Mutual Funds Can Form the Backbone of Your Retirement Plan

Mutual Funds Can Form the Backbone of Your Retirement Plan
Role of mutual funds in your retirement planning
If you are a Central Government employee, most of the financial aspects of your retirement are already sorted by the government. But for those of you who are working in the private sector or are self-employed, retirement planning is essential. A mutual fund is one of the few investment avenues that can beat inflation it is imperative that you make mutual funds the centerpiece of your retirement planning.
In simple terms, a mutual fund pools money from different investors and then invests that money in various equity stocks, debt and money market instruments.  In the long run, mutual funds offer excellent returns and help build a corpus for your post-retirement needs.
If you have an investment horizon of at least 20 to 30 years and want to make mutual funds the start of your retirement plan, then systematic investment plan (SIP) will help you accumulate and compound wealth in an affordable manner.

Systematic Investment Plan (SIP) for Retirement
Systematic Investment Planning, better known as SIP, is a systematic approach to invest money in mutual funds. Under SIP, you invest a fixed amount in the fund of your choice every month. There is no upper limit to investing via SIP, but it is desirable to fix an amount which you can afford easily every month. In addition to instilling financial discipline, SIP helps you learn money management skills, which help further with the planning your retirement.
Let us elaborate with an example. Suppose you are 30 years old and you start a monthly SIP of Rs. 5,000/-. Assuming that the returns on your investment are 15% p.a. (which is a standard rate for most mutual funds) and you continue the SIP for 30 years. By the time you are 60 years old, you will have a corpus of Rs. 3.46 crores approximately. Very few other investment avenues offer you such returns with moderate risk.
Using the SIP route to plan your retirement fund is an excellent approach as it offers you several benefits like:  
You can invest as much amount that you are comfortable with as there is no minimum requirement for investment in SIP.
You can switch between equity and debt instruments with the help of a systematic transfer plan. This helps you reduce your risk exposure as you gradually age.
Through the ELSS route, you can save on your income tax liabilities every year as the contribution to ELSS is tax deductible under Sec 80C of the Income Tax Act.

Example 1
   
Current expenses So as per given
* Current Age (years): 25 Rs. 40,000 p.m. will example the Rs. 2,000/- of SIP will
* Retirement Age (years): 65 be equivalent to Retirement generate the
* Current Living Expenses p.m. Rs.40,000 4,38,298/- p.m. post Corpus required is required retirement
* Compounding Return on SIP: 15% retirement Rs.6.20 Crs. corpus

Example 2

           
* Current Age (years): 30 Current expenses So as per given  
* Retirement Age (years): 65 Rs. 40,000 p.m. will example the Rs.3,000/- of SIP will
* Current Living Expenses p.m. Rs.40,000 be equivalent to Retirement generate the
* Compounding Return on SIP: 15% 2,71,536/- p.m. post Corpus required is required retirement
retirement Rs. 3.25 Crs. corpus
         

Example 3

           
* Current Age (years): 40 Current expenses So as per given    
* Retirement Age (years): 65 Rs. 40,000 p.m. will example the Rs. 6,200 of SIP will
* Current Living Expenses p.m. Rs.40,000 be equivalent to Retirement generate the
* Compounding Return on SIP: 15% 1,98,000/- p.m. post Corpus required required retirement
retirement Rs. 2.10 Crs. corpus