You might not be able to beat inflation by simply relying on the returns of traditional investment avenues.
People in India have finally started recognising the importance of retirement planning. Facing financial challenges post-retirement can get tricky, which is why you need to focus on creating wealth for retirement early on. One of the biggest challenges in retirement planning is saving less than what is required to live a comfortable life once you stop working. You might not be able to beat inflation by simply relying on the returns of traditional investment avenues. This is why you need to consider investing in mutual funds to work towards achieving your desired retirement goal.
Understanding retirement mutual funds
- What are retirement mutual funds?
Retirement mutual funds, also known as pension funds, aim to provide a regular income to investors after they reach the age of 55 or 60 years. Usually, pension payments start from age 55-60 years and continue till the investor’s demise. The remaining sum is then transferred to the nominee.
Retirement mutual funds are pension funds that typically invest in debt instruments such as corporate bonds, government securities, and money market instruments. Some retirement funds also invest in equity-related instruments. Do note that retirement funds usually include a lock-in period of 5 years or until the investor’s retirement. The investment cannot be withdrawn during this period.
- Types of retirement mutual funds
- Large-cap mutual funds: Large-cap mutual funds primarily invest in the stocks of large-cap companies and are suitable for stability and long-term growth.
- Mid-cap mutual funds: These funds invest in the stocks of mid-sized companies aiming to strike a balance between growth potential and risk.
- Balanced funds: These funds are also known as hybrid funds, investing in a combination of stocks and bonds. These funds aim to establish a mix of income and capital appreciation.
- Debt funds: Debt funds are mutual fund schemes investing in fixed-income instruments such as corporate debt securities, money market instruments, government bonds, etc. The goal of these funds is to offer a regular income while minimising risk.
Benefits of mutual funds in retirement planning
Being able to maintain a diversified portfolio is one of the key benefits of investing in mutual funds. By investing in a mutual fund, the money is spread across various investments. This helps in reducing your dependence on a single asset’s performance. This diversification provides assurance by mitigating the risks involved with market volatility. Your retirement savings would not be entirely susceptible to the fluctuations of a single stock since the investment is spread out across various asset classes and different sectors.
You do not have to worry about being a mutual fund expert. Your mutual fund investments are managed by investment professionals who have years of experience under their belt. These fund managers use their expertise and regularly analyse market trends and various investment opportunities, based on which they adjust the mutual fund holdings for optimising returns and managing risk.
- Flexibility and accessibility
As a retired individual, having access to your funds is essential for dealing with any sudden expenses. Retirement mutual funds offer that accessibility, allowing you to redeem your investments on a daily basis. This way, you have the flexibility required to get the money from your investments whenever required.
Selecting the right retirement mutual fund
- Risk tolerance: Before investing in mutual funds, you should be aware of the level of risk you are ready to undertake. Choose a mutual fund that is aligned with your risk tolerance.
- The ultimate goal: There are several mutual funds that you can choose to invest in, so choose a fund type that matches your preferred income, capital increase, and diversity.
- Years remaining for retirement: If you are in the early years of your career (20-35 years), you can consider opting for a mutual fund with moderate risk levels to establish steady investment growth. If you are older, your investment approach might need to be aggressive in order to beat inflation and grow a corpus for retirement.
- Fees and charges: Always remember to keep an eye on the management fees, exit and entry loads, redemption charges, etc. before investing in a mutual fund.
- Matching funds to retirement goals
Retirement mutual funds include various options to cater to your investment goals. While debt funds can provide a regular source of income, equity funds are more focused on capital appreciation. You can also choose to establish a balanced portfolio including a mix of both equity and debt instruments.
Strategies for effective retirement planning using mutual funds
- Asset allocation strategies
- Strategic asset allocation
The strategic asset allocation strategy includes determining your exposure to equity and debt, and then staying consistent on the ratio. This strategy requires you to rebalance your portfolio on a periodic basis based on market fluctuations to maintain the specific asset allocation. This type of strategy can be considered by investors who are seasoned and proactive.
- Dynamic asset allocation
Dynamic asset allocation is considered to be one of the most popular strategies when it comes to handling mutual fund investments. This strategy does not focus on a fixed ratio for asset allocation but invests funds depending on market movements. As per this strategy, you would favour exposure towards equity when there is an upward market trend and shift your focus from equity to debt during a downward market trend. You can also choose to go the opposite way for buying low and selling high.
- Tactical asset allocation
Tactical asset allocation is a flexible strategy that focuses on altering the asset allocation for cashing in when the market is favourable. You can adopt this strategy and change your ratio to make short-term capital gains. This strategy requires an ability to understand market movements for maximising returns by reallocating assets.
- Regular reviews and rebalancing
It is of the utmost importance to regularly monitor and adjust your mutual fund investments to ensure that they are aligned with your retirement goals. Getting your portfolio rebalanced from time to time can help in avoiding excessive risk and maintain optimal returns.
You can also opt for tax-saving mutual funds, known as equity-linked savings schemes (ELSS). With ELSS funds, you can claim a tax rebate of Rs 1,50,000 under Section 80C of the Income Tax Act. By investing in ELSS funds, you can get the dual benefit of wealth accumulation along with tax deductions.
Conclusion
Retirement mutual funds can potentially offer capital appreciation and stable returns along with the flexibility required. It is ideal to seek professional guidance from a fund manager who can cater to your specific retirement goals.
Disclaimer: Above mentioned article is a Consumer connect initiative, This article is a paid publication and does not have journalistic/editorial involvement of IDPL, and IDPL claims no responsibility whatsoever.
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 "Retirement planning: Leveraging mutual funds for a secure future")
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