Retirement Planning through Mutual Fund
Systematic Investment Plans
Retirement planning is a complex but a very important topic,
especially in today's context as our country is going through
a process of economic and social transformation. Some of these changes are:-
especially in today's context as our country is going through
a process of economic and social transformation. Some of these changes are:-
- Shift from joint families to nuclear families
- Children are migrating to other cities for employment
- Higher inflation levels
- Increased life expectancy
- Rising cost of healthcare
These changes and probably others in the future, makes it
imperative for us to plan for retirement early in our working
lives. It is important that we understand the fundamental
goal of retirement planning, which is to achieve financial
independence in your retired years.
One of the fundamental tenets of finance is the principle
of "time value of money". In simple terms, money loses
value over time, thanks to the ugly nine letter word, inflation.
Therefore the first step in the retirement planning process
is capital needs analysis. There are several factors involved
in need analysis including inflation, life expectancy, lifestyle
and investment returns. You should take expert help from
a financial planner to make sure that you have a robust
financial plan. Once you have determined the amount of
retirement corpus that you need, you can focus on building
the corpus.
While there are several products available in the market
for retirement, like Public Provident Fund, New Pension
Scheme and pension plans offered by insurance companies,
each with their own merits, mutual funds are very effective
instruments for retirement planning. There are a number
of benefits of retirement planning through Mutual funds
Systematic Investment Plans (SIP):-
Mutual funds are more tax efficient than some of the
other products (e.g. pension plans). Long term capital
gains for equity mutual funds are tax exempt. For debt
funds capital gains are taxed at 10% without indexation
and 20% with indexation. With high levels of inflation
capital gains tax with indexation is often nil. Income from
pension plans, on the other hand, are taxable
Mutual Funds are very flexible instruments. There are
no restrictions and penalties on regular SIP payments and
withdrawals, unlike pension plan premiums or PPF
For the smart investor, mutual funds offer more choices
and transparency. You can select products based on your
risk profile, track record, and fund objectives
Retirement planning is very long term in nature, and the
investors can select diversified equity funds balanced funds
or even long term debt funds, depending on their risk profile
and time horizon. The critical success factors in retirement
planning are (1) starting as early as possible to get the benefits
of compounding, (2) investing in the right asset class and (3)
staying disciplined on retirement planning
The table below shows a scenario analysis of the corpus built
over various periods of time at different investment return rates,
with a monthly SIP amount of Rs. 5000/-
The table above clearly illustrate the advantage of starting early.
For example, in the above table if you started investing through
SIP at the age of 30, you would generate a corpus of nearly
Rs. 11 crore at your retirement (assuming 20% expected returns),
by investing only Rs 5000/- per month. However, if you began at
the age of 45, to generate the same corpus will need to invest
Rs 1 lakh/- per month.
As you approach retirement, you should rebalance your portfolio
mix to have a greater allocation to fixed income instruments
like fixed maturity plans or monthly income plans, to protect your
capital. In order to meet your monthly income needs after retirement,
you can opt for Systematic Withdrawal option. It said that money
cannot buy happiness. However, lack of financial security,
does put a lot of stress in our personal lives. With proper planning
and rigorous discipline, mutual fund SIP is a great investment option
to ensure a very fulfilling retirement.
imperative for us to plan for retirement early in our working
lives. It is important that we understand the fundamental
goal of retirement planning, which is to achieve financial
independence in your retired years.
One of the fundamental tenets of finance is the principle
of "time value of money". In simple terms, money loses
value over time, thanks to the ugly nine letter word, inflation.
Therefore the first step in the retirement planning process
is capital needs analysis. There are several factors involved
in need analysis including inflation, life expectancy, lifestyle
and investment returns. You should take expert help from
a financial planner to make sure that you have a robust
financial plan. Once you have determined the amount of
retirement corpus that you need, you can focus on building
the corpus.
While there are several products available in the market
for retirement, like Public Provident Fund, New Pension
Scheme and pension plans offered by insurance companies,
each with their own merits, mutual funds are very effective
instruments for retirement planning. There are a number
of benefits of retirement planning through Mutual funds
Systematic Investment Plans (SIP):-
Mutual funds are more tax efficient than some of the
other products (e.g. pension plans). Long term capital
gains for equity mutual funds are tax exempt. For debt
funds capital gains are taxed at 10% without indexation
and 20% with indexation. With high levels of inflation
capital gains tax with indexation is often nil. Income from
pension plans, on the other hand, are taxable
Mutual Funds are very flexible instruments. There are
no restrictions and penalties on regular SIP payments and
withdrawals, unlike pension plan premiums or PPF
For the smart investor, mutual funds offer more choices
and transparency. You can select products based on your
risk profile, track record, and fund objectives
Retirement planning is very long term in nature, and the
investors can select diversified equity funds balanced funds
or even long term debt funds, depending on their risk profile
and time horizon. The critical success factors in retirement
planning are (1) starting as early as possible to get the benefits
of compounding, (2) investing in the right asset class and (3)
staying disciplined on retirement planning
The table below shows a scenario analysis of the corpus built
over various periods of time at different investment return rates,
with a monthly SIP amount of Rs. 5000/-
For example, in the above table if you started investing through
SIP at the age of 30, you would generate a corpus of nearly
Rs. 11 crore at your retirement (assuming 20% expected returns),
by investing only Rs 5000/- per month. However, if you began at
the age of 45, to generate the same corpus will need to invest
Rs 1 lakh/- per month.
As you approach retirement, you should rebalance your portfolio
mix to have a greater allocation to fixed income instruments
like fixed maturity plans or monthly income plans, to protect your
capital. In order to meet your monthly income needs after retirement,
you can opt for Systematic Withdrawal option. It said that money
cannot buy happiness. However, lack of financial security,
does put a lot of stress in our personal lives. With proper planning
and rigorous discipline, mutual fund SIP is a great investment option
to ensure a very fulfilling retirement.
