Sunday, May 22, 2022

Which are the best mutual funds for retirement planning?

Are you thinking about retirement planning? This is the right decision. Retirement planning is essential, and it is usually important to start early and properly.

You might be surprised to know why one needs a retirement plan. Retirement planning is essential for some of the reasons given below:

  • After retirement, your regular source of income will stop, but you will need money, so it is necessary to make a retirement plan for your future now.
  • You don’t know what will happen in the future. You don’t know how long you will live. But it is certain that you will need the funds.
  • As time goes on, your medical expenses may increase.
  • If you haven’t done tax planning properly, taxes can reduce your retirement corpus portion.
  • You can plan your future. This will help you plan your career and take better financial decisions.
  • You will be able to plan expensive vacations after your retirement or you may be able to pursue expensive hobbies, which you may not be able to pursue due to busy working life.
  • You can also take early retirement.
  • Retirement planning allows you to lead an independent life without having to depend on whom.
  • In your golden period, you will be able to lead a happy retired life.

Invest wisely to accumulate enough retirement corpus, so that your fund is protected against the rate of rising prices. Apart from saving through pension funds, one can also invest in mutual funds.

One of the few investment options that can beat inflation is mutual funds.

Mutual funds should be the focus of your retirement strategy. In layman’s terms, a mutual fund pools money from multiple investors and then invests it in various equity stocks, debt and money market securities. Mutual funds provide good long-term returns and can help you build a corpus for your post-retirement needs. But, the question here is, which type of assets are best for you keeping retirement in mind?

Here are some of the characteristics of different types of assets:

3. Equity: Shares (Common Stock), Mutual Fund (MF):

Buying shares of a company.

    • Equity shares provide liquidity; As their value increases, you can earn money by selling them. It is easily sold in the capital market.
    • In case of high profit, they get profit at a higher rate.
    • Equity gives the shareholders the collective right to control the management of the company.
    • Equity shareholders get benefits in two ways, annual dividend and profit on account of increase in the value of shareholder’s investment.
    • Equity shares carry the highest risk.
    • Mutual Funds (MFs) are less risky in comparison.
    • Collective funds of many investors are created by asset managing companies to buy shares of companies from different sectors, with the aim of benefiting the investors.

2. Debt Funds (Stocks and MFs):

When a company needs funds, it borrows money from investors as a loan. In return, they promise to pay a steady and regular interest to the investors. This is how, in simple words, debt funds work.

    • A debt fund invests in securities that offer fixed-interest.
    • The basic reason for investing in debt funds is to get a study interest income and capital appreciation. The entities issuing the debt instruments pre-determine the maturity period along with the interest rate you will get. Hence, they are also known as ‘fixed-income’ securities.
    • Debt funds invest in a variety of securities based on their credit rating.
    • Higher credit rating means that these entities are more able to pay interest on the debt security regularly as well as return the principal amount on maturity.
    • Debt funds try to optimize returns by investing in all classes of securities. With this, debt funds can earn good returns.
    • However, returns are not guaranteed. The returns of debt funds are often lower than expected. This provides a safe investment opportunity among conservative investors.
    • People having both short term (from three months to one year) and medium term (from three years to five years) investments invest in debt funds.

There are many types of debt funds: dynamic bond funds, income funds, short-term and ultra short-term debt funds, liquid funds, gilt funds, etc.

3. Commodity Funds, (which includes all types of gold investments) : 

A commodity fund is a fund that is invested in the trading of a particular commodity, such as petroleum products, gold, silver, food grains, coffee, etc. There is an opportunity to earn returns based on the performance of these commodities in the market. Commodity funds offer a wide range of benefits to their investors. However, it is also important to be aware of the risks that come with it.

Do a thorough research about the risks and benefits of these funds before investing. They should consult a professional financial consultant to minimize losses and maximize profits.

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