3 Tips for Planning your Retirement using Mutual Funds
Those who are perplexed at how to go about planning their retirement can take heart. None other than the legendary Nobel Laureate William Sharpe (famous for the ‘Sharpe Ratio’ named after him) recently called it the “nastiest problem in personal finance”. And why not? It is probably the most complex financial goal you’ll ever plan for, with a plethora of unpredictable variables that will influence its dynamics. At what age will you retire? What will inflationary trends be like over the next two to three decades? What will low risk investment returns be after two to three decades? Will advances in med tech render medical care more or less expensive? How will your health be in your retirement years? Will you need to support adult dependants into your retirement? The list of confusing influencers goes on and on.
Although Mutual Funds cannot help you solve the nasty problem of Retirement Planning in entirety, they can surely set you up for a fairy high degree of financial security in your non-earning years. Here are three tips to use Mutual Funds to create an impressive retirement corpus for yourself and your spouse.
#1: Ignore your Risk Appetite
Yes, you read that right. While risk profiling and asset allocation form the very basis of effective portfolio management and investing, there’s no need to get fixated on your individual risk tolerance levels while saving for your retirement. Even if you’re a conservative investor, your recurring retirement savings must necessarily flow into aggressive instruments such as stocks of blue chip companies, or equity mutual funds. When it comes to long term retirement planning, you must ideally turn a blind eye to market volatility and continue investing anyway. In the long run, the cost of your investments will average themselves out and provide you with returns that handsomely outpace returns from fixed income instruments. Consider this: Rs. 10,000, saved monthly for 25 years, will grow to Rs. 95 Lakhs in an 8% return instrument. In a 12% return instrument, you’ll have 1.87 Crores instead – nearly twice as much. That’s definitely a risk worth taking.
#2: Two birds, one stone: use ELSS funds for your retirement
Are you in the habit of scrambling to make your tax savings investments at the last moment? If yes, you likely end up putting money away into low return instruments such as Insurance Policies or Tax Saving Fixed Deposits. Sadly, these low return instruments do precious little in terms of helping you build a solid retirement corpus. Instead, choose to start a monthly SIP in an ELSS (Equity Linked Savings Scheme) and put your tax savings on autopilot. Earmark this investment for your retirement. With a category average 5-year return of 19.08% as on date, ELSS funds are ideal long-term wealth creation tools.
#3: Don’t allow liquidity to work against you
While the high liquidity intrinsic to most categories of Mutual Funds can be a blessing in times of emergencies, this very feature can work against you when it comes to using them to plan your retirement. With the recent technologizing of the Mutual Fund experience allowing instant redemptions at the click of a mouse, more and more Mutual Fund investors are falling into the trap of redeeming their so called long term investments in the pursuit of instant gratification, or the fulfilment of their ‘wants’. Unfortunately, even small and infrequent redemptions made in during the early stages of your retirement planning can have a massive impact on your final corpus. Consider this: Rs. 3 lakhs redeemed from your retirement corpus could impact your final fund value by more than 50 lakhs, 25 years down the line.