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Mutual Funds can help reach goal faster



Everybody expects an intendant and secured retired life. But look at the rising medical costs, increasing life expectancy and the high rate of inflation. The question is will traditional investment plans build a retirement corpus which, when invested on maturity , be able to generate a regular stream of monthly income to cover our expenses so that we are able to maintain at least the same standard of living as today , if not better?


This is why it becomes important to invest and plan for a retirement corpus in such a way that, besides taking care of our daily needs, it should suffice for other contingencies and for the needs of our loved ones till our survival. A look at the return and features of traditional investment products popular among investors shows us that the returns could vary between 8.5% per annum (EPF , Nabard Rural Bonds) and 5.5% (notified FDs). Some of these instruments also have tax benefits that lead to slightly higher actual returns. In a high inflation regime, say about 9%, the real return -that is nominal returns from investments minus the rate of inflation -in all these cases is negative. This means most of the time we get negative return on traditional investments.


Planning for retirement Today , the average individual starts working at 25 and works till he/she is 60. In these 35 years, the individual's percentage of savings to in come keeps changing, based on his/her life stage because of expenses like marriage, raising a family, child's education, etc, and additional income due to promotions, bonus payouts, etc.

During these years, he/she has to build a corpus which has to sustain him/her for the post retirement life of 25-30 years.


The retirement corpus varies from individual to individual, depending on income and ability to save, and the standard of living one intends to maintain post-retirement.
Calculating required corpus Let us assume a life expectancy of 85, inflation rate of around 6% over the saving time horizon (over 10 years), and return on FD as 8% (see the When using fixed deposits only section in the accompanying table).

Now, can we better this?


Let's take a look at how a combination of FDs and equity investments would have fared over the same time horizon. In India, stocks have given an average annual return of 12%. To achieve the target of c Rs 2.26 crore through equity funds only , we would have to invest Rs 7,815 per month. Thus, equities can help deliver the c same goal with a much lower investment. f Equities are, however, volatile. So we can divide our investments into equities and fixed l income instruments (like FDs, bonds, etc). The accompanying table's When using both FDs and equities section shows the amount that one needs to invest to achieve about Rs 2.26 crore for different equity and fixed income percentage allocations.

Investments in equity funds should predominantly be into those funds that benchmark against the nifty index. This way, an investor can be sure that if nifty/ sensex goes up, then his/her investment will also appreciate.

 

An investor can follow a static allocation model, where by his investment into equity and fixed income does not hange, or follow the dynamic model. In dynamic allocation, an investor reviews the investments every six months and hangs the allocation.

A simple strategy could be or every 15% rally in the equity markets, you reduce your exposure to equities by 5%. Similarly, if there is a fall in equity markets, then for every 15% fall in equities one can increase equity exposure by 5%. This way , you will be able to take advantage of equity volatility . Following this strategy can help you move out when there is over-optimism in the markets, and enter into equities when there is general pessimism.

 

Once you have a corpus of Rs 25 lakh, which should get created in the first eight years, you can start adding some midcap and sectoral funds.

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