Surveys reveal that Indians give Retirement top priority. We believe that investing in pension plans guarantee peaceful post retirement. It is not entirely true because there are some regulations for pension plans and the plans are not flexible. Is there an alternative to pension plans? Read on to learn more.
Is mutual fund the best alternative to pension plans?
1. Mutual Fund for accumulating your retirement corpus:
The first step to select a suitable retirement corpus plan is to calculate household and health expenses accounting for future inflation and arrive at the monthly investment required for smooth sailing. Understanding mutual funds is necessary to make the appropriate investment choice.
2. SIP (Systematic Investment plan) a Pre-retirement corpus building tool:
Systematic investment in equity mutual fund is a good financial practice. Systematic investment plan (SIP) shields the investor from market volatility and helps in rupee cost averaging (RCA).It eliminates the risk of timing the market. Monthly investment can be a mix of equity and debt (Employee provident fund (EPF) / public provident fund (PPF) / Debt fund) or a balanced fund depending on the period, till retirement.
The key to accumulating hassle free retirement corpus is to start early so that the monthly payment is more affordable. True to the proverb "Make hay while the sun shines", an early start to building Mutual Fund SWP also encourages investment in multiple open ended SIPs with diversified Asset management companies thereby increasing the return on investment.
3. STP (Systematic Transfer Plan) Approaching retirement, the strategy to shift corpus to Debt fund:
Shifting investments to debt 2-4 years ahead of retirement is recommended because equity is subject to high market risk and it is not advisable to retain corpus in equity till the last minute. Market should not be timed for making an entry and so also exit. STP can be used to transfer funds periodically from equity to debt or vice versa under the same Asset management company.
STP is defined as transfer from one fund to another fund in a systematic manner.
STP is highly recommended to minimize market risks just before retirement.
4. SWP (Systematic withdrawal plan) The solution to post retirement expenses:
SIP is very popular in cities and it is used as a general term for referring to mutual fund investments. STP, SWP are lesser known and understanding SWP helps in making a wise investment decision to handle post retirement needs efficiently. SWP is the reverse of SIP. In SIP one makes a regular fixed investment into a fund and in SWP one withdraws a fixed amount regularly from a fund. The amount to be withdrawn and the frequency (monthly, quarterly or annual) is determined by the investor.
Assuming that the corpus has completely been shifted into debt mutual funds, post retirement expenses can be met by withdrawing the money periodically. SWP paves way for regular retirement income along with appreciation of balance corpus in the debt fund.
For instance, if you invest 15 lakhs and the fund gives returns of 9% p.a. You run an SWP of Rs. 10,000 per month the funds would last for 17+ years of your requirements. In a fund expected to give returns of 9% p.a if your annual withdrawal from the corpus is only 7% your one time investment lasts forever.
In Peers like Senior citizen saving schemes (SCSS) and post office monthly income scheme (POMIS) the monthly income is fully taxable as per the applicable tax slab.
SWP has benefits like
Regularity: where the returns are fixedat a frequency determined by the investor
Taxation: Long term capital gains from equity are exempt in case the holding is for a period beyond a year,so the advantage is the withdrawals are tax free.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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