Consider bigger allocation to equity mutual funds of your retirement funds

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Retirees may need to look allocating a larger portion of retirement funds into equity related mutual funds to beat inflation and achieve decent growth in returns. Given the increasing lifespans, the time available for investments is long enough to manage the risks attached with equity oriented mutual funds. Check out the case for this being made by an investment expert. Team RetyrSmart

Consider bigger allocation to equity mutual funds of your retirement funds

While safety of the investment corpus remains the top priority, a senior citizen or a recently retired person should not ignore two important aspects—life expectancy and the impact of inflation. Post-retirement non-earning period can go up to 30 years as life expectancy in India is on the rise. If one takes a Voluntary Retirement Scheme (VRS) around age 50, nearly four decades of life are still ahead. While the VRS corpus is a substantial amount, one needs to keep the life expectancy factor in mind when investing this corpus.

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Allocation of capital

One, therefore, has to make provision to sustain a comfortable living with no active employment-based income after retirement. Allocating funds in a manner that it does not run out during the life of the investor is a crucial aspect of retirement planning. Opting to put the retirement corpus entirely in fixed-income investments such as Senior Citizens Savings Scheme, Post Office Monthly Income Scheme, bank fixed deposits, etc., may not prove fruitful as far as post-tax and post-inflation real rate of return is concerned. The risk of inflation eating into capital may lead to difficulty in meeting the rising cost of goods and services over the long term.

A possible solution is to allocate a sizable portion of the retirement funds into assets that have the potential to outsmart inflation in the long run, and also potential to grow one’s money. This is very much possible by investing in equities. Depending on the risk profile and the availability of funds one needs to invest a reasonable amount in equity-related investments such as equity mutual funds. Some mutual funds have a mix of equity and debt assets and even they may be considered.

Growth option in MF

Once the regular income requirement is met through the fixed-income investments, the surplus or the additional funds can be invested in equity-oriented mutual funds schemes. Here, take the growth option in equity MFs so as to let the money grow over the long term. At the time of need, one can make a partial withdrawal from the equity fund, which is ideally after 10 years of holding the investments.

Debt funds have the potential to generate effectively higher returns than post-tax returns of taxable investments such as bank FD (currently 5-6% pre-tax only) in which income is taxed as per income tax slab. The SWP option of debt funds is another way to manage taxation even while generating a better return.

A few investments that retirees should avoid are those that come with high risk such as real estate, direct stocks etc. It is better to spread the investments across so as to keep the risks in control. Thus it is very important for retirees to invest this money in such a manner so that capital remains safe, the income stream is made available, liquidity is ensured and tax liability is kept at a minimum. One may also consult a financial planner in order to manage the retirement money better.

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