The investment market consists of a wide variety of security instruments. Each instrument has its features. There are various kinds of mutual funds in the market that will help you in your retirement planning.
Let us know and understand the five types of mutual funds which are best for retirement planning:
- Index Funds: Index funds are the mutual funds that track the index. Their funds aim to offer returns comparable to the index they track. The composition of the securities in an index fund is the same as that of the index they track. Hence, the returns are often similar to those offered by the index funds. They are cost-effective since it is not required to trade individual stocks. The fund managers simply replicate the index funds, and they only match the portfolio of the index funds by removing or adding the stocks. Hence there is less impact if the fund manager changes. Investment in index funds would be beneficial for long term investment.
- Large-cap– The large-cap funds invest only in large and blue-chip companies. These companies already have a good track record in the market. The large capital base and business make them stable in the market. Even during any adverse situation, these companies manage market volatility. They offer consistent returns, and it is a good option for risk-averse investors.
- ELSS: Equity-Linked Savings Scheme (ELSS) are tax-saving mutual funds. One can invest in such funds for tax benefit. Investment of up to Rs.1.5 lakh is allowed as an 80C deduction for computation of income. These funds are equity-oriented, and at least 65% of the portfolio consists of equity-linked securities. One can invest in ELSS for long-term purposes as they generally come with a three-year lock-in period. Hence, it serves both the purpose of tax benefit and good returns.
- Equity-Oriented Hybrid Funds: These are equity-oriented funds with at least 65% investment in equities and balance in debt securities. The debt component in the portfolio balances the risk. These funds provide moderate returns and are best suitable for very risk-averse investors.
- Multicap/Flexicap– Multicap funds consist of 25% of its portfolio in small, mid and large-cap funds. Flexicap funds have 65% equity instruments without any defined investment limit in small, mid and large-cap funds. An investor may choose multicap or flexicap funds. A flexicap fund with a higher component of large-cap funds may provide you with stable growth with small-cap, and mid-cap securities may boost returns. Aggressive investors willing to take greater risk for better returns may also prefer to invest in such actively managed funds.
Hence, one can plan to include such type of mutual funds in their portfolio so that it will give better returns post retirement.