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Funding your retirement with mutual funds

December 17, 2010

So you are in your mid 30s and invest regularly in mutual funds, but are you worried about having a retirement plan in your portfolio than can take care of life after 60?

If yes, the basic questions that would be bothering an individual are — How much money is needed at retirement? How should I build that corpus? How will I get a monthly income to sustain my lifestyle post-retirement?

There are many calculators available online which can calculate the amount you will require so that you start working towards creating that corpus.

Though the market is flooded with retirement plans, you can also consider building a huge retirement corpus with your existing mutual funds portfolio.

All you need is a little bit of number crunching, a good but small set of mutual funds (researched and selected yourself or with the help of an adviser) and you are ready with a plan.

Numerous personal finance tools are available on the Internet which can help calculate your retirement needs and the amount you need to invest monthly to achieve that target (SIP Calculator).

For instance, if the plan is to retire at 60 with 50 million rupees, a 35-year-old can create that corpus by investing around 15,000 rupees every month (assuming a return of 15 percent per annum).

But starting early pays and a 30-year-old can achieve the same target with just around 7,000 rupees per month. That is the power of compounding.

It is tough to predict future fund returns, but historical data is interesting. There are around 10 equity mutual funds in India that have generated more than 20 percent per annum in the past 15 years, according to data from fund tracker Lipper.

Some retirement plans also offer a monthly income post-retirement, but it’s easy to do that yourself. In the above illustration, a corpus of 50 million rupees can be invested in a bank fixed deposit, considered one of safest form of investments, at retirement to get regular monthly income for everyday expenses and needs.

One cannot be sure about the interest rate scenario after 30 years, but a senior citizen can easily fetch 9 percent annual returns on FDs today for a given duration. This translates to a monthly income of 375,000 rupees on a 50-million-rupee corpus above.

As the above example is just illustrative, you can alter these figures to suit your needs at 60, and consult an adviser who can help you implement such a plan.

Experts also suggest that you need to reduce exposure to equities as your retirement age nears, so that you can secure your wealth.

Do you have another financial plan in mind which can help you plan retirement? Do share it with our readers.

(Aditya Kalra is a Reuters journalist. The views and opinions expressed here are his own and not those of Reuters. The article/blog above is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)


these are mind boggling figures and at first reading, look so untrue. but well thatz how compounding works. nice read. and also sane advice. tnks aditya.

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