How to Plan Your Retirement with Mutual Funds

Published On: 05-Feb-2020

Retirement is often seen as the second innings of life. That is the time when you enjoy the luxury of time, while you do not have any official meetings to attend or timelines to meet. While it may be an extended vacation, you may be in for many surprises, if you have not planned for it. Retirement planning must be done prudently and systematically so that you don't have any financial constraints while planning to fulfil your pending dreams and aspirations after retirement. With different systematic options available with mutual funds for varied purposes, one may indeed plan their retirement in a better manner. 


Here are three options to help you systematically plan your retirement:

Systematic Investment Plan (SIP)

This is required when you need to save and create an investment corpus. SIP is an investment facility to allow you to make investments in a specified mutual fund scheme periodically. Just like one register a Recurring Deposit (RD) with banks, SIP will enable you to make regular investments in mutual funds. Once you have registered a SIP, the amounts get automatically deducted from your bank account at fixed intervals and invested in the mutual fund scheme of your choice. 

The investments under SIP are made regularly, irrespective of the market direction, thereby helping you eliminate emotional bias. Since the investment amounts continue to be the same under SIP, you get higher units when the markets are lower and vice-versa. However, over a period, your cost of investments gets averaged due to consistent investments. Further, it helps you with an essential ingredient of retirement planning, i.e., financial discipline, as you continue to make investments towards your pre-set financial goal of retirement. 

Like small drops of water make an ocean, regular investments over a period may yield a healthy retirement corpus for you. For example, if you start investing Rs. 10,000 per month once you are 25, your retirement corpus can grow to Rs. 5.51 crore by the time you turn 60 (assuming the investments yield 12% returns per year). This is indeed the power of compounding over the long term. 

Systematic Transfer Plan (STP)

STP allows you to switch your investments from one mutual fund scheme to another. As such, you may shift your investments conveniently over a period through STP. The general thumb rule for maintaining asset allocation matching with your growing age and risk profile is to have an equity exposure equal to 100 minus your age. As such, suggestive equity exposure should be 75% when you are 25, while only 40% while you are 60. This takes into account the changes in the risk profile with the passage of time and the changing priorities to preserve the accumulated wealth. 

Thus, it would help if you shifted your investments steadily from equity schemes (perceived as a relatively risky asset class) to debt fund (seen as relatively low-risk schemes). This is also important as higher volatility in the investment portfolio is not desirable at later stages of life. Accordingly, one may consider using STP to switch his/ her investments in equity schemes to debt schemes in a systematic manner.  

Systematic Withdrawal Plan (SWP)

SWP helps you to periodically redeem the mutual funds' investments over a period systematically, instead of making lump sum redemption. Since the regular stream of earnings stops post-retirement, one must allow the retirement corpus to continue working hard for them and earn additional returns. Further, while the investments are redeemed partially, the balance investments continue to work hard for you. 

While different options like SIP, STP, SWP, etc. make your investing journey convenient, it is vital to stay committed to your financial plans. After all, the second innings of life must be played without any restrictions on your time and your finances. Plan to fulfil all your financial aspirations post-retirement.