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Invest a part of retirement funds in MF schemes

Apart from regular retirement financial instruments like NPS, PPF, bank FDs, among others, one can also look at investing a part of the life-savings in equity and debt schemes for better returns

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Most of us plan for our retirement; the day that we no longer have to report to work. However, financial freedom for that part of our lives where we will no longer be drawing a regular income from our organisations is something that we have to carefully consider.

Within this constraint, one can look at the option of investing in mutual funds (MFs) for a steady source of income.

"Mutual funds are a beneficial tool (for retirement planning) as it gives you the professional management along with a good combination of risk management and relatively superior returns," says Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management. Do remember that MFs invest across several asset classes including equity, debt and gold.

MUTUAL ROUTE

  • Mutual funds are more flexible than pension plans. There are no restrictions on making any partial or entire withdrawal at any given point of time
     
  • Underlying idea is that relying on just one product is not the right approach but rather a combination of such products should be used

"Mutual funds in India are well regulated and score high on transparency," said a spokesperson from Paytm Money. Also, MFs are easy to transact (buy/sell) with the advent of digital platforms.

Most mutual funds also offer special facilities like SIP (Systematic investment plan), STP (systematic transfer plan) and SWP (systematic withdrawal plan) which help investors in cost-averaging and managing cash flows. Mutual funds are thus one of the efficient investment products available to help plan your retirement, said the Paytm spokesperson.

"Usually, most investors opt for a pension plan for the retirement which is also a good option but is a distant second to mutual funds," says Archit Gupta, founder & CEO, ClearTax. This is because MFs enable you to have equity exposure and help reduce the risk through diversification of the portfolio.

The pension plans which are available in the market offer returns of around 6% post-tax, post-expense vis-à-vis mutual funds which have the potential to generate a return of around 14% post-tax, post-expense over a 25-30 years horizon, according to data compiled by Anand Rathi.

Mutual funds are more flexible than pension plans. There are no restrictions on making any partial or entire withdrawal at any given point of time. "If you feel, you can discontinue your investment and change to another mutual fund as and when you like," says Gupta.

And remember the biggest bugbear of a retiree – inflation or the erosion of the value of your money. Retail inflation in June 2019 stood at 3.18%, an eight-month high.

"Mutual funds are one of the few investment options that have the potential to beat inflation," says Gupta. While inflation erodes your wealth, mutual funds try to beat inflation and offer actual returns. The actual return on any investment is the difference between the returns and the rate of inflation.

"Post inflation, the next most important parameter for you to consider is your monthly expenses or the expenses that you need to sustain your current lifestyle," says Azeez, who feels that returns objective should be 12-14% per annum, factoring in inflation.

Based on this, you have to do the right asset allocation between equity and debt. While equity mutual funds will help you grow your wealth by generating alpha, debt mutual funds will provide the much-needed cushion to your portfolio.

The minimum investment amount varies across the mutual fund houses. Generally, there is no cap on the amount that can be invested in mutual funds. Again, how much to invest depends entirely on the goals and requirements of an individual.

"Historically, it has been observed that mutual funds have the potential to deliver double-digit returns in the long term," says Azeez. The only risk which mutual funds face is the volatility risk that subsides over the long term.

MFs and steady dividend

MFs do have the option of skipping a dividend payout. This can be done for a variety of reasons, ranging from your manager seeing an investment opportunity to poor fund performance.

"If the dividend payouts or returns from your mutual fund investment is the only source of income you have, then it is advisable to initiate Systematic Withdrawal Plan (SWP) when the fund manager decides to skip dividend payouts," says Archit Gupta, founder & CEO ClearTax .

You, as a mutual fund investor, are given the complete liberty to structure SWP to suit your requirements. Investors can choose the frequency of the SWP payout, and it can be monthly, quarterly, bi-annually, or annually. Through SWPs, you can choose to withdraw only the gains made on the capital invested or gains along with some portion of your capital invested.

"Moreover, SWP is more tax efficient as compared to paying a Dividend Distribution Tax (DDT). You will end up paying a DDT of 11.6% whereas, in SWP, you will be charged LTCG at 10.4% including cess in case of equity mutual funds," says Azeez of Anand Rathi Private Wealth Management.

Some other options for your retirement planning

Retirement planning has two distinct phases – accumulation or building the retirement corpus and distribution or using the income from the corpus post-retirement. In the first phase, the focus is to build a sufficient retirement corpus i.e. wealth creation by investing across asset classes.

This (first phase) can be achieved by investing in a combination of mutual funds, direct equity, NPS, EPF, PPF, bank FDs, real estate, gold and so on. In the second phase, the focus is on capital preservation, stable returns and anytime liquidity. This can be achieved by having cash in the savings bank account, investing in bank FDs, mutual funds, etc. "The underlying idea is that relying on just one product is not the right approach but rather a combination of such products should be used for effective retirement planning," said a spokesperson from Paytm Money.

An investor can consider investing in the National Pension Scheme (NPS), PPF (which is tax-free) along with mutual funds. MFs and PPF are the most preferred investment classes while planning for retirement, says Azeez.

Mutual funds and your taxes

Majority of mutual funds don't have any specific benefits linked to investments for retirement purpose, and the taxation is like any other mutual fund.

"However, certain funds under the "solution-oriented – Retirement" category do get the tax benefit for investments under section 80C," according to a spokesperson with Paytm Money, who advises a financial advisor for making an informed choice.

"Mutual funds, whether debt or equity, attract taxes only at the time of redemption thereby reducing the effective tax rate per annum to a large extent," says Feroze Azeez.

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