In the Sunday Series we dig into the archives and get to you articles that are worth resurfacing.This article discusses how mutual funds can be very helpful to create a nest egg that can see you through your retirement years.

Retirement is probably the last thing on our minds when we are in our twenties and just starting out in our chosen careers. All too soon however time speeds past and suddenly we are in our fifties. We realise that we have not done anything to create a nest egg that will see us through our older years when we may not be so productive as before.

Doctors, especially, spend a good portion of their twenties studying hard to get their medical degrees, compared to other professionals and therefore start out later earning their living. This makes their time to save and invest for their retirement much shorter.

Creating a retirement corpus

For long-term wealth creation, it has been proved time and again that equities are the best instruments. Yes, equities are risky. Yes, there are market crashes taking place all the time. Yes, they are subject to market forces and your investments are as likely to go down as up. But here we are talking about time periods of 10 to 20 years and more. In the long term, equities give you better returns than any other asset class and that includes gold and real estate, two favourites of most Indians.

Assuming that you start investing when you are 30, then you have a clear 30 years until the age of 60 (the normal average retirement age), to accumulate a good corpus that will see you through probably for another 30 years with minimum effort on your part.

Mutual Funds for Retirement

We recognise that not everyone understands the stock markets. Even if you understood them, you may not have the time to track them regularly, or you may not have the risk appetite for them. Investing in shares does require time, some painstaking research and regular monitoring plus the ability to stay calm when periodic corrections take place.

Therefore, instead of investing directly in shares, we recommend that you take the mutual fund route. Mutual funds invest in shares and each mutual fund scheme invests in an assorted group of companies. This ensures that your money is not all invested in one company. This diversification spreads out your risk and lowers it.

It is recommended to invest in the different schemes through systematic investments, that is investing regularly very month. This way you can take advantage of those times when the share prices are low and you can get mutual fund units at a cheaper price.

When your earnings go up over the years you will need to increase your investments too proportionately.

The table below shows the monthly amounts you would need to invest if you need Rs. 2 crores on retirement, for different time periods in different scenarios (rates of return). The returns are annual and not adjusted for inflation.

As you can see from the table, if you start early, you can invest smaller amounts every month to reach your goal. Every six months you need to take a look at your portfolio in order to check what kind of returns it is generating.

Are fixed deposits a good choice?

Most people in India gravitate towards fixed deposits when they want to invest in financial securities. While fixed deposits and other government-administered schemes are safe investment options, they are not the ideal way by which one can create a sizeable retirement corpus.

For one thing, the interest rates offered are not good enough since they barely beat the inflation rate. You may also want to remember that while fixed deposits give a guaranteed income, they are not tax efficient since the interest you are paid has to be added to your professional income and then you are taxed at the marginal rate applicable to your tax bracket.

Mutual funds on the other hand, employ analysts whose job it is to research the companies for them to invest. Every scheme has a fund manager who evaluates when to invest in the stocks when to take profits and so on. So, when you put your money in mutual funds, you have a team of professionals working for you.

You can take the help of an online platform such as Invezta to calculate your returns, make comparisons between different schemes and find the best mutual funds to make investments and reach your goals.

Disclaimer- The views and opinions expressed in this article are those of the author's and do not necessarily reflect the official policy or position of M3 India.

The article has been contributed by Invezta, a Robo advisory platform that provides a do-it-yourself facility for transacting at minimum cost, keeping track of investment portfolios and giving advice that is easily understood.

This article was originally published on 21.01.19