Mutual Funds for Retirement 2022 – Retirement Mutual Fund Types & Benefits
Retirement is something that many people look forward to. By then, they would have discharged all their financial liabilities and responsibilities. As there is no active work, people look forward to spending time with their loved ones, socialising, and spending time on hobbies and other leisure activities during retirement. However, to enjoy these things, you need to make sure that you are financially independent. You can do that by investing in mutual funds for a retirement funds. This article discusses mutual funds for retirement – Retirement mutual fund types & benefits.
What is a retirement mutual fund?
A retirement mutual fund is an open-ended retirement solution-oriented scheme with a lock-in of five years or until retirement age, whichever is earlier. A retirement mutual fund helps investors contribute money either in a lump sum or systematic investment plan (SIP) to build their retirement fund.
Mutual fund houses offer variants of a retirement mutual fund. Some of these include:
The aggressive variant is an equity-oriented variant with an equity exposure ranging from 80 to 100%. It is suitable for investors with an aggressive risk profile looking for inflation-beating high returns and creating wealth for themselves.
The moderate variant has a mix of equity and debt. The equity component may range from 65 to 85%, and the remaining is the debt component. It is suitable for investors with a moderate risk profile looking to balance equity-related risk with debt-related stability.
The conservative variant is a debt-oriented variant with debt exposure ranging from 70 to 100%. It is suitable for investors with a conservative risk profile who wish to have either no equity exposure at all or little equity exposure.
Fund houses may give different names to the above plans, such as equity plan, hybrid–equity plan, hybrid–debt plan, etc. Some funds may even call it a wealth creation scheme (equity-oriented) and income generation scheme (debt-oriented).
What is the purpose of a retirement fund?
The purpose of a retirement fund is to provide a platform to an individual to save and invest money towards building their retirement corpus. An investor can use a retirement fund to invest a lump sum or start a systematic investment plan (SIP) to contribute money during their working life. Ideally, a SIP should be the preferred mode of investing as it provides the Rupee Cost Averaging (RCA) benefit with regular monthly contributions.
Taxation of retirement fund
We will discuss the taxation of a retirement fund at the time of investment and redemption.
- At the time of investment
The investment made in a retirement fund qualifies for deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower.
- At the time of redemption
The taxation at the time of redemption will depend on whether the retirement fund is classified as an equity or non-equity fund from a taxation point of view. An equity fund has a minimum of 65% exposure to equity and equity-related instruments at all times. From a taxation point of view, any fund that is not an equity fund is taxed as a non-equity fund.
Taxation of equity funds
- Short-term capital gains (STCG) tax: If you sell your retirement mutual fund units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
Long-term capital gains (LTCG) tax: If you sell your retirement mutual fund units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.
Taxation of non-equity funds
- Short-term capital gains (STCG) tax: If you sell your retirement mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
- Long-term capital gains (LTCG) tax: If you sell your retirement mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.
Who should invest in a retirement fund?
Everyone should invest in a retirement fund because all of us will retire at some stage in life. Some of us aspire to retire before the usual retirement age of 60 years, while others aspire to continue working well beyond 60. Irrespective of the age (60, before, or after), at some point, you will retire, and hence you should invest in a retirement fund. It will help you live a financially independent life during your retirement years.
What should be the mode of investing?
You can invest a lump sum or start a systematic investment plan (SIP) for your retirement. Ideally, a SIP should be the preferred investment mode as it allows you to contribute small amounts of money regularly towards your retirement kitty.
Depending on your risk profile, you can choose to invest either in the aggressive, moderate, or conservative variant of the retirement fund.
How to calculate the amount you need for retirement?
To calculate the amount you need for retirement, you can take the following steps:
Expenses in the first year of retirement: Depending on your current age, current monthly expenses, and future expected inflation rate, calculate your monthly expenses during the first year of retirement.
- Retirement corpus: Depending on the monthly expenses in the first year of retirement, future expected inflation, return on investment expected for your retirement corpus, and life expectancy, calculate the retirement corpus you will need at the start of your retirement.
You can use online retirement calculators, available on many websites, to calculate the amount you need for retirement.
Major advantages of a retirement fund
If you have a retirement fund in place, you will be able to enjoy your retirement life on your own terms and conditions. You will be financially independent, which is important for self-esteem. There will be no obligation on you to work for money. You will have the freedom to spend time with your loved ones, get involved in social activities, travel, etc. If you have a retirement fund in place, you can enjoy your golden years the way you want.