3 Tips to Plan your Retirement with Mutual Funds

More and more millennials are starting to take their retirement plans seriously these days. Although inflation has started to trend downwards in recent years, the long-term inflation trend in India has firmly stayed put in the 6-6.5% range. This fact, coupled with steadily increasing life spans and the gradual break down of the joint family system, is pushing individuals in their mid-30’s to take a long hard look at their retirement plans.

Many individuals continue to heedlessly stash away their retirement savings into low risk, low return investments such as bank deposits, provident funds and life insurance plans. Although the NPS is a step forward in the right direction, it has its limitations too in the form of an enforced ceiling limit on the equity allocation, and the relative underperformance of its equity oriented schemes. Fortunately, a fantastic solution to your retirement planning exists in the form of Mutual Funds. When it comes to retirement planning, Mutual Funds Sahi Hai! Here are some tips to help you plan for your Retirement using Mutual Funds.

Go Aggressive with your SIP’s - Ignore Your Risk Appetite

SIP Investments (Systematic Investment Plans) are an excellent way to build up your retirement corpus slowly and steadily. But if your retirement is several years away, there’s no point in letting your risk appetite dictate the choice of your SIP investments. Over long periods of time, you’ll benefit greatly from the volatility that’s intrinsic to mid and small cap stocks, as the purchase price of your investments will get averaged out across market cycles. Even seemingly small differences in returns, over a long period of time, can make a large difference to your final retirement corpus. For instance, the difference between achieving a 12% return and a 15% return on a long term, 25-year SIP investment of Rs. 10,000 can result in a difference of nearly 1.5 Crores in your final fund value. Initially, don’t worry too much about goal targets and ideal SIP amounts – simply start with whatever is comfortable and build it up as you go along.

Be Consistent & Disciplined

When it comes to planning your retirement with Mutual Funds, it’s very important to be consistent and disciplined with your SIP Investments. Fight the temptation to withdraw your accumulated retirement corpus, as even a small withdrawal or two can make a massive dent in your final corpus. Equally important is the need to be disciplined with your SIP Investments. Make sure you keep your account funded on your SIP date, the way you would with an EMI. For best results, plan your retirement planning SIP’s in such a way that they get debited early on in your salary cycle, preferably before your monthly spends start kicking in and reducing your bank balance.

Systematically De-Risk as you Approach Your Retirement Date

As you approach your retirement date, you need to begin de-risking your retirement planning portfolio in a structured and disciplined manner. While its advisable to be heavily invested into equities throughout your accumulation phase, it’s equally important to slowly shift your asset allocation in favour of debt funds in the 3-4 years preceding your retirement date. To do this, start STP’s (Systematic Transfer Plans) from equity funds to debt funds, that will eventually result in around 80% of your overall equity corpus getting transferred to lower risk debt mutual funds by the time you finally hang up your work boots. When your income finally stops, you can initiate SWP’s (Systematic Withdrawal Plans) from these debt funds to generate a steady income to meet your day to day needs.