Planning for retirement requires lots of effort in the right direction. Though the rules are simple, it’s not that easy to follow them rigorously because of our psychology, changes in returns, and the all-pervading emotions of greed and fear.

There are several investment assets which we can use for building a retirement corpus. You must be aware of many of them, such as fixed deposits, gold, government schemes, deposit schemes by corporations, and bonds, among others.

There are also equity and equity-related assets that one can effectively utilise to build a retirement corpus.

In the last few years, mutual funds have shown tremendous growth across fund houses. The reason is the possibility of investment in different asset classes through mutual funds.

Most of the time, the performance of mutual funds has beaten traditional avenues of investment,  such as fixed deposits, gold, or government schemes. Besides giving a better return over the long term, mutual funds are managed by a competent fund manager. So, you cannot miss out on including mutual funds in your retirement plan.

Here’s how they can help you in your retirement plan.

Equity Mutual Funds Invest In A Set Of Assets

The risk of investing in individual stocks is very high, as the return depends on the fortune of a particular company. Mutual funds, on the other hand, invest in a set of stocks. This essentially diversifies, and thus, reduces the risk associated with investing directly in stocks.

Equity mutual funds offer a plethora of choices, such as sector-based funds, theme-based funds, market cap-based funds, and others.

Investors with a high-risk appetite and longer investment horizon can invest in equity mutual funds.

If you are young and have a high risk appetite, you can also invest in equity funds to maximise your returns. You can also invest through the systematic investment plan (SIP) route to further reduce your risks. As you grow older, you can gradually reduce allocation in equity mutual funds.

Mutual Funds Offer Several Choices

Mutual funds offer an immense variety of asset classes. If you are not ready to invest in equity-oriented mutual funds, you have other options, such as balanced funds, debt funds, gold funds, and so on.

Balanced funds invest in both equity and debt, and thus, are relatively less risky. If you want to avoid equities altogether, you can consider investing in debt funds. Debt funds invest in fixed-income securities, such as government bonds, deposits, and high-grade corporate bonds. You can also invest in gold through gold mutual funds.

Mutual Funds Can Help In Saving Taxes

If you can reduce your tax obligation and secure a high return, it can make a huge difference to your retirement corpus in the long term.

For this, you can consider investing in equity-linked saving schemes (ELSS) to save taxes under Section 80C of the Income-tax Act, 1961.

Investment in ELSS schemes allow for tax deduction benefits up to Rs 1.5 lakh in a financial year. If you factor in tax savings by investing in such funds, the returns will be very high.

Also, long-term capital gains (LTCG) up to Rs. 1 lakh in a financial year from equity mutual funds are exempt from taxes, and LTCG over and above Rs. 1 lakh are taxed at a rate of 10 per cent per annum.

The process of investing in mutual funds is easy and transparent. You can track your investment anytime. Depending on your age and risk appetite, you can choose an appropriate mutual fund scheme to build your retirement corpus. The best part is that you don’t need a big amount to invest in mutual funds; you can invest in instalments through SIPs and, in the long-term, build a huge corpus for your retirement.

Mind The Risks

Do note that equity mutual fund investments do not provide guaranteed returns. Also, the level of risk can vary depending on the category of equity mutual funds that you choose to invest in. For instance, small-cap equity funds may have a higher level of risk than large-cap equity funds. So, it’s important that you do your due diligence and align the funds according to your risk capacity and needs.

The author is an Independent Financial Journalist