Saving Options…

For Your Retirement Fund

The growing financial pressure on retirement system worldwide is forcing individuals to change the way he or she thinks about and plans for retirement. It is need of the time for an individual to plan at an early stage to invest in various investment products in order to create an adequate size of retirement corpus. Long before retirement, an individual needs to carefully map out his or her plans for ensuring a secure retirement. Retirement plan is an arrangement to provide you an income or pension during the cessation of service when you are no longer earning a steady income from business or from employment. All the activities in post-retirement period need money and without money one cannot survive in the society. Like financial planning, retirement planning has become an integral part of human life today.

You need money for every major decision such as buying a house and a vehicle, planning for children’s higher education and retirement. You create a clear goal what your life would look like and set your milestone based on your resources and find out the real path where you want to go in your life. Once your goals are set, you may start saving small amount each month regularly. Your long-term goals may face uncertainty due to volatility of the market (ups and downs) but don’t stop until you reach your destination.

Maintain disciplined approach:

An investor must be well disciplined; otherwise he/she will lose money due to wrong decision such as selling stocks and shares & mutual funds haphazardly due to volatility of the market. The decision to not invest in the bear market also reflects that the investor is not well disciplined as he/she is not investing regularly as per the defined / targeted goals.

Which investment products you need in retirement planning?

Retirement planning generally includes two stages such as: accumulation stage and distribution stage. Accumulation stage is that stage when you create corpus over the period generally up to retirement and thereafter distribution stage starts, where you spend your created money up to life long.

“A small amount of investment fulfills your dreams; one must think about it.”

These are some of the investment instruments that can form part of a retirement plan during the accumulation stage:

  • Pension plan,
  • National pension Plan(NPS),
  • Public provident fund (PPF),
  • Gold, e-gold & Gold Bond,
  • land & building,
  • debt instruments,
  • NCD and bonds,
  • Equity  and
  • Equity related instruments (mutual funds).

These are some of the investment instruments that can form part of a retirement plan during the distribution stage:

  • Bank deposits
  • Company fix deposits
  • Senior Citizen Savings Scheme (SCSS)
  • Pension Yojana
  • Annuity of Life Insurance Company
  • Post office MIS.

You can arrange to use the corpus in the distribution stage through interest, dividends, annuity and withdrawing capital, which you have accumulated during the period of working in your life. It is a process to think today about your future life and also for your beloved ones. To achieve your retirement goals, you need the right amount of corpus to take care of your needs & key commitments and provide regular retirement income to maintain your lifestyle post retirement life.

Those who invest irrespective of market trend, will achieve their goal in due time. Start investing in diversify equity mutual fund at the age of  25,  a very small amount say Rs.3000/- per month for your retirement after 35 years you will accumulate Rs.1.95 cores with an annual return of 12% , which is sufficient to generate Rs.1.26 lakhs Per month (7.75% interest in bank FDR) , of your post retirement living expenses easily. The above corpus can be achieved only by disciplined approaches irrespective of market volatility.

Why you invest in mutual funds (MFs)?

Mutual funds are the best option on date to invest for long-term goals as they have several advantages in comparison to other investment products. They are highly liquid, investor can recover his/her money within three days from the date of redemption. Mutual fund investments enable diversification in to different Asset class. They are less risky than equity, given that fund units are professionally managed. Further, they operate with greater transparency and user-friendly because of their online presence. In addition, mutual fund investments are tax-efficient, involve lower costs and offer consistency return over long-run.

Is consistency is an important parameter for selection of a fund?

A mutual fund has outperformed its benchmark index over a period of one year; it may not do well in the coming year. You can take funds five year return and its benchmark returns on every month for five years. On and average if fund return was over and above the benchmark return, we may call consistency in fund performance. The higher the outperformance, the better is the consistency.


What are the criteria for selecting MFs?

The selection of investing in mutual fund of portfolios by the investor will be generally guided by two criteria:

  • The investor would prefer to invest in the lowest risk fund with same expected return in a specific time frame in two funds.
  • The investor would prefer the higher expected return in portfolios of two funds with same risk.

An investor should make an investment strategy based on risk-tolerance capacity. Risk tolerance capacities differ from person to person and also their age. It is prudent for investor to invest in large cap, multi cap & diversify equity mutual fund scheme, rather than aggressively invest in mid-cap as well as small cap funds.

Invest directly in MFs

Expense ratio is the amount an investor pays a fund every year as a percentage of investment as payment for managing one’s money.  In the long term, a high expense ratio can reduce returns massively. However, a lower expense ratio does not necessarily imply a well-managed fund. Rather, a good fund is one that delivers a good return with minimal expenses. You must therefore consider the fund management charges while investing in a mutual fund.

For a SIP of Rs 3000/- per month in a diversify equity mutual fund direct growth- option scheme which generate a rate of return of 14 per cent per annum(assumed), a 1 per cent extra fund management charge will result in a loss of Rs 23.47 lakhs over a period of 30 years.

By investing directly with mutual fund houses instead of through distributors/ agents, you can save on distribution fees, and there is evidence that over the long term, direct equity mutual fund outperform regular funds by over 1%.

Think before you invest

Investing blindly in shares and other market related products may risk the loss of investor’s capital as speculator plays very important role in inflating the stock prices now-a-days. Security prices are affected by so many factors. It causes interest rate risks and purchasing power risks. Similar to the capital markets more broadly, mutual funds are governed by factors such as socioeconomic conditions, inflation and interest rates, global events, political stability, exchange rate fluctuations, as well as company performance and governance. Returns from shares and mutual funds also depend upon the earnings growth of companies. Hence, the concentration ratio of each fund should play an important role while selecting between different Mutual funds.

Create a balance portfolio by Investing in mutual funds

It is prudent to invest in different fund houses and different products, which not only protect your hard-earned money from the market volatility but also create wealth in the long-run. Mutual funds are the most suitable investment for the common man as it offers an opportunity to invest in diversified securities and different asset class, which are professionally managed by fund housed at a comparatively low cost. Mutual funds help an investor to create a good portfolio mix due to its various categories of funds such as: large-cap funds, multi-cap funds, mid-cap funds, hybrid funds, debt funds and gold fund. Equity funds have greater risk of capital loss in comparison to hybrid/ diversified funds.

“Diversification keeps you financially fit and also protect you from volatility of the market, as it reduces the risk exposure in your portfolio.”

Review portfolio & book profit periodically:

You can evaluate the performance of a mutual fund on the basis of parameters such as NAV, portfolio turnover, risk and return yearly or half yearly returns.  It is also advisable to book the profit periodically, or to transfer equity fund holding to liquid / debt fund when fund earns more than bank fixed deposit rate plus the current inflation. Investment of shares during your life times may give you 5 times positive return and 50 times negative return. It is not a process of win-win system. If you have known the actual market trend you can win in this volatile market, otherwise not. Speculative effect, demographic factors, micro factors, macro factors, fluctuation of currency & also political stability play an important role in capital market.

In addition, it is important to consider indicators such as standard deviation, the beta and the alpha, and the sharp, Treynor, Sortino and concentration ratios while review an equity mutual fund.

Why focus on the long-term….?

The S&P BSE Sensex yielded returns at a CAGR 8.83 per cent over the last 10 years. Historically, there has never been an instance of negative performance for a period of 10 years and above. As the tenure of investment increases, the probability of negative performance decreases.

Affirming this fact, as of 1th September 2016, actively – managed large cap and diversified funds generated a CAGR return of 15.86 per cent and 17.31 per cent respectively over the period of 10 years. In comparison, the benchmark index for large cap fund S&P BSE 200 yielded a lower, 9.38% during the same period. Clearly, then, equities deliver strong returns with lower downside risk in the long term, compare to debt instruments such as bonds, debentures and govt. securities. Hence, equity and equity related investments should always be for the long term, ideally more than five years, and one can assume returns of 12-15 per cent a tear over a longer horizon.

About Author:

RK Mohapatra is Joint GM – Finance, IRCON, and an eminent author of two bestselling books, “Retirement Planning: A Simple Guide for individuals” & “Investment…Risk & Growth”.Contact author-