Equity is a Crucial Ingredient in your Retirement Recipe
Retirement planning isn’t a need anymore, it’s a necessity.
Suppose you have a life expectancy of 85 years and you retire at 60, you have to sustain 25 years without any regular income. And if you wish to retire early, say at 50, your retired life would be longer than your working span. Unless you save enough while you are earning, your retired life can’t be as peaceful as you would expect it to be.
What is Retirement Planning?
Retirement planning is the process of setting up a roadmap for retirement. A big part of the retirement plan revolves around how the retirement will be funded. The lifestyle one desires will define the expenses and income required during retirement, which in turn will set the goal for retirement savings. Planning for retirement is about linking the current financial situation with expectations for the future and having a strategy in place to accumulate wealth for retirement.
Why do you need retirement planning?
It is easy to cover your expenses as long as you are earning regularly from your business, profession or employment. Post retirement, you need to have enough money set aside to live the rest of your life maintaining a good lifestyle and in order to cover daily living and medical expenses, to fight inflation and also to deal with uncertainties.
Retirement planning gains significance as the cost of goods and services will be higher during retirement than at present because of inflation. The current average inflation rate is 5%. Inflation puts an upward pressure on the sum of money required to meet expenses in retirement.
When should you start making investments to create a corpus for retirement?
The retirement corpus has to be built during the working life of an individual. There is no ideal age to begin planning for retirement but an early start of regular and consistent saving will help to achieve the goal of retirement with ease. In order to accumulate wealth, a portion of the earned income should be set aside for the retirement corpus. Choosing the right investment option for these savings is equally important.
What choices do we have?
There are various options available for investments. A person who is nearing retirement should prefer to invest his/her money in safer instruments whereas a young person has a longer time horizon and hence, should invest in instruments that carry relatively higher risk. In India, fixed deposits (FD) are considered as the safest instrument and investing in the stock market is deemed risky. Gold and real estate are two other investment avenues for investment. But in India, both of these are not bought with the intention of investment but for personal use. An important aspect to consider here is the effect of taxation on returns. The return one earns is reduced to the extent of taxes that are applicable on the returns. Hence while making an investment choice, the investor should understand the taxation applicable to various instruments. The table below lists the various investment choices available to investors and also the risks associated with them:
Source: ACE Equity & ACE MF, Ventura MF Research, BSE, HDFC Bank *Data as on 31-May-2019
If we compare the returns given by different instruments, it is evident that equity as an asset class has given the highest return among all asset classes. High returns in equity come with high risk as well. In order to minimize your risk, it is better to invest in equity through the route of mutual funds. This will not only help you to reduce the risk but you can benefit from professional management and various other advantages offered by mutual funds. Let us consider two examples to understand why only equity can help you retire rich!
It is clear from the table that in order to accumulate Rs. 1 crore, it will take more time and also more investment if one invests through FDs, whereas if one invests through equity, he/she can accumulate the desired corpus 6 years earlier and also will need to invest Rs. 7.20 lakhs less than through the FD route. In the next example we will find out the difference in corpus at the end of 20 years if Rs. 10,000 is invested per month in Equity as against in an FD.
The above illustration shows that if a person invests Rs. 10,000 per month in equity & FDs, at the end of 20 years, the money accumulated through FDs will be Rs. 41 lacs less as compared to equity.
If you invest in equity mutual funds via Systematic Investment Plans (SIPs), you would be able to build a sufficient corpus for your retirement. The power of compounding makes equity mutual funds a perfect investment avenue for retirement planning. While it’s true that investing in mutual funds for the long-term is crucial for generating a sizable corpus for retirement, it’s equally important to choose mutual fund schemes carefully.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company.
We do not individually or collectively hold 1% or more of the securities of the company.
We do not have any other material conflict of interest in the company.
We do not act as a market maker in securities of the company.
We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company.
We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships.
We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.