Jul 18, 2013,16.56 IST
How Mutual Funds can build your retirement corpus?
As per surveys conducted by many organizations in India, we have seen that most Indians consider retirement as their primary goal. Most of us wish to retire early, or in the late 50’s or latest early 60’s. Many of us assume that our pension plans will take care of our retirement.
Is it true? Not really because the corpus accumulated depends on the insurance company’s profit in case of traditional pension plans and on fund performance in case of unit linked pension plans. Also, these plans are not flexible since there are few regulatory mandates for pension plans.
How about Mutual Funds for Retirement?
You must have heard certain terms such as SIP, STP or SWP of mutual fund; but won’t know how you can use these options for investing in mutual fund and how to benefit from it. Let us understand how these options can be useful for your easy retirement. But before following this exercise, you need to undergo a warm-up session of calculating your inflation adjusted retirement corpus depending on your household and health insurance expense; and find out monthly investment required for accumulating the desired corpus.
Accumulating corpus via SIP (Systematic Investment Plan) ~ Pre-Retirement
It is always advisable to invest in equity systematically. Systematic Investment Plan (SIP) is one of the best methods of saving and investing in equity mutual fund. SIPs help us to benefit from the market volatility and helps in Rupee Cost Averaging. SIP removes the hurdle of timing the market. You should start monthly investment for accumulating your inflation adjusted in mix of equity diversified mutual fund and debt (EPF / PPF / Debt Fund) or even simply investing in a balanced fund; depending upon time to your retirement. Early you start saving for retirement, lower the monthly amount required for accumulating the corpus.
Shifting corpus to Debt Fund via STP (Systematic Transfer Plan) ~ Near Retirement
You should always start shifting your investments to debt when your retirement (or any other financial goal) approaches. It is advisable you start shifting your portfolio from equity to debt, 2 to 3 years before your retirement. Shifting the corpus is necessary and important because equity investments are very risky, and you cannot afford to take high risk till your retirement age. As you should not time the market for entering into equity, the same is applicable for exit also. You should shift the accumulated corpus systematically via Systematic Transfer Plan (STP) an option under mutual fund. With the help of STP, you can systematically transfer specific amount periodically (monthly / quarterly) from one scheme to another scheme (equity to debt and vice-versa) of the same AMC (Asset Management Company). So with the help of STP, you can shift your portfolio to debt systematically.
Withdrawing from the corpus via SWP (Systematic Withdrawal Plan) ~ Post Retirement
Now at the age of retirement, your corpus must have been shifted to debt funds of mutual funds via SWP. You can now start withdrawing specific amount of money periodically (Monthly/ Quarterly / Half yearly / Yearly) equal to your household and other expenses required for your retirement with the help of Systematic Withdrawal Plan (SWP) option of mutual funds. SWP provides you with regular income during your retirement through withdrawals, along with growth / appreciation of the balance corpus in the debt fund.
The key to accumulate your retirement corpus in this manner by investing mutual funds is ‘discipline’. You should make sure your SIPs do not bounce, or you should not stop your investment when you see equity market falling. Another thing you must consider is, reviewing your investment periodically (advised quarterly). You must review your investment periodically; it may be quarterly / half-yearly or yearly. You need to review the performance of the funds where you have invested and compare it with its peers and benchmark and make changes in the portfolio accordingly. So forget pension plans, calculate required retirement corpus and start your SIPs. As it is said, it is never too late; you can start saving for your retirement now!
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