Planning for retirement is an important step towards achieving the financial security you need to enjoy life after work. One of the most effective methods of accomplishing this is through investment in mutual funds and other financial instruments. This guide seeks to explain the various types of mutual funds as well as other financial instruments that can help secure your retirement.
Different Kinds of Mutual Funds Useful in Preparing for Retirement
Blue Chip/Large Cap Funds
These funds specialize in large market capitalization companies, that is, those that have a market cap of over Rs. 20,000 crores. Such companies include Reliance, Maruti Suzuki, Bajaj Auto, and Tata Steel. Blue Chip funds are considered safe: the returns are reasonable and the chances of loss through fraud are extremely minor. Investors can expect decent annual returns while keeping risks at bay.
Mid Cap Funds
Mid Cap funds are concentrated on companies with a market capitalization of between Rs. 10,000 and Rs. 20,000 crores. They are more risky than large cap companies, however, they do offer greater growth potential. To determine which mid cap funds are appropriate for retirement, you can view CRISIL’s PDF ranking of available funds and consider performance metrics such as Sharp ratio, Alpha, among others.
Small-Cap Funds
These funds purchase stock in companies that have a market capitalization between Rs. 5,000 and Rs. 10,000 crores. While the potential returns are higher compared to others, these funds are riskier. These funds can be an exciting option for aggressive investors looking for growth. However, extensive research needs to be taken before investing.
Key Factors to Check When Selecting Mutual Funds
Prior to investing in any specific mutual funds, always remember to check the following:
Top 10 Holdings: Analyze the top 10 holdings of a mutual fund. Are they with reputed companies that have performed well?
ROCE and ROE: Analyze the ROCE and ROE for the companies in the fund. Funds that focus on stocks of most of the companies within are ideal.
ROCE over 15%
ROE over 12%
These funds can also be invested by those of you wanting to invest in large-cap funds. Like SBI Blue-Chip Mutual Fund, Axis Blue-Chip Mutual Fund, or ICICI Prudential Blue-Chip Fund.
What are Hybrid Funds?
These funds are also known as balanced funds and invest in both debt and equity. These funds are designed to make profits, but with minimum risks attached. This is how they do it.
During Down Markets: Hybrid funds increase their equity holdings so they can take advantage of any rebounds the market may have.
During Market Peaks: Portion of a portfolio is constituted through more debt investments in order to lower the effects of volatility.
Moderately aggressive investors who are after a bit more stability might look towards hybrids as their ideal option. For the best hybrid funds, look for CRISIL’s ratings and focus on those funds which boast a high Sharp ratio and Alpha.
Other Useful Instruments in Retirement
Public Provident Fund (PPF)
This scheme launched by the government provides tax benefits along with a guaranteed rate of 8% each year. The scheme requires its investors to store their funds for 15 years and allows a minum investment of Rs. 500 annually. Since the PPFS tax free, it is a highly effective tool for retirement planning over the long term.
National Pension Scheme (NPS)
NPS is one of the other government-supported schemes that give the individual a monthly pension after he retires. This scheme also has a relatively lower return of 8-10%. This scheme is useful to someone who needs continual earnings after getting old. In addition, there are tax benefits under NPS. Specifically for the national pension scheme, tax-exemptions are offered under section 80C (1.5 lacs) and section 80CCD (50,000).
Bonds and Debentures
These financial instruments, especially the AAA+ or A rated ones, are also expected to bring steady earnings of approximately 8%-10%. Even though these investments are subject to tax, such options are relatively safer in terms of securing one’s retirement income.
Beginning Your Retirement Plan
Create a Retirement Plan: Ensure to include mutual funds that will help achieve your retirement objectives. An alpha biased allocation fund and high Sharp ratio value are also recommended.
Look for Other Financial Instruments: PPF, NPS, and bonds are other instruments that need to be considered for a safe and adequately diversified retirement portfolio.
Final Words
Separately managed accounts and purchases of perfect mutual funds along with correct instruments complications is the main challenge in retirement planning. Equity oriented funds have the benefit of superior return expectation but there are hybrid and debt funds that invest more conservatively. Further, PPF and NPS also help in guaranteed benefit and certainty of income. Preparation aims make you less stressed about the future of finances by enabling you to be free and at ease.
