Retirement mutual funds are open-ended retirement schemes with a lock-in period of 5 years or till retirement age. These are ideal for investors looking for a comprehensive solution that ensures steady returns after retirement.
Should you invest in a retirement mutual fund?
Before you decide, know how retirement mutual funds work, benefits, tax and if you should invest in them. Read on!
Retirement mutual funds invest primarily in safe investment options such as government securities that protect the capital from market fluctuations. These schemes also invest in equity and various debt instruments so that the investment grows over time. Income from capital gains and interests adds to the investment resulting in a sizeable corpus.
Many mutual fund houses offer dedicated retirement schemes. These are beneficial for inexperienced investors and those without much knowledge about investments. The mandatory lock-in period ensures a disciplined investment as you cannot exit the scheme in case of a slight market correction.
However, investors with a basic knowledge of mutual funds will want to directly choose the right combination of investments for their portfolio. So, if you are a young investor with a high risk-appetite, pure equity funds, such as the Navi Large Cap Equity Fund will help you accumulate wealth over time. It invests primarily in top companies of India and can offer more stable returns compared to other equity funds. Visit Navi Mutual Fund and start investing to fulfil your financial objectives.
Also Read: 14 Best-Performing Retirement Mutual Funds
Investors need to be aware that returns from these investments are taxable. Capital gains upon redemption of retirement funds are subject to taxes depending on the holding period and equity/debt portion of the investment. If the fund’s portfolio has over 65% equity exposure, it is taxed as an equity fund. Otherwise, it is taxed in a similar manner to debt funds.
For equity-oriented funds and a holding period of less than 12 months, Short-Term Capital Gains (STCG) taxes are applicable at 15%. For a holding period over 12 months, Long-Term Capital Gains (LTCG) are taxed at a 10% rate.
STCG tax for debt funds is applicable for a holding period of less than 3 years. The short term capital gains are added to the investor’s income and taxed as per their income tax slab rates. For a holding period over 3 years, LTCG is taxed at a flat 20% rate with the benefit of indexation.
Retirement mutual funds invest in a mix of equity and debt securities to accumulate enough funds for retirement. Before selecting the best retirement funds, you may want to calculate your ideal retirement corpus and check the above-mentioned factors.
The lock-in period of retirement funds is helpful for investors who are likely to panic during the slightest correction of the markets. The mandatory lock-in period helps investors weather market cycles, making sure that investors stay disciplined with their investments.
Follow the given steps to get an estimate of your retirement corpus:
A. Calculate your fixed and variable expenses
B. Include all sources of income after retirement
C. Make a rough estimate of how much money you will need
D. Adjust this against expected inflation
These are close-ended mutual funds with a lock-in period of five years suitable for investors with a long-term investment objective. There are two types of solution-oriented mutual funds in India- retirement funds and children’s funds.
Most people prefer SIP to invest in these funds as it helps to accumulate wealth by investing a small amount over a long time. They are suitable for new investors as they help develop a habit of investing regularly. Moreover, investors save money on purchasing fund units due to rupee cost averaging.
Risk tolerance differs from one investor to another, and there are no fixed rules for balancing risks and returns. Someone who is approaching retirement often tends to invest in low-risk funds, while younger investors may take a more aggressive approach.
Before you go…