habit of investing. Markets remain volatile on the short to-medium term but average-out over the longer horizon. An investor having seen the ups and down of such market remains poised for the long haul and is largely undisturbed with such frequent fluctuations. And most importantly, mistakes made during the initial days of investing helps one learn the basics of investments that come to rescue in the later stages of life.
After retirement you would need a regular source of income to sustain all through the non-earning period which may extend anywhere above 20-25 years. Life expectancy is increasing and for women it’s even higher than men. And to achieve that comfortably, you need enough money. If you are one of those who haven’t started saving towards retirement, it might not be too late to start planning for it.
#Mutual Fund investments are subject to market risk. Read scheme related documents carefully before investing.