Retirement Planning with Mutual Funds

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Retirement planning includes the process of evaluating retirement income goals and the right approach to pursue it. Retirement planning in India is especially important for people who work in the private sector or are self-employed as they are not obliged with pension income like government employees. Evaluating the long-term nature of retirement planning, Mutual funds comes across as the best fit for a stable retirement plan.

Why choose mutual funds for retirement planning?

Mutual fund is a considerable retirement investment option as it beats inflation, offers investment options over a wide horizon, flexible with pension plans according to personal needs, transparent with schemes and most importantly, mutual funds are tax efficient.

In simple words, a mutual fund pools money from different investors and further invests that amount through active selection by diversifying in various equity stocks, money market instruments and fixed income securities. Offering the investors, a wide array of risk/return profiles for different time periods to choose from.

Comparison of different instruments?

Usually, a lot of investors choose pension fund for retirement, which is a good alternate but offers way less returns than mutual funds. In the long run, mutual funds offer outstanding returns and builds a strong base for your post-retirement needs. Mutual funds help in reducing equity exposure through diversification in a transparent manner. If your investment period is of minimum 10 to 30 years and you are willing to choose mutual fund as your retirement planning investment, then systematic investment plan (SIP) is the best fit for accumulating and growing your wealth in an affordable manner. 

Below mentioned is the return and lock-in profile for different schemes:

 

INVESTMENTRETURNSLOCK-IN PERIOD
BANK FIXED DEPOSITS6%-7%5 YEARS
NATIONAL PENSION SCHEME11%-13%TILL RETIREMENT
MUTUAL FUNDS15%-18%NO LOCK IN
ELSS(Mutual Fund)14%-18%3 YEARS

 

As we can analyse from the table, Mutual Fund offers the highest return among the preferred instruments for retirement planning with no lock in period. Mutual fund has an edge over other investment options as it focuses on spending time on asset allocation to increase return and diversify risk. Mutual fund retirement schemes give you the flexibility to change from high equity in your early stages to more debt when you are close to your retirement, adjusting as per your risk appetite as you moderately age. Whereas, pension funds do not provide such flexibility and transparency in its investment.

What is SIP?

SIP is a systematic approach where you invest a fixed amount in the mutual fund every month of your choice. SIP has investment plans starting from as low as Rs. 500 with no upper limit, but it is advisable to fix an amount according to your investment capacity. Additionally, SIP further helps with retirement planning and refurbish your money management skills.

Let’s take an example, imagine you are 35 years old and start a SIP of Rs. 10000/- per month. Taking the average return on investment rate of mutual funds; 15% p.a. and with 25 years to your retirement. By the time you reach your retirement you would have accumulated 3.3 crore approximately with just an investment of 30 lakhs spread over 25 years. Limited investment options offer such returns with moderate risk and a pension fund is nowhere near these grounds.

 

Benefits on choosing Mutual funds for Retirement Planning:

Many investors will be tempted to choose pension funds over mutual funds for retirement planning due to the pre-conceptions, but mutual funds are comparatively safer and a better option. Below listed are the benefits of choosing mutual fund over pension fund.

Flexibility:   Mutual fund offers flexibility with no restrictions on partial or full withdrawal at any time period. It gives you the flexibility to switch between equity and debt instruments with systematic transfer plans which helps you reduce risk as you moderately age. You can invest in mutual fund with as low as Rs. 500 through SIP with no upper limit. 

Tax Efficient:   Mutual funds are comparatively more tax efficient than pension funds, as income from pension fund is added to an individual’s income for taxation with no exception. Whereas, with equity mutual funds, long term gains are exempted up to Rs. 1 lakh annually. In the case of debt funds, the gains are taxed at 20% with the benefit of indexation for long term capital gains. In case of investments made in ELSS (Equity Linked Savings Scheme), the tax from contribution to ELSS, to the extent of Rs.1,50,000 annually is deducted under Section 80C of the Income Tax Act. This helps in saving Rs.46,800 per year in taxes.

Transparency:  Mutual Funds are comparatively more transparent than pension funds as one can access all the information about their fund. Mutual funds are transparent with the securities they have invested into. Whereas, pension funds do not provide such information about their investment. At an old age, you want to have a stable source of income to be able to accomplish your post-retirement goals. Through, mutual funds you can minimize the risk involved and easily plan a for stable future.

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