During our working lives, one of our top financial priorities should be retirement planning. Retirement mutual funds are open-ended retirement savings plan that can help you save when you retire. Before you decide, know how retirement mutual funds work, the benefits, tax working and if you should invest in them. You can learn all about the availability of mutual funds designed specifically to meet your needs for planning on retirement in this blog.
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.
Here are types of retirement mutual funds in which individuals can pool their money:
1. Debt mutual funds
These funds are an ideal option for retirement planning for conservative or risk-averse individuals. One can be sure about stable returns at low risk. These can help in leading a stress-free life after retirement.
2. Equity mutual funds
These invest in equity and equity-related instruments of companies. As equities are highly volatile, these funds carry high risk. However, their return potential is higher than debt funds.
3. Hybrid funds
Hybrid funds invest in both debt and equity instruments. Depending upon the asset allocation, these funds can provide high returns as well as stability. Individuals should choose a hybrid fund that can fulfil their investment objective.
4. Pension funds
Many fund houses provide the option of investing in pension funds which are designed to cater to the needs of post-retirement life.
The following are the annualised returns of some of the best retirement mutual funds in India:
|Fund Name||3-Year Returns|
|HDFC Retirement Savings Fund – Equity Plan – Direct Plan-Growth||17.26%|
|ICICI Prudential Retirement Fund – Pure Equity Plan – Direct Plan-Growth||15.70%|
|HDFC Retirement Savings Fund – Hybrid- Equity Plan – Direct Plan-Growth||12.45%|
|ICICI Prudential Retirement Fund – Hybrid Aggressive Plan – Direct Plan-Growth||10.80%|
|Tata Retirement Savings Fund – Direct Plan – Moderate Plan-Growth||10.67%|
*Returns data as of June 21 2022
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.
Here are some risks of investing in retirement mutual funds:
1. Market risk
One of the most prominent risks associated with investing in retirement funds is market related risk. These funds invest in the debt and equity instruments of companies. All these come with some degree of risk. Any fluctuation in the stock market will influence the performance of these funds.
2. Inflation risk
Inflation has a direct effect on purchasing power. The inflation rate in the country will reduce the returns received from these funds. The net return is also called the real rate of return. There will always be inflation risk in any investment avenue.
3. Interest rate risk
This type of risk mainly affects the debt mutual funds. Debt funds invest in financial secured instruments like bonds. The bond prices and interest received have an inverse relationship. An increase in interest rate will reduce the bond price and vice versa, thereby affecting capital gains.
4. Credit risk
Again, this risk is mainly associated with debt instruments. Credit risk implies the risk that the bond issuer may not be able to repay the principal amount along with interest. It is higher in case the debt instruments have a low credit rating.
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
Mode of Investment in Retirement Funds
Lump-sum method of investment involves making one-time payment or paying a large sum upfront. It is suitable for individuals having a substantial investment corpus and those having high-risk tolerance.
On the other hand, SIP or systematic investment planning involves investing a fixed amount in a mutual fund scheme at regular intervals. It is suitable for individuals who have a small investment corpus. It is suitable for new investors as it inculcates a sense of financial discipline and offers wealth accumulation over the long term.
Both these methods have some shortcomings and advantages. It is advisable that individuals consider their risk appetite, and disposable funds before choosing an investment method.
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 fewer than 12 months, Short-Term Capital Gains (STCG) taxes are applicable at 15%. For a holding period of 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 fewer 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 of over 3 years, LTCG is taxed at a flat 20% rate with the benefit of indexation.
How Much Money Should One Have Before Retirement?
This is a subjective issue and it is different for each individual. The ideal corpus before one enters his/her retirement age depends on the expenses and standard of living. The rate of prevailing inflation also plays a role. Hence, what was considered to be ideal in 2000 may not be so in 2022.
Also, one must consider his/her financial goals and risk appetite before allocating their money to any retirement fund.
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.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
What is Nifty Midcap 150 – Returns and Stock Lists 2023What is Nifty Midcap 150? Nifty Midcap 150 is an index on the NSE (National Stock Exchange... Read More »
What is Nifty Midcap 50 – Returns and Stock Lists 2023What is Nifty Midcap 50? The Nifty 50 Midcap index comprises top 50 Indian companies based on ma... Read More »
Index Funds – Types, Benefits, How does It Work and How to Invest in 2023What Is Index Fund - Meaning and Definition An index fund is a passively-managed mutual fund tha... Read More »
What are Large Cap Mutual Funds? – Features, Risk and AdvantagesWhat are Large Cap Funds? Large cap mutual funds are equity funds that invest in the stocks and ... Read More »
10 Best ULIP Plans in India to Invest in February 2023ULIP (Unit-Linked Insurance Plan) is an excellent financial instrument that combines the benefits o... Read More »
Best SWP Mutual Funds in India to Invest in February 2023A Systematic Withdrawal Plan (SWP) is a type of investment strategy in which a set amount of money ... Read More »
Mutual Fund: Meaning, Features, Types, Benefits & WorkingThere has been an increased awareness regarding mutual fund investments in India. According to a re... Read More »
What is an Auto Sweep Facility? – Working, Taxation and UsesA lot of people have money lying in their savings account earning a mere 3% to 4% annual rate of in... Read More »
Alternative Investment Funds (AIF): Types, Features, Benefits and WorkingAlternative investment funds (AIFs) are privately pooled investment funds that doesn’t fall under... Read More »
3-in-1 Accounts: Savings, Demat and Online TradingWhat is 3-in-1 Account? A 3-in-1 account is a combination of bank account, trading account and D... Read More »
10 Best Lumpsum Mutual Funds in India to Invest in February 2023Lump sum mutual fund investments involve making a single, bulk deposit in a mutual fund scheme as o... Read More »
Best SIP Mutual Funds To Invest In India (2023) – Its Types And TaxationA Systematic Investment Plan (SIP) is a convenient way to invest a fixed sum in mutual funds. For i... Read More »
All information is subject to specific conditions | © 2023 Navi Technologies Ltd. All rights are reserved.