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Mutual Funds For Your Retirement

The human mind is conditioned to seek certainty. Hence, we like investments that offer a certain percentage of returns for a specified period of time whether stated explicitly or built implicitly into the investment

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When it comes to saving for retirement, people usually harbour some misconceptions. Let’s look at some of the more common ones.

Myth: I don’t need to plan for it

We all would, at some point in time, buy a life insurance policy. Some would have already bought one, while some are in the process, and a few others plan to do it someday. What could be the motive for buying a life insurance policy? To provide for your family in your absence, right? Of course, that’s in the worst-case scenario. Why then, would you not want to plan for your retirement, which also helps provide for your family; that too, while you are still around. Worse than dying without a cover is a situation where you are unable to provide for your loved ones, while you are still alive.

Myth: I have already invested in traditional investments avenues that will be sufficient for my Retirement

The human mind is conditioned to seek certainty. Hence, we like investments that offer a certain percentage of returns for a specified period of time whether stated explicitly or built implicitly into the investment. For example, an investment doubling in nine years is an implicit guarantee that you will get a compounded return of 8.01 per cent per annum. A guaranteed return may be good if you are investing for a short-term goal. But for a goal like retirement, where the horizon is anywhere upwards of 15 years, choosing a guaranteed return could cost you dearly. Firstly, in years of high inflation, such investments may not even be able to earn you a real net return. Secondly, if such returns are taxed every year, you stand to lose on the returns that could be earned on the taxed portion of the total earnings. Thirdly, equities are a better investment for long-term goal as they offer potential for higher returns. They are also favourable from tax perspective.

Myth: I have invested in a retirement product that would give me Rs x per month when I retire and that should be sufficient for my retired life

As discussed above, any investment that guarantees a return, takes away the opportunity to earn higher returns and may not be tax efficient. On the other hand, investment avenues such as mutual funds offer various investment options based on risk appetite, for young savers as well as those about to retire in a few years. If you are closer to retirement, Monthly Income Plans, which invest predominantly in debt and some portion into equities, give you the stability needed in a retirement corpus. Enrolling for a Systematic Withdrawal Plan facility would give you monthly cash-flows as long as your corpus lasts. If you are more than 10-15 years away from retirement, equity funds offer you potential for higher returns and hence, the possibility of a larger corpus at retirement. Tools such as Systematic Investment Plans invest gradually and build your corpus. Some reasons why mutual funds are ideal for saving for retirement:

1. Regulated by Sebi

2. Offer various options that can be used as per suitability and needs of individual investors

3. Tax efficient and if you invest in Equity Linked Savings Schemes, you can claim tax deduction under section 80C of Income Tax Act, 1961

4. Most schemes offer flexibility of withdrawing in case you need funds in an emergency

5. During your retirement, if you need funds at one go, you can get the full amount credited to your bank account

All you need to do is ask your financial advisor to prepare your retirement plan with the help of mutual funds.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Mohit Bhatia

The author is Head - Sales & Marketing of Canara Robeco AMC

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