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How to Choose Best Mutual Funds for Retirement? Research Team | Posted On Tuesday, January 14,2020, 04:08 PM

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How to Choose Best Mutual Funds for Retirement?



Retirement planning is the best way to secure your post-retirement years financially. Planning for your retirement means identifying:

  • The various sources of income
  • calculating the post-retirement expenses
  • choosing the necessary means to achieve these goals
  • Steadily investing money towards the goal

The long-term nature of retirement planning makes mutual fund investments an ideal fit for meeting retirement income goals. Investing in mutual funds through an SIP is the best way to meet your long-term goals and save money for your retirement. Mutual funds have the potential to offer greater returns than any other investment options. It will ensure inflation-beating returns and will allow you to get favorable tax benefits.

How to Choose Best Mutual Funds for Retirement?

When people plan their retirement they mostly choose to invest in a retirement product like the pension plan like EPF, PPF or NSC. These are good options but are a distant second to mutual funds. Mutual funds not only enable you to create an attractive corpus through equity exposure but also reduce the risk related to equities through diversifying your investment portfolio.

Since retirement planning involves investing for at least 20 to 30 years, mutual funds provide a safe and pocket-friendly investment avenue for investors. When planning for retirement you need to determine your retirement income and start investing through SIP to achieve your long-term financial goal. With mutual fund SIP, you can accumulate and compound your wealth in an affordable manner.

See Also: Mutual Fund Returns

-Discuss with Financial Advisor:

Before investing in mutual funds you can seek the guidance of a financial advisor to understand how you should go about your investments. A financial advisor can help you understand your asset allocation based on the amount of risk you can take.

If you are a young investor then you can opt for aggressive equity funds as time is by your side. Your EPF contributions will help you balance the debt investment and it will grow over time. Consequently, retirement mutual fund is an ideal option for traditional investors who lack discipline and cannot manage their portfolio allocation on their own.  

-Choose Retirement Funds:

A Mutual fund is an investment instrument that is designed to deliver returns based on specific objectives. Thus your returns depend on your financial goal and the tenure for which you want to remain invested. Before investing, ask yourself these simple questions – do you want to achieve long-term capital appreciation? Or secure your current income?

Your preference will help you select the fund from different categories of mutual funds for your retirement portfolio. You may invest in either one or both to build your retirement portfolio.

Growth funds: As you know, the main aim of the growth funds is to grow your invested principal. Thus in this kind of fund, you are likely to receive much more returns than the invested amount. The reason is these funds invest in stocks of companies that give given above-average returns. Therefore such investments are the most preferred option for investors seeking capital appreciation over long investment tenure. 

Income funds: Income funds, on the other hand, are the schemes that mainly invest in dividend-paying stocks and bonds to ensure investors get a regular income. These investments are ideal if your aim is to receive a monthly income after retirement.

See Also: Which Type of Mutual Fund Is Best to Invest?

-Risk Tolerance:

Risk tolerance is an important factor when it comes to choosing the best mutual fund scheme. Risk tolerance is the degree of variability in the investment returns that the investor is willing to withstand during planning their finances. If you are among those who are willing to take a higher level of risk to maximize your returns then you may choose growth funds. These funds are subjected to more fluctuations and can give you high returns in a rising market. However, their value drops significantly in a falling market.

In contrast, income funds are more suitable for conservative investors because they are less risky. This is because they won’t increase as steadily as growth funds during a rising market but they may not fall during a falling market.

See Also: How Mutual Funds Work?

-Look for Retirement Funds with low expense ratio:

Most often investors overlook the fees and costs associated holding a mutual fund investment. The fund management fees and the associated charges are summed up as the expense ratio that must be paid by the investor for the professional management of their mutual fund investments. The fee is imposed by the company offering the mutual fund on an annual basis and is usually a percentage of your investment.

Thus while looking to accumulate retirement funds you must choose a mutual fund scheme that has a lower expense ratio. This will allow you to get better returns on your investments through higher portfolio value. However, if you choose a scheme that has a higher expense ratio then your returns will significantly be affected over time, resulting in comparatively lower returns over the years.

You need a stable income to pursue your current lifestyle and hobbies during your golden years. With mutual fund investments, you can easily plan for a secure future as well as minimize the risk involved while getting favorable returns on investment.

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