How To Invest In Mutual Funds To Plan Your Retirement?

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Mutual funds have emerged as popular asset classes to accumulate funds for various financial goals, one of them is retirement. Judicious planning coupled with prudent investment in mutual funds can help you build a sizable retirement corpus that can help you take care of your post-retirement needs with ease.

While you would have taken care of most financial goals by the time you hang your boots, you need a corpus that can outlast you. Given the improvement in medical science, your retired life could well last up to 15 to 20 years and even more. Therefore, your corpus should be large enough to help you sail through this period without hiccups.

Here’s what you should know about investing in mutual funds to build a portfolio for retirement.

Benefits of Building Retirement Portfolio Via Mutual Funds

  • Flexibility on offer

Mutual funds are among the most flexible financial instruments available. They give you the flexibility to increase your investment with a rise in income and withdraw funds when required. 

If you can track market movements, you can invest in direct plans to save on commissions. You can also switch from a poor performing fund to a better one if needed.

  • Transparency 

The Securities and Exchange Board of India (SEBI), the regulator guiding mutual fund investment in the country, has introduced several measures to make mutual fund investment more transparent and investor-friendly. Steps like fund categorisation and introducing the new risk-o-meter are aimed at making investing in mutual funds more transparent. 

  • Tax efficiency

Mutual funds are tax-efficient financial products as their post-tax returns are high compared to other financial instruments. Long-term capital gains (LTCG) from equity funds above INR 1 lakh are taxed at 10%. In case of debt funds, 20% LTCG tax is levied after indexation which reduces the cost of acquisition thus bringing down the final tax amount.

  • Wide choice 

The mutual fund universe is vast. You can invest in a range of funds as per your post-retirement needs. If you are starting early, you can opt for equity funds to build your retirement corpus. As you near your goal, you can shift from equities to debt to protect the gains from eroding due to market volatility.

  • Diversification

Mutual funds help you diversify your portfolio. Your money is invested across different companies in varied sectors. Diversification is an important principle of investing and it helps balance the risk and reward equation. 

Factors to Keep in Mind While Calculating the Retirement Corpus

This is the most crucial factor to consider. Inflation reduces the value of money with time and what may seem adequate today may prove to be insufficient tomorrow. For example, let’s assume your monthly expenses are INR 1 lakh today and you have 10 years remaining for retirement. Even a modest inflation of 5% will push this amount to a whooping INR 1.6 lakh.

Assuming your post-retirement expenses to be 70% of pre-retirement expenses, your monthly expenses would be somewhere around INR 1.1 lakh. With an 8% expected rate of return on investment, you would need a corpus of INR 1.7 crore to generate a monthly income of INR 1.1 lakh. 

If your retired life lasts for 25 to 30 years, then you would need a corpus somewhere close to INR 3 crore to ensure you have an adequate amount in your kitty to lead a stress-free retired life.

  • Inheritance

This is another vital consideration. Often after retirement, people want to leave behind an inheritance for their legal heirs. If you intend to do that then you might need a bigger corpus.

  • Medical Expenses

Medical costs form a significant portion of a retiree’s expenses. Therefore, it’s vital to make enough provisions in your corpus to take care of these costs. While a medical contingency can wipe out your savings in no time, the level of difficulty compounds in your retired life as there’s a break in active income. 

All you have is the retirement corpus to bank on and if that depletes because of a medical emergency, spending the rest of the retired life can be quite challenging. Therefore, it’s better to either set up a separate fund to address medical expenses or make your kitty large enough so that it can absorb the shock of a large medical bill.

Steps To Build Retirement Portfolio Through Mutual Funds

After calculating the amount you need as retirement corpus, you can choose the systematic investment plan (SIP) route to accumulate the desired amount. SIP is a mode of investment in mutual funds whereby a fixed amount is invested in your chosen fund on a specified date. The amount gets deducted from your bank account and invested in the fund.

How Much SIP Do You Need?

The amount of SIP you need to build your retirement fund depends on the time horizon and expected return rate. Let’s assume you need to build a corpus of INR 3 crore, and your investment time frame is 10 years. Assuming the rate of return to be 8%, the SIP amount you need would be a little over INR 54,000 per month.

However, if your investment horizon is 30 years, then this amount would drastically drop to a little over INR 6,000 per month. So, the bigger is the investment horizon, the lower is the SIP amount. Therefore, it’s prudent to start accumulating funds for retirement through SIPs as early as possible.

An early start gives more time to your money to grow and brings in the power of compounding that has a multiplier effect on wealth.

Benefits of SIPs

  • Disciplined Savings

Creating a retirement corpus and portfolio warrants a long-term commitment. In other words, you need to remain invested for a long period of time. As SIPs can help you start small, from as little as INR 1,000 per month and the money is automatically deducted from your savings account and invested, it imbibes a disciplined savings habit. This is highly essential to create funds for retirement. 

  • Gain from Rupee Cost Averaging

This is another significant benefit. SIPs help you buy more units when markets are low and vice-versa. It ultimately allows you to gain more units and averages out the cost of buying with time. 

  • Create Wealth Through Power of Compounding

A disciplined investor’s best friend, SIP is one of the most effective means to beat market volatility. After some time, it brings the power of compounding into play that has an enormous impact on wealth creation. 

Investing in Equities to Beat Inflation

While building your retirement portfolio and corpus, you could initially opt for SIPs in equity funds. This is because in the long-term, investing in them can help you generate inflation-beating returns. In other words, investing in equity mutual funds can help you build a corpus large enough to counter inflation, which decreases the value of wealth with time.

Shifting to Debt As Your Near Your Goal

As you near your goal, i.e., approach retirement, you should slowly shift from equity mutual funds to debt funds to protect the corpus from getting depleted due to market volatility. Debt funds are relatively less risky compared to equities.

You can set up a systematic transfer plan (STP) to do so. In an STP, you transfer specific units periodically from one mutual fund to another of the same fund house. So, you can gradually move units from equities to debt at regular intervals. STP helps you in rebalancing your portfolio from time to time.

Choosing Mutual Funds for Building a Retirement Portfolio

Irrespective of whether you choose an equity fund or a debt fund for building your retirement corpus and portfolio, there are certain things that you need to consider. Some important factors are:

  • Fund fundamentals

Check out the underlying holdings of a fund and ensure they are sound enough. Do check out the sectors and the companies that the fund is investing into. There are many websites where you can find information about a fund and its underlying holdings.

  • Long-term performance

Before investing in a fund for building retirement corpus, take into account its long-term performance. See how consistent it has been in delivering returns. Doing so will also help you understand how the fund has been able to contain downsides when markets haven’t been performing well. It’s advisable to consider eight to 10 years performance before making the final choice.

  • Performance against benchmark indices

Another vital lookout, check the fund performance against its benchmark index. It’s advisable to choose a fund that has been able to outperform its benchmark consistently. On the other hand, if a fund cannot do so for a long period, it’s better to avoid it.

  • Experience of the fund manager

The experience of the fund manager matters. Check out how long the manager has been at the helm of the fund. Among the several factors that have a direct impact on fund performance is the call taken by the fund manager. It’s better to opt for a fund whose manager has been in charge of it for an extended period.

Bottom Line

Building your retirement corpus and portfolio with mutual funds is a simple and easy process. Do get started at the earliest as it not only gives more time to your money to grow but also make changes midway in case things are not to your liking. Keep a maximum of three to four funds, as too many funds will make it difficult to monitor the portfolio and dilute returns.

Also, ensure that the funds are different in terms of their underlying holdings as funds with the same holdings will only bloat your portfolio. They will not provide you with real diversification. Take help from a financial planner in your journey who will guide you with the right advice to make informed decisions.