Every individual wants a secure and comfortable retirement life and seeks ways to build a robust corpus fund to sustain them until death. Of late, open-ended mutual funds have caught people’s attention because of their vast potential in wealth building. These funds are diversified and professionally managed, which reduces risks, making them an attractive option for investors. In an email interaction, Sumit Duseja, certified financial advisor (CFA), Securities and Exchange Board of India (Sebi)-registered investment advisor, co-founder & CEO of Truemind Capital, elaborates on ways to build a retirement fund and common pitfalls young investors should avoid.

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Q. What retirement fund options would you suggest for young investors?

Ans. We recommend a portfolio of mutual funds across equity, debt, and gold based on the investor’s time horizon, risk profile, and liquidity requirement to build a sturdy retirement corpus. Instead of investing in a retirement mutual fund scheme that has a lock-in period of five years, one can invest in a portfolio of open-ended mutual funds by way of SIPs to create a retirement corpus over the long term. Open-ended mutual funds have various benefits:

First, there is no lock-in period, which offers quick liquidity in an emergency. Second, fund managers must perform each year or face the risk of investors’ exit due to underperformance.

Q. Are there any specific tax benefits or incentives for investing in retirement funds?

Ans. Investors can avail of tax benefits under Section 80C of the Income Tax Act for investing in retirement funds. Similar tax benefits can be availed of by investing in equity-linked savings schemes (ELSS) with a 3-year lock-in compared to 5 years in a normal retirement fund.

Q. How should young investors assess their risk tolerance?

Ans. We do not recommend investing in retirement funds due to their 5-year lock-in. Instead, one should invest in a portfolio of customised mutual fund schemes across equity, debt, and gold.

Q. Any advice for young investors to balance short-term financial goals, such as buying a house or starting a family, while not losing sight of long-term retirement goals?

Ans. Retirement planning should be prioritised above every other goal. It’s important to know the appropriate retirement fund to sustain your lifestyle and the investment needed to achieve it. Once you have allocated your savings to secure your retirement corpus, you should direct the remaining savings to meet other goals like buying a house, children’s education, etc.

Q. What common pitfalls youngsters should avoid when investing in retirement funds?

Ans. The biggest pitfall a young investor should avoid is believing that retirement planning should start a few years before retirement. By that time, a crucial time is lost to gain from the power of compounding. Also, taking excessive loans to fund your lifestyle or buying an expensive house or car could be detrimental to your comfortable retirement life. Therefore, avoid loans, live life in moderation, and build assets by saving and investing.

Q. What strategies would you recommend for investors to stay informed about the latest market trends, investment opportunities, and retirement planning best practices?

Ans. There is a plethora of content available online and offline that young investors can consume to upgrade their knowledge about market trends, investment opportunities, and retirement planning best practices. However, one should not follow finance influencers for advice who do not have practical experience in managing other people’s money or don’t have a Sebi license. Most of this advice from such sources could do more harm than benefit. Young investors should encourage their organisations to conduct investment awareness programmes to help them understand basic finance principles. Also, choose your knowledge source carefully.

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Q. Finally, how should young investors adapt their investment strategies as they progress in their careers and income levels and economic conditions change?

Ans. Initially, it’s important to start investing through SIPs to build an investment portfolio. As your income grows, increase your savings more than your expenses. Once your investment portfolio reaches a considerable size, upwards of Rs 25 lakh, one should consult a fee-only Sebi-registered investment adviser. Last but most importantly, secure your savings by purchasing appropriate health insurance, term insurance in case of dependents and create a contingency fund worth 6-8 times your monthly expenses in safe and liquid investment avenues like fixed deposits (FDs) or short-term debt mutual funds.