Why you need mutual funds for retirement planning

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For most of you, holding an EPF account with your company or investing separately in PPF could be the only retirement plan in place. This means of saving may have held water about a decade ago. But for the upcoming generation of retirees, dependence on EPF and lack of pension may mean that they are at a real risk of falling short of capital, post retirement.

Just take a look at the kind of returns that your Employee’s Provident Fund (interest declared by the central government) was delivering about 2 decades ago and how steadily the rates have been declining. This is no different with your PPF account.

epf rates

 At the same time, consumer price inflation (CPI) has been on the rise, particularly in the last 5 years and has crept to an average of 10.2% in the last 5 years (taking the old CPI rates for Industrial workers, as the new CPI is available only from 2011).

That means, your net returns from your provident fund or PPF would actually be negative!

Now, if you have not built enough wealth for your retirement, chances are that you will not sustain yourself costs post retirement with just the interest income from your kitty. You will have to start spending your capital as well; reducing the corpus left to generate interest income. Now that is not a happy proposition.

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Now, just take a look at the graph below. It is a simple example, assuming Rs 500 a month contribution to EPF, with an annual increase in contribution by 5%. Similar money is invested in Franklin India Bluechip as well.

epf vs equity fund

 After 10 years, the differential in your corpus is 33%. It would be even higher with a longer period, as interest is compounded annually in your EPF, while equity funds undergo continuous compounding by way of remaining invested in the markets.

Elsewhere too, lower interest on traditional options has meant that people looking to save for investment scout for mutual funds.

This is why a majority of the households in countries such as the U.S. invest their retirement savings through mutual funds; so much so that retail investors’ retirement holdings alone account for 50% of the mutual fund assets in that country.

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