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Mutual Funds – How to Plan your Retirement with Mutual Funds

Planning Retirement with Mutual Funds

A famous motivational writer had once said, “Like all successful ventures, the foundation of a good and comfortable retirement is planning”. In fact, planning for your golden days should ideally start during the prime itself. Retirement planning is a crucial financial goal. There are multiple products available such as Pension plans, Provident Fund, POMIS (Post Office Monthly Income Scheme), Tax Free Bonds, etc. However, one product that stands out from the crowd is Mutual Funds.

What makes Mutual Funds so special?

• Flexibility
Mutual Funds offer great degree of flexibility to the investors. You can start with a contribution as low as just Rs. 500. There is no upper limit on the amount that can be invested in these schemes.

• Potential for higher returns
Mutual Funds have the potential of generating higher returns as compared to the traditional instruments such as FDs, PPF, etc.

• Diversification
With Mutual Funds, investors get access to multiple asset categories. You can choose a scheme which is in sync with one’s risk appetite, financial goals, investment horizon. Diversification enables investors to strike the perfect balance between the 2Rs – Risk and Return. In short, there is something for everyone.

• Tax efficiencies
Mutual Funds are relatively more tax-efficient. For instance, ELSS Funds qualify for deduction under Section 80C. Long-term capital gains on equity funds are exempt from tax till Rs. 1 Lakh.

• Ease and transparency
They are extremely investor friendly. The application and transaction process are simple and hassle-free. Moreover, they are transparent as all the required information (past performance, investment details, etc.) are easily available.

So, which all Mutual Funds can you invest for your retirement planning?

Before forming a Mutual Fund Retirement Plan, you should assess these factors –

• How much risk you are comfortable with?
• How long will you continue to work? Or How far away are you from retirement?
• Retirement corpus that you want to have?

Basis these, you can choose from any of these options-

1. Equity Funds
These Mutual Funds invest a significant part of the corpus in the stock markets. They have the potential to generate higher returns as compared to other investment avenues such as FDs, debt funds, etc.). Equity funds invest across different market cap stocks basis the scheme’s objective.

When should you go for these?
Equity Funds by nature are aggressive. They come with a high-risk factor. So, if you are someone who has a good risk appetite you can go for these. Also, equity funds are more suitable for investors who start planning early. So, if you are in 30s, are going to be earning for a long time or basically far away from retirement, equity funds can be a good retirement planning option.

2. ELSS Funds
ELSS Funds serve a dual purpose. In addition to being a good long-term investment option they also provide tax savings. As per Sec 80C, investments in ELSS (till 1.5 Lakhs) is eligible for tax deductions. Also, the capital gains (long-term) on these funds are exempt from tax till Rs. 1 Lakh. The dividend paid is also tax-free in the investor’s hands. Additionally, compared to other tax saving scheme, they have a shorter lock-in period (3 years).

When should you go for these?
If you do not want to invest in two different set of products – one for retirement planning and the other for tax planning, ELSS Funds can be a good choice. But remember, that these funds also invest in equity market, so you need to have a decent risk appetite. Also, though they have a short lock-in period of three years. So, you should try to remain invested for at least five to seven years. That will help you to maximise the return potential.

3. Pension Funds
Mutual Fund Pension plans are debt-oriented hybrid funds. They invest a big chunk of the corpus in government securities, low-risk bonds and other such money market products. The balance is invested in stocks, equities and their derivatives.

As they are hybrid funds, they offer best of both the worlds (i.e. equity and debt). The equity portion helps the Mutual Fund Pension plans grow and earn higher returns when the markets are strong or in an upswing. The debt portion helps to bring down the risk quotient of the investments. Mutual Fund Pension plans are taxed as per the rules applicable for non-equity investments.

When should you go for these?
If you have a low-risk appetite but still want some equity exposure, then you can try out the mutual fund pension funds.

4. Sector Funds
Sector or Thematic Funds invest in stocks from a specific sector such as banking, utilities, energy, etc. As the market exposure is restricted to only some select sectors, their risk quotient is higher when compared to traditional MFs.

When should you go for these?
If you have in-depth knowledge about a certain sector/ industry or can constantly monitor policy changes, market fluctuations, economic conditions, then you can go for these. Many sector investors start when the sector funds are beaten down and sell when they recover and grow.

5. Asset Allocation Funds

Asset Allocation Funds invest across a wide range of instruments. This includes equity, debt, bonds, government securities, real estate stocks, etc. Some AMCs offer a scope to alter the portfolio composition. This option can be helpful for retirement planning. For instance, you can opt to reduce the equity percentage with age so as to reduce the risk.

When should you go for these?
You should opt for Asset Allocation Funds when you would like the fund to rebalance your portfolio based on a pre-set asset allocation option without regular intervention. It is actually a hassle-free retirement planning option.

Ways to invest in Mutual Fund:

There are multiple ways to invest in a Mutual Fund.

1. Lump Sum: Most option people invest in a lump sum by putting in one go. 

However, there are systematic options of investing in mutual funds as well. They are:

2. SIP: Systematic Investment Plans are a boon for investors who want to start small. It offers flexibility and also creates a disciplined attitude to savings. SIPs are also a great way to spread risk across market cycles. 

Some of the key benefits of SIPs are:

• You can start with amount as low as Rs. 500
• Investment through SIPs ensures regularity. It removes worries such as timing your investment, looking at market trends, etc.
• SIPs have the advantage of compounding. They help to average out the cost and optimise earnings in the long-run.
• There are multiple kinds of SIP Plans available. For instance,
• Top–Up SIPs which allow investors to increase their contribution amount over time.
• Flexible SIPs offer the flexibility to increase or decrease the SIP amount. This ensures that in times of cash crunch or an unexpected windfall, the investor is able to put the money to the best use.

3. STP:

Systematic Transfer Plans are like Systematic investment plan but it is a transfer from one fund to another in a systematic manner, instead of investing the entire amount in the target fund in a lump sum. This is a very easy investment option for the retired people where you have a large corpus for investment but do not wish to enter the target fund in one go. Hence you can park your funds in another fund and then systematically transfer the same over time.

You can also withdraw your investment systematically and create your own pension fund by using:

Systematic Withdrawal Plans are like quasi pension schemes. They allow individuals to draw a fixed income from their mutual funds in the future/ post retirement. The frequency of withdrawal can be monthly, quarterly, bi-annually or annually basis the individual’s requirement.

It is never too early to start planning for your retirement. All you need to choose a scheme or fund that suits your requirement. And if you feel confused about which is the best mutual fund for retirement planning, you can always reach out to market experts such as IndiaNivesh. They offer a wide range of services in areas such as equities, mutual funds, derivatives, IPO, insurance and corporate advisory. Their in-depth market knowledge, experience and technological expertise will ensure that you can have a robust Mutual Fund Retirement Plan in place.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing