Why you need mutual funds for retirement planning?

For most of you, holding an EPF account with your company or investing separately in PPF could be the only retirement plan in place. This means of saving may have held water about a decade ago. But for the upcoming generation of retirees, dependence on EPF and lack of pension may mean that they are at a real risk of falling short of capital, post retirement.

Now, if you have not built enough wealth for your retirement, chances are that you will not sustain yourself costs post retirement with just the interest income from your kitty. You will have to start spending your capital as well; reducing the corpus left to generate interest income. Now that is not a happy proposition.

Traditional options has meant that people looking to save for investment scout for mutual fund

Rules for retirement investing using mutual funds

The first rule to follow in mutual fund investing, when you invest for retirement, is to hold reasonable exposure to equities in the early years and gradually reduce them by moving them to debt funds and other traditional saving options such as tax-free bonds and deposits.

Most people burn their fingers simply because they take high exposure to equities just a few years ahead of retiring and expect equities to generate high returns in a short time. A down market, in such instances, can even wipe the capital.

The second rule is to rebalance your mutual fund portfolio, preferably every year. This involves bringing your portfolio to the original asset allocation, if the equity, debt, gold proportion in your portfolio moves out of kilter

The third rule is that your retirement portfolio can do without any theme or fancied sector funds to pep your portfolio. If you do wish to take such exposure, limit it to 10% and ensure you exit the theme at least a few years ahead of your retirement. The last thing a retirement portfolio needs is volatility from cyclical funds.

The fourth rule is that if you have some exposure to mutual funds post retirement, don’t depend on them to declare dividends, if you need monthly income, use the systematic withdrawal plan (SWP) option to create your own annuity plan. SWPs are also very tax efficient, as they enjoy capital gains indexation benefit in the case of debt funds held over a year (equity funds are exempt from capital gains tax).

Following the above will likely ensure that you build a comfortable retirement corpus without burning your fingers.

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