INVESTMENT: Use MFs to build your retirement corpus

Everyone who is planning for their future aims for a secure future and relaxed life after retirement. For this one needs a well-saved corpus. Government employees have a pension to depend on, after retirement. However, for those working in the private sector, or self-employed or business owners, it is essential to invest time in retirement planning. While there are many ways to accumulate a corpus towards retirement, one needs to evaluate if those are the right choices.

Some of the options like Public Provident Fund, bank fixed deposits, bonds, pension plans, etc, are popular as they are safe investments and offer fixed income. However, over the long run, tax and inflation matter a lot. All these options have the potential to deliver a pre-tax return of around 7-8% per annum and post tax it comes down to 4-5% (depending on the tax slab applicable).

Further, after considering the long-term inflation rate of the country, it will be negative. Investors often fail to consider the biggest risk factors like tax and inflation which have a significant impact on their retirement corpus. Often realising that their corpus is too small to generate an adequate income during retirement.

Diversified mutual fund seems to be a good solution to these problems. The way MFs are structured, they give tax arbitrage and simplicity over other investment options. MFs combine money from different investors and further invest in various fixed income, stocks and money market instruments. They give you equity exposure and help in reducing the inflation risk.

Professional management and expertise ensure that risk is reduced by diversifying your portfolio. This implies that in the long term they offer exceptional returns and help to build the corpus you need post-retirement. With a 20 to 30 year investment window, if you decide to make MFs the initial point of your retirement plan, then the Systematic Investment Plan (SIP) will help to compound wealth affordably.

While pension plans and PPF are great investment ideas here are a few more things you need to know before making that choice:

Transparency: All the information regarding MFs is easily accessible and thus is more transparent compared to other plans. The portfolio, that is, where the MFs are invested, is declared every month.

Flexibility: MFs are flexible in their investing; no restriction on partial or full withdrawal, easy to hold. You can also discontinue the investment or switch to other plans if you need it.

Convenient and simple: Buying one equity fund is equivalent to buying a bunch of 35-50 stocks. Similarly, buying one debt MF is equivalent to buying many debt securities (bonds, non-convertible debentures, commercial papers, etc). You can eliminate complexities by holding MFs rather than these options for a better return.

Tax efficient: MF is not an investment instrument in itself. It is an investment vehicle that holds other instruments such as stocks, bonds, NCDs, etc. It has a capital gain, rather than interest. Hence, it is charged a lower tax. The long-term capital gains tax in equity MFs is 10% of the gain and debt funds is 20% with indexation benefits which is substantially lower as compared to other options.

All those who have not yet thought about their need to consider questions, such as, when do I want to retire, how much do I need, how much do I need to save, where do I need to invest so that it grows meaningfully.

The writer is is founder, Happyness Factory