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Failing to plan for your retirement now is planning to fail financially after retirement. Who doesn’t look forward to that golden period – free from work and family-related responsibilities? You have all the time to pursue your passions. But to be able to lead a comfortable life post retirement, you need to have significant retirement corpus as well as a steady source of income (pension).

Role of mutual funds in your retirement planning

If you are a Central Government employee, most of the financial aspects of your retirement are already sorted by the government. But for those of you who are working in the private sector or are self-employed, retirement planning is essential. A mutual fund is one of the few investment avenues that can beat inflation it is imperative that you make mutual funds the centerpiece of your retirement planning.

In simple terms, a mutual fund pools money from different investors and then invests that money in various equity stocks, debt and money market instruments.  In the long run, mutual funds offer excellent returns and help build a corpus for your post-retirement needs.

How to invest in mutual funds for retirement?

Usually, most investors opt for a pension plan for the retirement. That is also a good option but is a distant second to the mutual funds. Mutual funds enables you to have equity exposure, but help reduce the risk through diversification of the portfolio.

If you have an investment horizon of at least 20 to 30 years and want to make mutual funds the start of your retirement plan, then systematic investment plan (SIP) will help you accumulate and compound wealth in an affordable manner.

Why choose a Systematic Investment Plan?

Systematic Investment Planning, better known as SIP, is a systematic approach to invest money in mutual funds. Under SIP, you invest a fixed amount in the fund of your choice every month. There is no upper limit to investing via SIP, but it is desirable to fix an amount which you can afford easily every month. In addition to instilling financial discipline, SIP helps you learn money management skills, which help further with the planning your retirement.

Let us elaborate with an example. Suppose you are 30 years old and you start a monthly SIP of Rs. 10,000/-. Assuming that the returns on your investment are 12% p.a. (which is a standard rate for most mutual funds) and you continue the SIP for 30 years. By the time you are 60 years old, you will have a corpus of Rs. 3.50 crores approximately. Very few other investment avenues offer you such returns with moderate risk.

Using the SIP route to plan your retirement fund is an excellent approach as it offers you several benefits like:  

  • You can invest as much amount that you are comfortable with as there is no minimum requirement for investment in SIP.
  • You can switch between equity and debt instruments with the help of a systematic transfer plan. This helps you reduce your risk exposure as you gradually age.
  • Through the ELSS route, you can save on your income tax liabilities every year as the contribution to ELSS is tax deductible under Sec 80C of the Income Tax Act.

Benefits of planning your retirement with mutual funds?

While many of you will be tempted to opt for a pension plan instead of mutual funds for your post-retirement financial requirements, but the fact remains that mutual funds are a safer and better option. Here are the reasons you need to know while choosing between mutual funds and pension plans.

Flexibility: –

Mutual funds are more flexible than pension plans. There are no restrictions on making any partial or entire withdrawal at any given point of time. If you feel, you can discontinue your investment and change to another mutual fund as and when you like.

Tax Efficient: –

Mutual funds are more tax efficient as compared to pension plans. Pension income is added to your other incomes for taxation, and there is no exception. While in case of equity mutual funds, long-term capital gains are tax-free up to Rs 1 lakh, and in case of debt funds, it is levied after indexation, which most of the time reduces the tax to nil.

Transparency: –

Mutual funds are more transparent as compared to pension plans as you can easily access all the information that you want regarding a mutual fund.

Post-retirement life requires you to have a stable source of income to be able to continue your lifestyle. With the help of mutual funds you can easily plan for a secure future and minimize the risks involved.

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