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How to plan your retirement with mutual funds?

You might have heard this umpteen times in your life: mutual funds are the best tool to achieve your various financial goals.

, ET Online|
Nov 22, 2018, 11.49 AM IST
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You might have heard this umpteen times in your life: mutual funds are the best tool to achieve your various financial goals. And equity schemes are your best option if you are investing for your long-term financial goals like retirement. Why?

Simple. Investing a small sum regularly over a long period though a monthly SIP in an equity scheme is arguably the best way to create a large corpus. This will help you in many ways: one, it imparts financial discipline to your life – you would invest regularly without getting influenced by the market conditions. Two, it will also help you to average your purchase cost and amass more mutual fund units. Three, it will help you to benefit from the power of compounding and produce inflation-beating better post-tax returns.

Make no mistake. Each of these factors are crucial when it comes to creating a corpus to meet your long-term goals. Think of it: you have only so much to invest. If your investment fails to deliver the required returns, your future plans would just remain plans - only on paper. And your ambitious goals like retirement would be in jeopardy.

Are you convinced now? If yes, let us proceed to find out how you can use mutual funds effectively to fund your retirement. To begin with, since you are invested for the long term, you already know your investment choice: equity mutual funds. Now how would you further narrow down your choice?

Do a quick assessment of your risk appetite. Find out how much risk you can take to reach your target. Do not do mental juggling- take an online quiz. Once you know your real risk taking abilities, you can choose a scheme easily.

We typically ask conservative equity investors to stick to aggressive hybrid schemes or large cap schemes because of they are relatively less volatile. You may expect around 10-12 per cent returns from these schemes. Moderate investors are better off with multicap schemes - they have a higher risk, but can also be rewarding. These schemes have the potential to offer 12-15 percent returns. Aggressive investors can bet on high risk choices like midcap and smallcap schemes. These schemes, as mentioned earlier, can be highly risky and volatile, but they can also offer very high returns (more than 15 per cent) over a long period.

Now, what would you do if you find that the returns offered by the scheme that matches your risk profile is not good enough to achieve your target corpus? Should you ignore your risk profile and opt for a scheme with higher risk to pocket higher returns? We would advise against that. We have noticed that investors often find it difficult to continue with investments that are beyond their risk tolerance level. Only way out in such situations is to increase your investment. If you can’t increase it at one go, you may increase it gradually. Better still, always increase your investments in tandem with your salary hike.

Here are some useful links
Best mutual funds to invest in 2018
Best aggressive hybrid funds to invest in 2018
Best large cap mutual funds to invest in 2018
Best multicap schemes to invest in 2018
Best midcap schemes to invest in 2018
Best smallcap schemes to invest in 2018

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