Retirement corpus using mutual funds

How to Build Your Retirement Corpus using Mutual Funds?

Surveys reveal that Indians give Retirement top priority. We believe that investing in pension plans guarantee peaceful post retirement. It is not entirely true because there are some regulations for pension plans and the plans are not flexible. Is there an alternative to pension plans? Read on to learn more.

Is mutual fund the best alternative to pension plans?

The first step to select a suitable retirement corpus plan is to calculate household and health expenses accounting for future inflation and arrive at the monthly investment required for smooth sailing.

Read this article-cum-guide – Calculate Your Right Retirement Corpus to calculate the right amount of retirement corpus you will need at retirement. If you already have a retirement corpus in mind, the guide also has a calculator to check for its sufficiency.

Once you calculate your retirement corpus, all you have to do is make money and invest it wisely. However, understanding mutual funds is necessary to make the appropriate investment choice .

1. SIP (Systematic Investment plan) a Pre-retirement corpus building tool

The fact that many potential investors refrain from investing in mutual funds is because of the high volatility involved.

Systematic investment in equity mutual fund is a good financial practice that came as a counter measure for this market volatility. In a SIP, an investor will be investing a fixed amount of money at regular intervals over an extended period of time.

What is the Danger with Volatility?

Let’s say you are investing ₹1 lakh in a mutual fund scheme as Lumpsum investment. On the next day, if the unit value drops by even 2%—you will have lost ₹2000 for nothing.

This kind of capital loss will continue as the NAV (Net Asset Value) of the scheme fluctuates. Especially if the market is bearish for a prolonged period, the losses will be very high. A retail investor can never afford such a volatility which will push them into emotional turmoil. To avoid such a scenario, investing in mutual funds require a good entry strategy.

So How Does SIP Minimize The Risks?

Systematic investment plan (SIP) shields the investor from market volatility and helps in rupee cost averaging (RCA).It eliminates the risk of timing the market.

Let me give you a mechanical model of how SIP works.

Imagine you are jumping down from a height of 3 feet. A one point landing, that is, landing on your feet alone can break your ankles. It could often lead to complete paralysis due to spinal injuries caused by the impact.

Yes, just like a Lumpsum investment where you invest only one time and taking all the risk at the same time. It could lead to a financial paralysis.

On the other hand, a wide range of professionals say, if you can spread the impact of falling to multiple points of your body you can avoid injuries. Parachute Landing Fall (PLF) is one such technique followed by paratroopers all around the world while skydiving.

To simply put, Systematic Investment Plan (SIP) is the PLF in the world of investing. It increases the impact points, minimizes the risks and neutralizes the losses.

Monthly investment can be a mix of equity and debt (Employee provident fund (EPF) / public provident fund (PPF) / Debt fund) or a Balanced Fund depending on the period, until retirement.

Does it mean investing through SIP is a long term commitment?

Yes. But with Mutual Fund SIPs, the commitment is in the hands of the investors and not the Asset Management Company.

How Flexible Is SIP?

As far as one can say, SIP is as flexible as it gets.

  • Top-up SIP

  • Your earnings increase every year, so should your investments. With the top-up feature, you can increase your SIP amount as you wish to increase your rate of investment.

    For example: If you are investing ₹5000 every month through SIP, and your active income increases by 15%, you can increase your SIP amount to, say ₹6000 per month.

    That said; the opposite is also possible. For example: If you face any sudden financial crunch, you can reduce your investment amount in SIP investment for a while.

  • Missing a SIP Date

  • Unlike recurring deposits, which follows a similar investment strategy, there is no penalty for missing a SIP date.

    If you accidentally miss a SIP payment by not having sufficient balance in your bank account, you can compensate for it.

    For example: if your SIP date is 5th of every month and your bank account has no sufficient balance to make the payment, it will be considered a missed SIP. You can compensate for the missed SIP by making an additional payment for the SIP amount the next day. Since there will be no bigger change in NAV of units in 1 day, it will not affect your corpus accumulation process.

    The key to accumulating hassle free retirement corpus is to start early so that the monthly payment is more affordable. True to the proverb “Make hay while the sun shines”, an early start to building Mutual Fund SWP also encourages investment in multiple open ended SIPs with diversified Asset management companies thereby increasing the return on investment.

2. STP (Systematic Transfer Plan) Approaching retirement, the strategy to shift corpus to Debt fund

A Systematic Transfer Plan is much of a transition plan for investors.

STP can be used to transfer funds periodically from equity to debt or vice versa under the same Asset management company.

STP is defined as a transfer from one fund to another fund in a systematic manner. STP is highly recommended for minimizing market risks just before retirement.

Shifting investments to debt 2-4 years ahead of retirement is recommended because equity is subject to high market risk and it is not advisable to retain corpus in equity till the last minute. Market should not be timed for making an entry. The same is true for exiting from the market, too.

For example: If your planned retirement is due in 5 years, you shall initiate a STP for your retirement corpus to a debt fund. It will transfer a fixed amount from your retirement corpus in high return-high risk equity fund to a lower return-low risk debt fund.

The reverse of it is also an effective investment strategy for making an entry into the equities market.

That is, if you have a lump sum, as we have seen in the previous section, it will be a poor investment decision to invest all of them in an equity based fund in one shot. On the other hand, keeping large sum in your bank account will not fetch you an appreciable return either.

To maximize returns during this transition, you can invest in a debt fund as a Lumpsum investment and then transfer the same periodically in SIP manner through STP.

On average, debt funds offer 7-8% CAGR. As the debt fund feeds your equity fund through STP, you can make investments in this debt fund as additional investment simultaneously.

3. SWP (Systematic Withdrawal Plan) A Solution to Post Retirement Expenses

SIP is very popular in cities and it is used as a general term for referring to mutual fund investments. STP, SWP are lesser known than SIP. And understanding SWP helps in making a wise investment decision to handle post retirement needs efficiently.

SWP is the reverse of SIP. In SIP one makes a regular fixed investment into a fund and in SWP one withdraws a fixed amount regularly from a fund. The amount to be withdrawn and the frequency (monthly, quarterly or annual) is determined by the investor.

Assuming that the corpus has completely been shifted into debt mutual funds, post retirement expenses can be met by withdrawing the money periodically. SWP paves way for regular retirement income along with appreciation of balance corpus in the debt fund.

For instance, if you invest 15 lakhs and the fund gives a return of 9% p.a. You run an SWP of Rs. 10,000 per month the funds would last for 17+ years of your requirements. In a fund expected to give returns of 9% p.a if your annual withdrawal from the corpus is only 7% your one time investment lasts forever.

In Peers like Senior citizen saving schemes (SCSS) and post office monthly income scheme (POMIS) the monthly income is fully taxable as per the applicable tax slab.

SWP has benefits like

Regularity: where the returns are fixed at a frequency determined by the investor

Taxation: Long term capital gains from equity were exempt in case the holding is for a period beyond a year until 2017-18. For now, LTCG is levied at 10% for withdrawals over 1 lakh. However, accumulating retirement corpus is the longest investment process there is. It offers the wide time frame required for getting the returns with minimal taxation.

In your journey of retirement corpus accumulation, you will face downfalls and probably a lot of mistakes. Read here, the “Top 10 Retirement Planning Mistakes” investors make and stay a step ahead of the investment blunders that might come your way.

Final Word

Mutual Funds are volatile, there is no denying that. But with entry and exit strategies like SIP, STP and SWP, one can develop the discipline that equity mutual funds demand for a better investment appreciation.

“Discipline” is defined as the process of accumulating retirement corpus in mutual funds. If you are looking for professional assistance in creating a strong, sound retirement plan, then you can take advantage of


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