Best Ways To Build Retirement Corpus

Divya Nair

08 Nov 2016

As the regular income stream dries up as you draw near to your retirement, it is critical that you build a retirement corpus sufficient to cater to your expenses post retirement. Each individual has different expenses and family circumstances. Therefore, the amount of money needed post-retirement varies from person to person. This is where the importance of planning a retirement corpus comes into the picture. In the following pointers, we have tried to indicate some of the best possible ways a person can ensure a comfortable retirement.

Estimate Post-Retirement Expenses

The hard fact about life is regular income stops, but expenses don’t. Major retirement expenses include monthly household expenses, medical expenses, vacations or family visits etc. What will one spend would depend on the kind of lifestyle he/she leads post-retirement. Future expenses must be carefully projected so that the arrangements can be made while the person is still working.

Balance Between Spending & Savings

Typical human tendency is to spend more during early years. This needs to be attended as soon as we start earning. Whatever is your income, every young person should learn to live within his/her means in order to avoid unnecessary spending.

Keep An Eye On Effect Of Inflation

Inflation greatly effects retirement planning. To get fixed returns when retired, people usually invest money for long-term. But inflation keeps increasing, and we don’t make much money in reality. A person should invest in such a manner that he/she is able to hedge against the effects of inflation. One can invest in inflation protected schemes and funds, equities and mutual funds (since the returns are historically more than 12%).

Inflation rate 6% 7% 8%
Years to retire 30 40 30 40 30 40
Present monthly expenses (Rs.) 50,000
Future Value of monthly expenses ( Rs lakh) 2.9 5.1 3.8 7.5 5.0 10.9
Corpus required at retirement age (in Rs. cr.) 5.3 9.5 7.6 15.0 11.0 23.8

Invest Smartly

As said above, people should identify the best possible investment avenues to plan build a fair corpus of their retirement. There are several financial assets where one can put in money regularly till retirement. Let’s have a look at some of the ideal assets to invest money to get fixed returns during retirement:

Investment Assets PPF Mutual Funds NPS EPF
Why Invest Protection of capital and accumulated interest on PPF is guaranteed by the government, thus completely safe. Managed by asset management companies (AMCs), which channelize people's money into collective investments in equity, debt and other financial products managed by investment experts. National Pension System is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to systematically save during their working life. It is the most popular retirement saving instrument in India. Investors should opt for EPF transfer whenever there is change of job. This lets investors reap the benefits of guaranteed returns along with power f compounding.
Risk Carries interest & rate risk Though, managed by expert fund managers, they still face market-specific risks. Fund performance depends on fund manager and the asset class choice Carries interest rate risk
Taxation Comes under exempt-exempt-exempt (EEE) category Long-term capital gains on equity funds are tax-free This product is EET (exempt-exempt-taxable) Offers deduction up to 1 lakh limit under section 80C
Returns 8.7% 14-15% 8-11% 8.75%

But before you decide where all you can invest your money, it is important that you determine your risk appetite first. Risk appetite is the amount of risk an investor is willing to take while investing. An investor’s risk profile can be conservative, moderate, moderately aggressive or aggressive. Investors should ideally go for those particular financial tools that suit their overall investment risk profile.

Conclusion - Whatsoever your financial position is at present, you should be able to live financially independent when you retire. Therefore, planning your retirement from financial point of view is crucial and an integral part of financial planning.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Best Ways To Build Retirement Corpus

Divya Nair

08 Nov 2016

As the regular income stream dries up as you draw near to your retirement, it is critical that you build a retirement corpus sufficient to cater to your expenses post retirement. Each individual has different expenses and family circumstances. Therefore, the amount of money needed post-retirement varies from person to person. This is where the importance of planning a retirement corpus comes into the picture. In the following pointers, we have tried to indicate some of the best possible ways a person can ensure a comfortable retirement.

Estimate Post-Retirement Expenses

The hard fact about life is regular income stops, but expenses don’t. Major retirement expenses include monthly household expenses, medical expenses, vacations or family visits etc. What will one spend would depend on the kind of lifestyle he/she leads post-retirement. Future expenses must be carefully projected so that the arrangements can be made while the person is still working.

Balance Between Spending & Savings

Typical human tendency is to spend more during early years. This needs to be attended as soon as we start earning. Whatever is your income, every young person should learn to live within his/her means in order to avoid unnecessary spending.

Keep An Eye On Effect Of Inflation

Inflation greatly effects retirement planning. To get fixed returns when retired, people usually invest money for long-term. But inflation keeps increasing, and we don’t make much money in reality. A person should invest in such a manner that he/she is able to hedge against the effects of inflation. One can invest in inflation protected schemes and funds, equities and mutual funds (since the returns are historically more than 12%).

Inflation rate 6% 7% 8%
Years to retire 30 40 30 40 30 40
Present monthly expenses (Rs.) 50,000
Future Value of monthly expenses ( Rs lakh) 2.9 5.1 3.8 7.5 5.0 10.9
Corpus required at retirement age (in Rs. cr.) 5.3 9.5 7.6 15.0 11.0 23.8

Invest Smartly

As said above, people should identify the best possible investment avenues to plan build a fair corpus of their retirement. There are several financial assets where one can put in money regularly till retirement. Let’s have a look at some of the ideal assets to invest money to get fixed returns during retirement:

Investment Assets PPF Mutual Funds NPS EPF
Why Invest Protection of capital and accumulated interest on PPF is guaranteed by the government, thus completely safe. Managed by asset management companies (AMCs), which channelize people's money into collective investments in equity, debt and other financial products managed by investment experts. National Pension System is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to systematically save during their working life. It is the most popular retirement saving instrument in India. Investors should opt for EPF transfer whenever there is change of job. This lets investors reap the benefits of guaranteed returns along with power f compounding.
Risk Carries interest & rate risk Though, managed by expert fund managers, they still face market-specific risks. Fund performance depends on fund manager and the asset class choice Carries interest rate risk
Taxation Comes under exempt-exempt-exempt (EEE) category Long-term capital gains on equity funds are tax-free This product is EET (exempt-exempt-taxable) Offers deduction up to 1 lakh limit under section 80C
Returns 8.7% 14-15% 8-11% 8.75%

But before you decide where all you can invest your money, it is important that you determine your risk appetite first. Risk appetite is the amount of risk an investor is willing to take while investing. An investor’s risk profile can be conservative, moderate, moderately aggressive or aggressive. Investors should ideally go for those particular financial tools that suit their overall investment risk profile.

Conclusion - Whatsoever your financial position is at present, you should be able to live financially independent when you retire. Therefore, planning your retirement from financial point of view is crucial and an integral part of financial planning.

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