What is the first thing that comes to mind when you think of retiring from your job? The loss of your monthly income. After all, you depend on your salary for all your financial requirements – be it paying your rent, EMI, or getting groceries for the month. For most of us, our financial commitments are irrevocably tied to our monthly salary. Now imagine a time when there is no salary being deposited into your account. In this scenario, how do you manage your various expenses, while remaining independent? This is where retirement planning comes in and, mutual funds are an excellent way to start investing your money today, with the aim of securing all your tomorrows. If you have recently started your career, then this is the best time to start planning as the longer you stay invested, the better your results will be.
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Early-stage planning
It is advisable to begin your retirement planning as soon as possible, as this provides you more time to build a suitable nest egg for your future. If you are at the beginning or early stage of your career, then you also have the ability to undertake higher risks, in the quest for higher returns. First of all, you should allocate a portion of your monthly income towards creating a contingency or emergency fund. This fund will help you tide over unexpected situations like a health crisis, or the loss of a job. Ideally, your contingency fund should be able to take care of your expenses for a period of six months. Once this is done, consider investing in equity mutual funds through both the lump-sum and systematic investment plan (SIP) routes. You can do this by starting a monthly SIP, aligned with your salary and the amount you want to save for your retirement. Further, whenever you receive a bonus or a gift, in the form of money, use it to make lump sum investments as this will help you accumulate a sizeable corpus for your post-retirement future.
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Mid-Career
If you have already spent some years building you career, and want to now focus on retirement planning, you should choose a mix of equity and hybrid mutual funds, to boost your investment portfolio. This is because, as you advance in your career, there is a reduction in your ability to tolerate risk and withstand losses. In this scenario, it is imperative that you focus on earning solid returns, while also mitigating the risks faced by your portfolio. As you move closer to your retirement period, gradually shift your portfolio from equity to debt, and ensure that only a small portion of your portfolio remains invested in equity mutual funds. This move will help you reduce the risk quotient, while helping you earn a decent rate of return. Another important aspect to remember is, as your corpus grows bigger, you must take consistent efforts to reduce volatility and this can be done by investing in a combination of conservative hybrid, and debt mutual funds. All of these a high debt allocation, making it a relatively safe investment option.
Post-retirement journey
Now that you have created a solid nest egg and retired from your career, there is an excellent way for you to continue to earn a monthly income. You can opt for systematic withdrawal plans or SWPs, to fund your monthly expenses. Since you have to keep your corpus safe, it is advisable that you draw your SWPs from predominately debt-oriented funds, with a 20-30% equity allocation for sustained returns.
In this manner, mutual funds emerge as an excellent way to plan your retirement as they ensure tax efficiency, offer you the possibility of diversification across style and philosophies, and help you earn tidy returns without active market investments. However, even as you create a suitable portfolio, remember to undertake periodic reviews and avoid high sectoral or thematic exposures as these could lead to unnecessary risk. Avoid over-diversification or looking for funds aimed at seasonal outperformance, since you are investing for the longer term. Research, analyse and understand the construct and possible behaviour of the portfolio in different market conditions and train your mind to see volatility as normal, especially in the early days of your investment.
