Invest

How Does Equity Investing Help Build A Retirement Corpus?

Post-retirement risk appetite usually comes down. So, you must invest in equity instruments when working towards your retirement corpus.

Avatar
Amit Sethi
June 19, 2023
How Does Equity Investing Help Build A Retirement Corpus?

Your retirement corpus should be large enough to meet all your post-retirement expenses. To build an adequate retirement corpus, you need efforts such as regularly investing a big portion of your income, beating inflation in the long term, and choosing the assets that offer you a high return on your investments.

Advertisement

You should try to use the abovementioned points, i.e., invest more and earn a high return on investment. While investing in debt can guarantee a return, equities can offer you a high return, and together they build a balanced portfolio. Let’s check out how equity investments help you build the retirement corpus.

Beat The Inflation And Generate A Higher Real Rate Of Return

When you look at most of the low-risk investments like bank FDs and small saving schemes, they offer a return of around 7.5% pa. The post-tax return may further come down to around 5.25% pa (if you fall in the highest tax bracket). So, the real rate of return, i.e., inflation-adjusted return on investment, is often not very attractive in low-risk instruments. Suppose the average inflation rate during the investment tenure remained at around 4%; the real rate of return after tax would be only 1.25% pa (5.25% Less 4%).

On the other hand, equity instruments have the potential to generate a much higher real rate of return compared to debt investments. The longer you stay invested, the bigger return you will be able to generate. Equity mutual funds have given a return in the range of around 14% to 18% pa in the past 10 years, beating inflation by a substantial margin.

So, investing in equities early in your career towards your retirement goal can help you grow the corpus bigger. Taking a long-term view while investing in equities can help you somewhat reduce the risk.

The Benefit Of Rupee Cost Averaging
You can invest in the equity mutual fund through SIP mode, i.e., in instalments. SIP can help you build a big corpus in the long term while also allowing the benefit of Rupee cost averaging amid volatility in the equity market. The longer you invest through SIP, the bigger corpus you’ll be able to build while significantly reducing the associated risks.

Excellent Tax Benefit In The Long-Term
Equity investment comes with attractive short and long-term tax benefits. Short-term capital gain on equities, i.e., units sold within 1 year of purchase, are taxed at a 15% rate. On the other hand, Long-term capital gain (LTCG), i.e., units sold after 1 year of purchase, are tax-exempt to the maximum limit of Rs 1 Lac in a financial year. LTCG above Rs 1 Lac is taxed at a 10% rate.

So, equity investments, including equity mutual funds and direct stock, can offer you a higher tax efficiency compared to most of the investment products (non-tax-saving) available in the market, enhancing the post-tax return on investment.

You must try and maintain the right asset balance in your investment portfolio and ensure an appropriate level of diversification. A portfolio skewed towards debt can eat away return on investment, on the other hand, if it’s skewed towards equity, it can increase the risk on capital. You must realign your investment portfolio towards retirement from time to time in sync with changes in your risk appetite and return expectation.

 

The author is an Independent Financial Journalist

Related Articles