Mutual Funds

Fund query: How to save towards retirement

Parvatha Vardhini C | Updated on March 20, 2021

I am 42 years old. My home loan EMI is ₹19,170. I pay approximately ₹5,000 per month as premium for my LIC policy. My salary at present is ₹60,000 per month. What are the better plans to invest in to build a good pension amount?

Tapas SparePresently, your home loan EMI constitutes about 30 per cent of your monthly salary, which is a reasonable EMI outgo to have. Beyond this, you need to set aside sums for regular monthly household expenses and savings/insurance. While you have mentioned that you have an insurance premium payment of ₹5,000 every month, it is not clear what other savings you have. If you don’t have an emergency corpus equal to six months’ expenses, you need to build that as well. Considering that we have limited information on your existing savings, about how much you can save every month, as well as the retirement corpus or pension amount you are looking for, we are giving a general guidance.

One, if you have signed up for a traditional insurance plan (money-back or an endowment policy, for example), you can take a term insurance instead, as it will bring down your premium outgo and, at the same time, provide you with life cover. The sums you save by having a lower premium outgo can be redirected to other savings instruments such as mutual funds or the National Pension System (NPS) for your retirement goal.

Assuming you will retire at 60, you have another 18 years to build your retirement corpus.

You can choose to save for this through a combination of systematic investment plans (SIPs) in index funds, large- and mid-cap funds, flexi-cap funds and aggressive hybrid funds which invest at least 65 per cent in equities. We are suggesting equity funds assuming you have an appetite for risk, and also taking into consideration that you are starting your retirement savings late, and as equity can provide a kicker to returns.

You still have more than 15 years to reach your goal. Hence, equity investment is still not a bad idea. This time-frame is good enough for markets to go through ups and downs and deliver. A return expectation of about 10 per cent (CAGR) over your time period of investment is reasonable. You can also exit the funds one or two years prior to your retirement and invest in safer fixed deposits to preserve your gains.

Once you retire, you can use a combination of immediate annuity plans from insurers, systematic withdrawal plans (SWPs) in mutual funds, post office Monthly Income Scheme or Senior Citizen Savings Scheme, and PM Vaya Vandhana Yojana for generating regular payouts (pension) to meet your expenses post-retirement. You need to choose from among these options based on their risk-return trade-off.

Apart from saving through mutual funds, you can also consider NPS investments. Here, you can choose to invest in a combination of government securities, corporate bonds and equity as per your risk appetite, through an ‘active choice’ or ‘auto choice’ option.

When you turn 60, at least 40 per cent of the NPS corpus needs to be utilised for the purchase of an annuity product, and the balance is paid as lumpsum. The mandatory requirement to purchase annuity will provide for monthly pension after retirement. You can invest the remaining 60 per cent in any instrument of your choice to supplement the annuity income.

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Published on March 20, 2021

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