Should You Invest In Retirement-Focused Mutual Funds?

One of people's biggest concerns is having enough corpus to survive post-retirement life. Everyone should think about how they plan today to make their tomorrow financially secure.

Amit Sethi
September 20, 2023
Mutual Funds

Mutual Funds

Studies suggest that many retirees will not have enough money to last their lives after retirement. Building a retirement corpus requires planning for investment and savings for the future. While many avenues exist for investments and savings, retirement-focused mutual funds can offer distinct benefits. So, knowing whether you should invest in such funds is important. The answer is a resounding yes. Let us list a few crucial points that can help you decide to invest in mutual funds for your retirement.


Mutual Fund Options To Plan Your Retirement Corpus

Mutual funds offer a plethora of choices for retirement planning. You can invest in an equity-oriented fund, which allocates a significant part of assets in equity. Then there are debt funds, which invest a major part in debts. Hybrid funds invest in debt and equity both. These three types of funds differ in risk and reward.

Equity funds have the potential to give higher returns, but it also exposes you to maximum risk as the returns are subject to the market and companies underlying the funds. However, in the long run, these risks balance out.

Hybrid funds consist of lower risk than equity-oriented mutual funds. They are safer because of the debt component. But the debt component also reduces your returns to that extent. Hence, hybrid funds have a lower risk but also give relatively low returns. Debt funds offer the highest level of safety compared to equity and hybrid funds, as they invest a significant part in government bonds and high-grade corporate bonds. The chances of default are minimal in debt funds. With low risk, the return is also suppressed. But remember that the purpose of debt funds is to preserve your capital and generate a decent level of return at the same time.

The choice of mutual funds for retirement should depend on your risk appetite. However, it is suggested that equity mutual funds or hybrid funds are the better choices for the long term. As you get closer to retirement, you can gradually switch your investments from equities to debt-oriented funds.

Solution-Oriented Retirement Funds 

Solution-oriented retirement funds are pension funds meant to accomplish your retirement-related financial needs. The schemes under retirement funds allocate funds to assets that carry lower risk and allow a decent return so that you can build the desired corpus for your retirement. Retirement funds also offer the option to invest in equity and debt assets, similar to regular mutual fund schemes. Unlike NPS, which requires a compulsory investment in an annuity on its maturity, in a retirement fund, you can receive a lump sum payment or a regular annuity through the SWP option. Most retirement funds have a lock-in requirement of up to 5 years or till the retirement age, whichever is earlier. Due to lock-in requirements, it inculcates discipline and secures your retirement goal.

Right MF Schemes Can Easily Offer Inflation-Beating Returns

Inflation is like an indirect tax on your income. It depletes the value of your money. This means that to maintain the same lifestyle, you must increase your money at the same rate as inflation. There are very few investments that can beat inflation with a significant margin. Mutual funds are certainly one of them.

When investing in mutual funds for your retirement needs, you can choose a solution-oriented mutual fund scheme, i.e., a retirement mutual fund, or you can select appropriate regular mutual fund schemes, keeping your retirement goals in mind. Choose the mutual fund schemes while keeping your risk appetite and return needs in mind.

The author is an independent financial journalist.

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