Should you opt for mutual funds to accumulate sufficient wealth for retirement? Experts weigh in

Mutual funds: Retirement planning should be one of the most important goals of everyone’s life. As soon as an investor starts earning, it is recommended to set aside a small sum towards retirement. It may appear too conservative an approach but the research has proved its benefits. From Ben Graham to Warren Buffett, every legendery investor has also spoken a great deal about it.

The phenomenon of starting to invest early for long term wealth creation is also known as compounding. In his autobiography, Warren Buffett calls compounding a snowball which – when rolling down a long hill — picks up more snow as it gains momentum until it becomes a massive snowball.

To make the compounding work for you and to accumulate massive amount of wealth before retirement, it is recommended to invest in mutual funds across categories.

Saving for retirement

I. Starting early helps: At the outset, it is vital to note that investors should start early in their career to maximimise the impact of compounding.

“Provision for retirement should start with your first pay cheque. If you start contributing early for this purpose, you can build a sizable amount in your retirement kitty,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

If you invest ₹10,000 a month in a fund that grows at the rate of 10 percent per annum, you would accumulate ₹76 lakh in 20 years. But if you had continued five years earlier, it would have been ₹1.33 crore. And if you add another five years, it would have grown to ₹2.28 crore.

(When you invest ₹10K a month in a fund that grows at 10% p.a.)

II. Follow a plan: Your financial goal of retirement should be quantified in absolute terms and then you could do the backward calculation to compute the ideal amount needed every month for investment.

For instance, if you want to accumulate ₹1 crore by the time you retire, you could do a backward calculation to find out how much amount you would need to arrive at the desired figure.

“For effective retirement planning, one should start early and invest consistently to benefit from compounding returns. One could set a clear retirement goal, estimating your future expenses and accounting for inflation,” says Siddharth Alok, AVP Investments, EpsilonMoney.

III. Retirement funds: When it comes to the choice of mutual funds, you could choose an array of funds. One option is to invest in retirement funds which incidentally are not very popular. However, there are only 29 schemes in this category with only 30.16 lakh investor accounts.

Total assets under management (AUM) of all retirement schemes put together is ₹31,415 crore. Some of the retirement schemes include HDFC Retirement Savings Fund, ICICI Prudential Retirement Fund, Tata Retirement Savings Fund (conservative, moderate and progressive) and UTI Retirement Fund, among others.

IV. Equity and debt categories: The other option is to invest across categories such as equity and debt. And experts recommend investors to invest via SIP (systematic investment plans).

“As far as financial products are concerned, you can have a mix of equity and debt asset classes. In the equity asset class, MFs can be the core portfolio. Those who don’t understand direct equity, mutual funds are the best vehicle to enter the Stock Market through it,” adds Ms Zende.

Since equity offers greater scope of wealth creation, so one should allocate higher amount to equity in the younger days and lower allocation to debt. This relationship should be reversed as the time rolls on. Ideal equity-debt ratio is believed to be 70-30 with 70 percent allocated to equity and rest to debt.

On similar lines, Zende speaks about the concept of core and satellite approach wherein large amount of investment should be allocated to safe funds (core) such as large and flexicap fund and a smaller portion to the risky funds such as mid cap and small caps comprising satellite portfolio.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.

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