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How To Use Mutual Funds For Retirement Planning

Retirement planning is an important activity and the right mutual funds can create the corpus you require. This article guides you on how to invest in them.

Retirement is a concept that seems far away when one is in their 20s and starting the hustle towards creating wealth. However, the years pass by in a flash, and one is left staring at the prospect of retiring in a few years – often, without a game plan.

Don’t let this happen to you: it is never too soon to plan for your retirement. Indeed, the right time to start retirement planning is when you are in your 20s or 30s. A headstart on planning can give you several years of dedicated investment and course correction wherever needed, to accumulate the kind of corpus you require in the post-employment years. If you dream of a financially stable, worry-free retirement, then this article is for you.

What Are Mutual Funds?

They are an investment option where your money, along with that of several other investors, is professionally managed and pooled in to purchase high-grade securities. The money is invested in debt, equity, or a mix of both, or fixed income instruments, depending on your investment objectives and the type of mutual fund selected. You have the freedom to buy mutual funds online, through a fund house, or through a fund distributor.

Using Mutual Funds as A Retirement Planning Tool

Obviously, the first step is to choose the investment instrument that best suits your retirement objectives. Most people opt for pension plans, but you should ideally choose mutual funds. Mutual funds offer the kind of diversified exposure to the markets that build steady wealth for several years. If you have an investment horizon of about 20 to 25 years (or longer), then you should buy online mutual funds today to kickstart your retirement planning in earnest.

Why you should consider mutual funds in India as opposed to pension plans, for retirement planning:

  • They offer a stable, much safer option than most other instruments, especially over a long vesting period. By the time you retire, they create a large corpus of money for your use post-retirement
  • They are more flexible than most other instruments, including pension plans. They do not restrict you from partial or full withdrawal during the investment period, and you can stay invested or discontinue the investment at any time. You also have the option to switch to another mutual fund if the latter offers better returns.
  • They are more accessible as compared to pension funds. You can get all the real-time information about mutual funds with the click of a few buttons. This transparency of information is not seen with pension plans.
  • They offer better tax efficiency than pension plans. While the income from pension plans is added to all other income sources while computing taxation, equity mutual funds offer tax-free long-term capital gains up to Rs 1 lakh per year. If you are invested in debt funds, the tax is calculated after indexation, and this is normally next to zero or is a negligible amount.

How To Invest Mutual Funds For Retirement

Let’s go over a step-by-step plan to invest in mutual funds for a stable retirement:

* Choose the appropriate scheme: The mutual fund scheme you choose depends on your investment objectives and risk appetite. Start by deciding how much of your investment will be devoted to debt funds, and how much for equity funds. Aim for a 50-50 split at the start to get the appropriate amount of diversification. Next, choose whether you wish to go the SIP (Systematic Investment Plan) route, or try ELSS. The ELSS is the best option for retirement planning.

* Decide how you wish to invest: You can either invest incrementally, such as with an SIP or STP (Systematic Transfer Plan) or in a lump sum. You can invest as little as Rs 500 or Rs 1000 per month with the former route, or up to Rs 1 crore with the latter. It all depends on how you wish to pump money in the investment, which other investments you are currently involved in, and your risk appetite. If you are a new investor, you should invest incrementally and take a yearly review for any required course correction.

* Use a calculator to decide: Mutual fund calculation becomes a breeze when you use online calculators. The calculator lets you know the projected growth of the fund over a certain time period – this helps you decide which fund is better for your retirement planning.

* Be patient: Do not be tempted to switch funds regularly based on varying market conditions. Allow the fund to weather risks and losses over a longer time frame to arrive at the desired corpus.

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