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Category: Retirement Planning

The benefits of investing in equity to meet your retirement corpus

The Advantages of Equity Investment for Building Your Retirement Fund"

Meta Description: "Discover the benefits of investing in equities for your retirement corpus. Understand how equity mutual funds can provide better returns compared to traditional fixed deposits. Explore strategies for different stages of retirement planning."

In today's world, retirement planning is imperative due to increased life expectancy and the influence of factors like inflation, changing lifestyles, and advancements in medical care. Investors are faced with the task of choosing the right investment products to secure their retirement.

Let's examine two hypothetical scenarios for retirement planning:

  • Fixed Deposits: Consider someone who retires with a corpus of Rs 1 crore, which they invest in a bank fixed deposit. A year later, this corpus would have grown to Rs 1.07 crores, resulting in earnings of Rs 7 lakh. However, taking into account a realistic inflation rate of 5%, to maintain the real value of the principal amount, one would need to keep Rs 1.05 crores in the bank. This leaves only Rs 2 lakhs for withdrawal and expenditure over a year (around Rs 16,666 per month). This may not be sufficient, especially if interest rates surpass inflation, leading to income tax reducing the real value of the money.

  • Equity Mutual Funds: With equity-backed mutual funds, the scenario differs. Unlike fixed deposits, these funds offer high returns but come with volatility. While annual returns can fluctuate, over five to seven years or more, they often exceed inflation by 6-7% or even more. In such funds, one can comfortably withdraw 4% annually and still have a substantial safety margin. Moreover, there's no income tax, and capital gains tax is just 10% on actual withdrawals. For the same monthly expenditure, you'd need half the investment compared to fixed deposits. To receive a monthly income of Rs 50,000, Rs 1.5 crore would suffice.

Why Equity Mutual Funds Are Ideal for Retirement:

  • Liquidity: Open-ended mutual funds offer on-demand redemption, which is useful during emergencies or for portfolio rebalancing. In contrast, products like PPF and insurance policies come with defined lock-in periods.

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  • Tax Benefits: Some equity mutual funds offer Section 80C benefits, and all equity schemes are exempt from long-term capital gains tax after one year.

  • Lock-in: Open-ended MF schemes do not have lock-in periods, and investors can withdraw within a few days, with the payment of an exit load if applicable. Traditional products, like PPF and insurance pension plans, have extended lock-in periods and significant penalties for early withdrawals.

Investment Strategies for Equity Mutual Funds in Retirement Planning:

  • Pre-Retirement: Use systematic investment plans (SIP) to invest systematically in equity during the pre-retirement stage. SIPs enable regular monthly investments and reduce the risk of mistimed market entries.

  • Close to Retirement: As retirement approaches (within three to five years), consider moving a significant portion of the accumulated corpus from equity schemes to debt schemes via systematic transfer plans (STP) or lump sum transfers to secure investments and minimize risk.

  • Post-Retirement: After retirement, you can withdraw funds as needed or use the systematic withdrawal plan (SWP) to transfer funds into your bank account at regular intervals, similar to an annuity. The SWP allows your remaining corpus to appreciate in the debt fund.

Conclusion:

When planning for retirement, taking a long-term view is essential. Equity mutual funds have the potential to provide substantial returns in the long run, helping you beat inflation and secure tax-free returns. Diligent and consistent investment in equity mutual funds can help you achieve your retirement corpus goals. It's advisable to seek expert guidance in selecting the right schemes and devising a retirement planning strategy.

Debalina Roy Chowdhury Dilzer Consultants

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