Route to the Golden Years- Equities remain the best bet to create a sizeable corpus for your retirement needs
Written on Saturday, February 14, 2015
By Mr. Sunil Dhawan
If you feel your employee provident fund (EPF) is sufficient enough to take you through retied years,think again. It's true yet scary that one could heavily fall short if he is solely depending on provident fund. EPF (and even public provident fund) being debt assets fails to negate the impact of inflation. The real return i.e. inflation-adjusted return is low and therefore merely helps to preserve your savings. While inflation hovers around 8-9 percent, the returns from fixed income investments too are around 9 percent. Debt assets are preservers of your capital and at best help in meeting short to medium term goals.
The better alternative
It is therefore imminent that one chooses equities to reach long term goals. The idea should be to generate returns which are at least 3-4 percent or higher than inflation. Even a small difference in returns impacts the maturity corpus. See 'Strive for more' to know how important it is to choose the right asset-class. For creating wealth over longer term,real returns and not nominal returns matters. Studies in the past have shown that equities have delivered high real return than any other asset class including gold, debt or real estate over long term.Consider this - Sensex's compounded annualized returns over past10-15-20 years has been 17 percent, 12 percent, 11.23 percent respectively. Therefore, retirement goal which is typically this long makes equities its safe bet.
The MF way
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. Importantly, choose MF schemes that are 100 percent in equities especially during accumulation phase and give you option to move into debt fund overtime. Such inbuilt-feature in schemes to shift between equity and debt assets helps.
Use the SIP way 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. 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.
Earmark funds towards retirement
Choose 2-3 equity MF- Preferably,retirement focused funds which are 100 percent in equities
Keep it running- Put bonus, wind falls into same SIP (same folio)
Increase SIP amount nearing retirement
De-risk your investments with about three years away from retirement
On retirement, start SWP option to start getting pension
Remember, returns from equities are volatile as it depends on market movements which in turn are greatly influenced by several economic and non-economic factors. Volatility is more pronounced in short term but reduces and becomes largely predictable over long term. Hence, it's better to ignore day-to-day and non-incidental events and stay invested.
Starting to save for retirement brings in discipline to your investing. What you need to save for retirement is much less than what is required to save for children needs. Start early, benefit from the power of equity and move in your golden year's comfortably.