It's a question that has foxed financial planners for ever - how to beat inflation and generate the desired wealth over long periods.
Inflation, we know, can upset calculations by eroding the value of savings. At 5% inflation, an expense of Rs 10,000 will become Rs 40,000 in 30 years. For a person saving for retirement, generating returns that can beat inflation seems difficult. It's not, provided he invests wisely in mutual funds.
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For a long time, retirement planning meant investing in small saving schemes like the Public Provident Fund (PPF), the National Saving Certificate Scheme and the Employee Provident Fund (EPF). Some also bought traditional insurance policies. However, the problem was that these seldom beat inflation. Then came mutual funds in 1964, when UTI was launched, but these were seldom used for retirement planning. Things picked up slightly from 1993 with the advent of private sector mutual funds. Now, they are changing fast.
Before investing, there are some questions you need to ask yourself. How many years are left for your retirement? How much money will you need at retirement? What is your risk-taking ability? What is the monthly income you will need to sustain your current lifestyle? Once you have answered these, planning becomes simple. No matter what your investment horizon is, no matter what your risk-taking ability is, no matter how much your investment is, there are mutual fund products for every need.
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You can invest in equity funds for capital appreciation, debt funds for regular income or gold funds for securing your future. In terms of risk, not only can you choose funds which are safe (liquid funds), you can also invest in funds that are highly risky (sectoral funds), or hybrid funds, which invest in both equity and debt and are moderately risky. Abhinav Angirish, founder, www.InvestOnline.in, says apart from versatility and convenience, mutual funds are the lowest cost options for wealth creation when compared to unit-linked insurance plans and structured products.
Time it right
Building a corpus for retirement is most likely your last goal after others such as child's education or buying a home. This means you have more time to plan and invest for retirement.
This, experts say, is why equity schemes are the best vehicles to build a retirement corpus. Anil Rego, CEO & founder, Right Horizons, says large-cap and blend-cap (which invest across market caps) funds can be used.
"In fact, over long tenures, most equity risks are ironed out," says Swapnil Pawar, chief investment officer, Karvy Private Wealth. Also, equity as an asset class tends to be adequately hedged against inflation, the biggest risk in the long run, says Pawar.
Although the choice between blue-chip and mid-cap or sectoral schemes depends on your risk profile, Pawar recommends well-diversified equity and index schemes to begin with.
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TAKING NOTE: MFs can harness equity advantage
Given the uncertain nature of the 'Future', the natural tendency for savings, security and growth is inevitable. However, the complexity of the present economic setup - not the least of which includes multitudinous investor aspirations, multifactorial financial markets, globally integrated economy, overlapping systemic and non-systemic events - present an arduous undertaking for an investor.
Moreover, the idea of saving, without having to invest, is a risk in itself since inflation slowly corrodes the wealth of a non-invested savings corpus. This becomes more relevant for retirement. From the long-term perspective, an investment in equity tends to be more competitive and cost-effective option for generating income, than other available investment avenues.
For example, in the last 31 years period, the equity market(Sensex) provided a CAGR return of 16.85%, which is higher than other comparable asset classes. This highlights that equities' investment is may be better suited to generating wealth over a longer period of time.
Furthermore, it is also important to begin investment early. And that is for two reasons. Firstly, it provides the investor a higher risk appetite, and a higher potential for return over the long run. Secondly, a seemingly marginal delay in investment, results in a disproportionately high opportunity loss for the investor in the eventual realisation of the corpus. For example an equity mutual fund investor, who invested Rs 500 once at 25 years (i.e: 01/01/1980), would have had a corpus of Rs 69,465 on Aug 11, 2011.
However, had the same investor invested in an SIP of Rs 500 per month, the corpus at the end of 31 years would have been around Rs 41 lakhs against a total investment outflow of around Rs 1.9 lakh.
But an intuitive outlook to investing in equities may be equally hazardous. The intricacy of the equities market places a stringent demand for a highly skill-oriented, knowledge-intensive application.
Therefore, investors should avail equity oriented mutual funds. Since mutual funds are essentially a pass through vehicle for investment, an investor is able to obtain the benefits of professional portfolio management service, cost efficient equity investment, and a potential for a superior risk-adjusted return.
CEO, Kotak Mutual Fund
(This is a sponsored article)