As per surveys conducted by many organizations in
India, we have seen that most Indians consider retirement as their
primary goal. Most of us wish to retire early, or in the late 50’s or
latest early 60’s. Many of us assume that our pension plans will take
care of our retirement.
Is it true? Not really because the corpus accumulated depends on the
insurance company’s profit in case of traditional pension plans and on
fund performance in case of unit linked pension plans. Also, these plans
are not flexible since there are few regulatory mandates for pension
plans.
How about Mutual Funds for Retirement?
You must have heard certain terms such as SIP, STP or SWP of mutual
fund; but won’t know how you can use these options for investing in
mutual fund and how to benefit from it. Let us understand how these
options can be useful for your easy retirement. But before following
this exercise, you need to undergo a warm-up session of calculating your
inflation adjusted retirement corpus depending on your household and
health insurance expense; and find out monthly investment required for
accumulating the desired corpus.
Accumulating corpus via SIP (Systematic Investment Plan) ~ Pre-Retirement
It is always advisable to invest in equity systematically. Systematic
Investment Plan (SIP) is one of the best methods of saving and investing
in equity mutual fund. SIPs help us to benefit from the market
volatility and helps in Rupee Cost Averaging. SIP removes the hurdle of
timing the market. You should start monthly investment for accumulating
your inflation adjusted in mix of equity diversified mutual fund and
debt (EPF / PPF / Debt Fund) or even simply investing in a balanced
fund; depending upon time to your retirement. Early you start saving for
retirement, lower the monthly amount required for accumulating the
corpus.
Shifting corpus to Debt Fund via STP (Systematic Transfer Plan) ~ Near Retirement
You should always start shifting your investments to debt when your
retirement (or any other financial goal) approaches. It is advisable you
start shifting your portfolio from equity to debt, 2 to 3 years before
your retirement. Shifting the corpus is necessary and important because
equity investments are very risky, and you cannot afford to take high
risk till your retirement age. As you should not time the market for
entering into equity, the same is applicable for exit also. You should
shift the accumulated corpus systematically via Systematic Transfer Plan
(STP) an option under mutual fund. With the help of STP, you can
systematically transfer specific amount periodically (monthly /
quarterly) from one scheme to another scheme (equity to debt and
vice-versa) of the same AMC (Asset Management Company). So with the help
of STP, you can shift your portfolio to debt systematically.
Withdrawing from the corpus via SWP (Systematic Withdrawal Plan) ~ Post Retirement
Now at the age of retirement, your corpus must have been shifted to debt
funds of mutual funds via SWP. You can now start withdrawing specific
amount of money periodically (Monthly/ Quarterly / Half yearly / Yearly)
equal to your household and other expenses required for your retirement
with the help of Systematic Withdrawal Plan (SWP) option of mutual
funds. SWP provides you with regular income during your retirement
through withdrawals, along with growth / appreciation of the balance
corpus in the debt fund.
The key to accumulate your retirement corpus in this manner by investing
mutual funds is ‘discipline’. You should make sure your SIPs do not
bounce, or you should not stop your investment when you see equity
market falling. Another thing you must consider is, reviewing your
investment periodically (advised quarterly). You must review your
investment periodically; it may be quarterly / half-yearly or yearly.
You need to review the performance of the funds where you have invested
and compare it with its peers and benchmark and make changes in the
portfolio accordingly. So forget pension plans, calculate required
retirement corpus and start your SIPs. As it is said, it is never too
late; you can start saving for your retirement now!
Published in: Moneycontrol.com, The Tribune
