Topic 1: Why you need mutual funds for retirement planning

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.

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.

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

So what is preventing Indians from investing in mutual funds? Here are some of the myths that need to be busted for you to ensure you are not left grappling at the last minute:

1.      Mutual funds are risky, I will lose my money

No doubt, mutual funds, especially equity funds, move with the market forces and can therefore be risky. But long-term equity fund data shows that the risks are evened out over the long term.

2.      Mutual funds will give too much exposure to equity markets

 Mutual funds, for most people, mean investing in equity markets. This is not true. Mutual funds offer exposure to a wide range of low-risk to medium- risk debt instruments too.

A well-diversified basket provides sufficient exposure to various asset classes using a single product called mutual fund.

 3.      Mutual funds cannot give steady returns like deposits

The objective behind saving for retirement is to build a decent corpus until you retire. A healthy corpus can then be invested in reasonably safe investment avenues, to generate some monthly or annual income for you, to substitute the loss of salary/business income, once you retire.

This being the objective, going for regular interest payout options do not help the purpose of building wealth because chances are that you will not diligently reinvest.

Rules for retirement investing using mutual funds

The first rule to follow in mutual fund investing, when you invest for retirement, is to hold reasonable exposure to equities in the early years and gradually reduce them by moving them to debt funds and other traditional saving options such as tax-free bonds and deposits. The shifting process, if you have been investing for at least 15-20 years, can start even 5 years ahead of your retirement.

The second rule is to re-balance your mutual fund portfolio, preferably every year. This involves bringing your portfolio to the original asset allocation, if the equity, debt, gold proportion in your portfolio moves out of kilter.

The third rule is that your retirement portfolio can do without any theme or fancied sector funds to pep your portfolio. If you do wish to take such exposure, limit it to 10% and ensure you exit the theme at least a few years ahead of your retirement. The last thing a retirement portfolio needs is volatility from cyclical funds.

The fourth rule is that your retirement kitty should be a basket – EPF, PPF, mutual funds (equity and debt; with gold being optional) and other traditional debt options such as deposits.

The fifth rule is that if you have some exposure to mutual funds post retirement, don’t depend on them to declare dividends, if you need monthly income, use the systematic withdrawal plan (SWP) option to create your own annuity plan. SWPs are also very tax efficient, as they enjoy capital gains indexation benefit in the case of debt funds held over a year (equity funds are exempt from capital gains tax).

Following the above will likely ensure that you build a comfortable retirement corpus without burning your fingers.
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