How to invest in mutual funds for your retirement

Kavya Balaji   /   December 31, 2020

There has been a dramatic increase in Indian citizens’ life expectancy in the past decade. Life expectancy was about 62.5 years in 2000 and it is 69 years now. People are deferring their retirement. However, most people do not have adequate retirement benefits. This means that they need to work harder to make enough wealth for use after retirement. Given the increasing lifestyle and healthcare costs people will need a much higher retirement corpus than they might have required a decade ago. This is especially because of higher life expectancy. 

Here’s an example. Let’s say you are 30 years old. You plan to retire at 58. If you hope to live till 65, you will need Rs. 87 lakhs for your retirement. This is assuming that your monthly expenses come to Rs. 25,000, your provident fund contribution per month is Rs. 3,600, inflation is 5% and your investments give you 12%. 

However, if you expect to live till you are 80 years, you will need Rs. 2.5 crores when you retire, which is an increase of 187% in the corpus. You need to either save more money or invest in financial products that give you a higher rate of return on investments. This is where equity mutual funds can help. 

Why equity mutual funds

People have many responsibilities in their working lives that includes children’s education, caring for aged parents, EMIs etc. That is why higher return on investment is one of the most important factors of wealth creation. Equity mutual funds help you get exposure to different asset classes and provide superior returns in the long run. Historical data reveals that equity can provide inflation beating returns in the long run. 

In the last 10 years, the Nifty 50 has given returns of more than 125%. If you had started saving for retirement by investing in Nifty 50 using a Systematic Investment Plan (SIP)for the last 10 years, you will have Rs. 50 lakhs by now assuming you invested Rs. 25,000 every month. If you invested in the best of equity mutual funds such as the UTI Equity fund, your investment will be worth Rs. 79 lakhs.  

How to invest in mutual funds for retirement

You need to start investing early for retirement. The earlier you start the better your returns will be. Compounding is a powerful tool. Your savings can generate good returns if you invest early and give the investment enough time. 

You need to review the investment amount every year.An increase in income is usually used to increase one’s lifestyle. Along with lifestyle upgrades, you should look at increasing your investment amount whenever your salary increases. Let’s say you have a salary hike of 10%, then you can look at increasing your investment amount by at least 5% instead of keeping it constant. This will help you save more as years go by and you are closer to your retirement. Incremental savings can help you end up with a good retirement corpus. You can boost your savings by periodically adding a percentage of your annual bonus or other income.

When you are young and start saving for retirement, look at funds that will provide you with higher returns as you can afford to take higher risks.One of them is the thematic mutual funds. Read this article to know more about them – Should you consider thematic funds?. Mid and small cap funds can provide higher returns in the medium to long term. Funds such as the Axis Midcap fund have provided annualised returns of more than 16% in the past 3 years. 

The most important aspect of retirement saving is to not touch your retirement savings until you retire. Regardless of the effort you make to generate a good amount for retirement, if the savings starts seeing withdrawals then there will be a negative impact on your savings. So, use different investments for the various financial goals such as your child’s education and marriage. If you earmark investments for your retirement, it will help you safeguard it until your retirement.

Mutual fund SIP is one of the easiest ways to invest for retirement planning. The money will be auto-debited from your savings bank account every month. It is a disciplined way of investing because you invest regularly. SIPs in equity mutual funds will average the cost of your purchase and help you tide overstock market volatility. 

Want to invest in mutual funds for your retirement? Click here to invest in some of the country’s best mutual funds. 

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