Salaried employees are generally covered under EPF or NPS from their employers for retirement savings. On the other hand, traditional investments like PPF is most common among non-salaried individuals.
While most of the traditional retirement savings focus on capital preservation and therefore, invest in debt instruments, investors can end up with insufficient corpus on retirement.
Soaring inflations and improving life expectancies demand a different approach to retirement planning and subsequent wealth creation. Here is where mutual funds can pitch in a different outlook.
Most retirement focused mutual funds offer exposure to equity instruments which is best suited for long term goals like retirement. Let us look at why:
- Inflation adjusted returns
To understand the impact of inflation on investment let us assume an educational course that is currently priced at Rs. 7 lakh. Assuming an inflation rate of 10%, the same course would cost around Rs. 18.16 lakh in 10 years and around Rs.29.24 lakh in 15 years! This is the impact of inflation which cannot be ignored while planning for a future corpus.
Inflation can eat into the savings and the saved funds may not be sufficient to meet the financial goals. Thus, investment made for retirement has to beat inflation and schemes having exposure to equity instruments can deliver inflation adjusted returns over the long term.
Equity usually tends to generate inflated adjusted returns and hence appears to be an appropriate fit for a retirement portfolio.
- Long term capital appreciation
Capital appreciation is the increase in the value of the asset. For example, a stock of Rs. 100 whose value increases to Rs. 150 has appreciated by Rs. 50. Planning for retirement by investing in equity early has the potential of creating a large corpus over time.
Medical expenses as well as utility bills and other household expenses continue even after retiring. Retirees are also desirous of philanthropic activities, gifting grandchildren regularly and other passions like travelling or entrepreneurship. They would also like to leave a substantial inheritance for the next generation. All of this requires proper planning and a considerable corpus. With a sizeable corpus in hand, the retiree can lead a financially independent life without having to compromise on his standard of living.
- A diversified portfolio
Other than Equity, mutual funds also give access to investing in diverse asset classes like Debt, Gold ETFs, REITs/InVITs and Overseas Funds/FOFs. Diversification can improve portfolio returns and combat overall volatility.
To conclude, sole dependency on conventional retirement tools may not be sufficient to meet the post-retirement needs. It has become important to look beyond these and consider equities as vital to retirement planning.
