Planning for retirement is a must these days. Increased mortality rates can be tough due to changing inflation, life styles, and medical advancement. Investors need to decide on the right product while choosing the investments options for retirement.

Let us look at two hypothetical situations.

  1.  Money parked in fixed deposit : One retires with a Rs 1 crore corpus. The same is put in a bank fixed deposit. A year later, it will be worth Rs 1.07 crores. The actual earnings here is Rs 7 lakh . However assuming a realistic inflation rate of 5%, if one has to preserve the real value of the principal amount , one must leave Rs 1.05 crores in the bank . This leaves behind Rs 2 lakhs to withdraw and spend over a year ( around Rs 16,666 a month). Now this is not enough. It can happen that the interest rate just exceeds the inflation rate and the income tax on the interest effectively reduces  the real value of money.
  1. Money parked in Equity mutual fund : The above situation becomes different with equity-backed mutual funds. Unlike fixed deposits, these are high-earning, yet volatile. In any given year, the returns can be high or low. Over five to seven years, or more, these returns may exceed inflation by 6-7% or even more. The returns may fluctuate, though. In such funds, one can happily withdraw 4% a year and still have a big safety margin. Besides, there is no income tax and the capital gains tax is 10% on actual withdrawals. Effectively, for a given monthly expenditure through equity funds, one needs half the investment that one should keep in deposits. So, for a monthly income of Rs 50,000 a month, Rs 1.5 crore will suffice.

Why Equity MFs are the best means to build retirement fund?

Let us have a look at the overall benefits which make equity fund a better option to build retirement corpus. :

Liquidity: Open ended mutual funds scheme has the option to redeem on demand which is helpful during emergency or while doing rebalancing.

Other products such as PPF and an insurance policy come with a defined lock in period – thus one cannot easily withdraw money when needed.

Tax Saving: Some equity mutual funds schemes have the benefit of Section 80C. Also, all the equity schemes are exempted from long term capital gain (LTCG) after one year. Redemption after one year is totally tax free in the hands of investors.

Other products, like insurance, has to be held much longer – five years minimum, to make it tax free.

Lock in : Open ended MF schemes do not have lock in option. An Investor can withdraw even after 3-4 days, with the payment of exit load (if applicable). Units of closed ended funds are traded on stock exchange and if required, one can sell the units over there. In case of ELSS funds, an investor cannot sell the units before three years.

Traditional products like PPF has a tenure of 15 years and one can withdraw money from the end of 7th year. In insurance pension plans, one has to pay a heavy penalty in case the need arises to withdraw.

Which strategy can be useful for equity mutual funds?

Different investors have different strategies for investment related to equity. Few people tend to stay invested for long term without disturbing the corpus, while few prefer rebalancing of their portfolio at regular interval. However, when we talk about retirement, an investor can refer the recommendation mentioned below :

Pre-retirement: In pre-retirement stage, SIP (systematic investment plan) is the best way to invest in systematic manner in a volatile asset class such as equity. It allows regular monthly investments and eliminates risk of ill-timing the market.

Close to retirement: Once the corpus is built and investor is close to retirement (retirement date is three to five years down the line), then one should try to move a significant part of accumulated corpus from equity schemes to debt scheme via systematic transfer plan (STP) or through lump sum transfer. Keeping retirement fund in equity is risky and if market crashes then one may lose most of the built up corpus and hence at this stage an investor needs to make his investments safe.

Post-retirement:  One can either withdraw funds whenever needed or can also instruct the fund house through systematic withdrawal (SWP) facility to transfer funds into bank account at regular interval. This is similar to annuity from pension plans. The best part of SWP facility is that along with the withdrawal, balance corpus keeps on appreciating in the debt fund.
Dividend option in hybrid funds is also available as an effective and tax free tool of retiral income.

Product Name 1 Year 3 Year 5 Year Fund Value of Rs.10,000 Invested Per Month (5 Years)
Aditya Birla Sun Life Small and Midcap Fund – Growth 13.97% 22.94% 28.01% Rs.11,72,257
Canara Robeco Emerging Equities – Growth 13.24% 20.25% 30.21% Rs.12,33,265
Franklin India Prima Plus – Growth 10.93% 11.77% 18.77% Rs.9,44,288
HDFC Balanced Fund – Growth 11.59% 12.97% 19.10% Rs.9,51,705
Mirae Asset Emerging Bluechip Fund – Growth 12.54% 21.95% 30.39% Rs.12,38,390

Top Five Funds for Retirement Planning for Investors Between 41 and 50 Years of Age (Category: Equity)

Product Name 1 Year 3 Years 5 Years Fund Value of Rs.10,000 Invested Per Month (5 Years)
BNP Paribas Mid Cap Fund – Growth 6.37% 14.17% 23.53% Rs.10,56,239
Kotak Select Focus Fund – Regular – Growth 10.46% 15.40% 20.60% Rs.9,85,995
L&T India Prudence Fund – Regular – Growth 11.00% 12.88% 18.69% Rs.9,42,499
Mirae Asset India Equity Fund – Regular – Growth 15.23% 15.64% 20.57% Rs.9,85,301
SBI Magnum Multi Cap Fund – Growth 15.48% 15.91% 20.84% Rs.9,91,611

Top Five Funds for Retirement Planning for Investors Between 51 and 55 Years Age (Category: Equity)

Product Name 1 Year 3 Years 5 Years Fund Value of Rs.10,000 Invested Per Month (5 Years)
Aditya Birla Sun Life Balanced 95 – Growth 9.97% 12.32% 16.72% Rs.8,99,433
Franklin India Balanced Fund – Growth 9.79% 10.07% 15.88% Rs.8,81,633
ICICI Prudential Balanced Advantage Fund – Regular – Growth 10.24% 10.45% 14.22% Rs.8,47,348
Mirae Asset India Equity Fund – Regular – Growth 15.23% 15.64% 20.57% Rs.9,85,301
SBI Bluechip Fund – Growth 13.65% 13.17% 17.98% Rs.9,26,773

Top Five Funds for Retirement Planning for Investors Above 56 Years of Age (Category:Equity)

Product Name 1 Year 3 Years 5 Years Fund Value of Rs.10,000 Invested Per Month (5 Years)
Aditya Birla Sun Life Balanced 95 – Growth 9.97% 12.32% 16.72% Rs.8,99,433
Aditya Birla Sun Life Short Term Opportunities Fund – Regular – Growth 5.72% 7.88% 8.79% Rs.7,43,528
DSP Blackrock Credit Risk Fund – Regular Plan – Growth 5.71% 8.31% 8.74% Rs.7,42,643
ICICI Prudential Balanced Advantage Fund – Regular – Growth 10.24% 10.45% 14.22% Rs.8,47,348
Mirae Asset India Equity Fund – Regular – Growth 15.23% 15.64% 20.57% Rs.9,85,301

Source : https://www.bankbazaar.com/mutual-fund/best-retirement-funds.html

GST rate of 18% applicable for all financial services effective July 1, 2017.

Conclusion:

While planning a strategy for retirement goal, one should always have a long term view in mind. Equity mutual funds have the potential to provide healthy returns in long term. While fixed income products may be safer and offer fixed returns, they are unable to outpace inflation. Hence, one needs equity to create the additional inflation-beating returns and so far equity is the only asset class which has helped an investor to beat inflation with tax free returns.

One can very well achieve the targeted corpus for retirement with mutual funds, provided he/she sticks to the plan and invest diligently. However, an investor can think of taking the help of an expert to select the scheme and to make strategy for retirement planning.

 

Debalina Roy Chowdhury

Dilzer Consultants

Sources

https://economictimes.indiatimes.com/wealth/plan/equity-mfs-can-help-ensure-your-investment-income-beats-inflation-after-retirement-view/articleshow/65166301.cms

https://www.moneycontrol.com/news/business/mutual-funds/why-equity-mfs-arebest-means-to-build-retirement-fund-1283939.html