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Posted On Thursday, May 14, 2015
According to figures by the Labour Ministry, about 40% of the working population now is employed in private sector firms. All those employed in Private Sector firms have to make a provision for their own retirement corpus to take care of themselves and loved ones during the Golden Years of Life.
Those employed in the Public Sector too have to plan their retirement, but most of them have the benefit of pension from their jobs once they retire. But the question remains, will the amount be good enough?
How do we create a provision for the money required post retirement for ourselves?
Today, we have an advanced financial system, ease in availability of information and choice of financial products. And the rise in confidence of investors to make healthy diversification from traditional investments – bank deposits and gold – is perhaps at an all-time high.
With the help of all these we may create wealth for the future while we are still in the earning phase, and rest assured we may have a care-free, enjoyable retirement.
Where do we begin? Asset allocation which is at the core of any retirement plan is where we must start. Asset allocation, as you well might know, is spreading out your investments across various asset types (equity, bonds, liquid securities, gold etc). This is of paramount importance for the success of investments for the long term of 10, 15, 20 years or so. It is unhealthy to be too aggressive and concentrate all your investments in equities. Similarly the opposite of it, to be too risk averse and skip equities. Thus asset allocation is all about finding the balance, based on your risk appetite, goals, time horizon and other factors.
To get moving ahead we need a solid plan. Here is a fact reported from a global survey on retirement planning: people with a formal financial plan save more and are more likely to comfortably meet their financial goals for the future.
So here are three easy steps to plan your retirement corpus with mutual funds –
1. Estimate your retirement corpus requirement with a Retirement Calculator
2. Accumulate corpus using SIP through your working years
3. When approaching close to retirement use STP to move assets from more risky assets to less risky assets
4. Through SWP meet your expenses for an enjoyable retirement
1. How much of your present income would you need to remain comfortable in your retirement? Being financially ‘comfortable’ means different things for different people. Thinking about your own current circumstances you must assess how much would be the minimum gross income that would be required to maintain your current standard of living. The Retirement Calculator on our site could serve as a rough guide to what this figure can be, taking into account various future expenses.
2. Mutual funds are a good tool to achieve your long term investment goals. SIP or Systematic Investment Plan is a feature offered by mutual funds that help you invest a fixed, convenient amount in a desired fund regularly. Just like you would do in an FD or like your contributions to Public Provident Fund (PPF), you can set aside a portion of savings (ideally, the amount you figured out from the retirement calculator) for investing every month in mutual fund via SIP.
You can read in detail about the benefits of SIP in one of our previous articles.
For an illustration on retirement corpus planning, take a person of 35 years of age and presently having a monthly expenditure of Rs 30,000 a month and expects inflation to be 7% throughout these years.
If he expects to live to the age of 80, he’d require a corpus of about Rs. 2 crores by the time he retires. This is the amount he’d live off for the rest of his life. He has solid 20 years before him to save, invest and build a corpus of Rs 2 crores.
Let's take a look at how much amount he’d have to invest monthly at different rates of return.
|Rate of investment return||Monthly SIP required|
Disclaimer: The numbers used in the table above are for illustration purpose only; performance figures are not actual.
Thus to the extent that his asset allocation permits he can build the corpus with SIP in an equity fund. At a modest 12% returns he’d be able to smoothly build the required corpus with an investment of Rs 20,000 a month. And if the returns clocked are higher he’d end up with a pleasant surplus for a retirement bash or vice versa!
Now the consequence of failing to invest the sufficient amount is anybody’s guess. He might have to compromise on his lifestyle in retirement as his income would not support the same. So this highlights the importance of saving and investing adequately, in the proper financial instruments, much before the goal arrival time.
3. As retirement draws near equities might no longer be the ideal asset type for your investments. Bonds and other fixed income instruments may be more suitable. Therefore you can shift your holdings from equity schemes to debt schemes using the Systematic Transfer Plan or STP of mutual funds. This allows you to choose a target scheme into which specific amounts from the transferee scheme will be moved every month (or as frequently as you choose).
4. Finally as you enter the golden years, you can put to use Systematic Withdrawal Plan or SWP, another great feature offered by mutual funds. Automatically withdraw the amount required by you monthly (or as frequently as you desire) into your savings account.
Follow the three steps to custom-create your retirement plan with mutual funds and you would be able to meet your goals smoothly.
Now what next; if you are not investing through SIP, start one today, as it is better to start at the earliest to make the most of it. If you have an existing SIP do check whether that is good enough to help you retire peacefully. Please speak to your investment adviser for assistance on any investment related decisions.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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