Why choose mutual funds for retirement planning?

 The second innings of life, commonly called retirement, is the time to reap benefits of smart investments made in your time. There are many retirement / pension plans that you may come across today. But the one that may stand out as the best retirement planning investment option is – mutual funds.

Here we tell you why!

A happy retirement tomorrow not only needs capital investment today, but also foresightedness to understand your own needs in the future. And therefore it is only wise to choose the best investments to accumulate a sufficient corpus for that time.

Mutual fund investments are designed such that they suit different requirements, risk appetites and inculcate financial discipline in life. They can certainly play an important role in accumulating your retirement corpus, just the way you want to!

Why are mutual fund investments a good retirement planning option?

Mutual fund schemes are diversified investments in themselves. With options to invest in any asset class or a combination of asset classes, mutual funds can fit any risk appetite & requirement.

Flexibility: With mutual fund investments you can:

  1. Choose the asset class depending on your risk appetite,
  2. Partially withdraw money (after the lock-in period, if any) without penalties
  3. Make one-time payment or invest regularly through SIP, whatever works for you
  4. Start a mutual fund investment with as low as Rs. 500
  5. Discontinue investments without having to pay penalty (after the lock-in period, if any)

Better returns: When chosen the right set of asset classes to invest in for the long term, mutual funds have given the best returns among all financial products.

Tax benefits: A category of mutual funds – ELSS – gives tax benefits under Section 80C of the Income Tax Law 1961.

Easy & TransparentMutual fund investments are one of the best option for beginners as there is complete transparency in the process and the money is managed by a financial expert.

Liquidity: Withdrawing money from your mutual fund investment is not difficult and hence it saves you from any financial risks.

Asset allocationDepending on your risk profile, there are three kinds of funds–

  1. Equity Funds (high-risk-high-return)
  2. Debt Funds (low-risk-low-return)
  3. Hybrid Funds – mix of equity & debt (moderate returns)

Mutual fund investment: Young & Earning

With time and a steady inflow of money, mutual fund investments to accumulate retirement corpus can show you the magic of compounding. However, let your risk appetite help you decide the type of mutual funds should you be invested in.

The younger an investor is, the more time he has on his hands to collect a retirement corpus. This means that he can get more aggressive with his investments, as his steady income inflow is there to support higher risk.

Therefore many financial advisors would recommend an equity scheme to begin with. Within this, an investor with a higher risk appetite can choose a midcap or smallcap scheme, while someone with a lower risk tolerance can safely choose a largecap scheme or even an aggressive hybrid scheme. For an even more cautious investor, schemes that invest in multicaps can be a good choice. Nevertheless, always check the performance record of any type of scheme before investing.

Also, to accumulate a good retirement corpus, try to increase your investments in tandem with your income hikes.

Mutual fund investment: Nearing retirement age

Mutual fund investments is that they can suit any risk appetite, age and amount. The trick is to make the right choice!

At a time when there is still a steady flow of income, but not much time before retirement, your priority should move towards capital protection over capital growth. If you start your retirement planning at this stage, then some caution is advised here because there is less time to recover the losses made in case of market volatility. Therefore, investing in balanced schemes that are a mix of equity & debt is recommended. Equity-oriented hybrid schemes, in which a larger part of the investment is in equities should be considered.

Keeping a restraint on high risk appetite is the key at this stage. Hence you should also consider moving your high-risk mutual fund investments, if any, into low-risk balanced funds or even debt funds.

Mutual fund investment: After retirement

If you decide to invest in mutual funds after retirement, you should aim at capital protection and a steady income. Therefore, at this stage, it is recommended to invest in liquid funds like debt funds and the likes.

There are also debt-oriented hybrid schemes available for retirees that invest a larger part of the investment in debt market, making it less exposed to risk. A small part is also invested in the equity market to enhance returns.

For regular cash flow, investors can opt for either of the options: Dividend Option in Equity oriented schemes or Systematic Withdrawal Plan (SWP) feature available in Growth Option.

With the change in the taxation structure, Systematic Withdrawal Plan (SWP) in the Growth Option has become more tax efficient to meet investors’ cash-flow needs. The dividend distributed by equity oriented mutual fund is subject to a Dividend Distribution Tax (DDT) at 10% (plus surcharge, as applicable and cess). SWP facility in a mutual fund scheme allows its investor to withdraw a pre-decided amount at a regular intervals – monthly, quarterly, semi-annually or annually. As LTCG tax is applicable only on appreciation part, it is lower than DDT which is applicable on the dividend declared by the scheme.

Retirement schemes in Mutual Fund

Several asset management companies have introduced mutual fund schemes aiming at retirement planning. Such schemes are open-ended and have a lock-in period of five years or till the time of retirement, whichever comes first. Just like balanced and hybrid schemes, retirement schemes also invest in equity & debt. The returns from retirement mutual fund schemes are moderate in the long term.

How to use mutual funds for retirement planning?

It is important to understand that investing for a future income is not the same as investing for an event or a big purchase. Retirement planning requires a lot more than merely choosing retirement plans or investments to build the corpus.

  • The right way to go about choosing your mutual fund investments for retirement is to first plan out withdrawal rules for your retirement.
  • Divide your retirement years in time segments and then invest in mutual funds accordingly – looking at amount of investment in each fund, tenure, holding period, expected dividends, etc.
  • Decide whichof your mutual fund investmentswill provide for your regular income for which&how many years


Life gives good amount of time to prepare for its second innings – the retirement. However, it is up to you how well you prepare for it! Choosing an investment which fits your requirements in every way is one of the main keys for this preparation. And mutual funds certainly fit the bill here!

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