4 Types of Mutual Funds to Build Your Retirement Corpus – Best Mutual Funds for Retirement Planning

September 12, 2023 Mutual Fund

Retirement is an inescapable truth of life which should not be overlooked. While some individuals may decide to voluntarily hang up their boots early in life, a majority may still be waiting to officially retire at the age of 60 or may be 65 years.

Most individuals envision living the golden years of life in bliss by pursuing a hobby or an activity they always wanted to do, travelling the world, spending time with family, catching up with old friends, and so on.

But one would also agree that to live a blissful and comfortable retired life comes with a price. Hence, it is important to ensure that money earned over the years of hard work is sensibly deployed, whereby it compounds well over a period of time, counters inflation, the capital is well protected, and there is enough money to meet the post-retirement expenses.

[Read: All You Need To Know About Retirement Planning]

“As in all successful ventures, the foundation of a good retirement is planning.” – Earl Nightingale (the famous American author and motivational speaker).

Not only planning but also investing sensibly in reliable asset classes and avenues are quintessential for successful retirement planning.

Post-retirement, the regular flow of income would stop, but ongoing expenses would still continue. In fact, some costs, such as medical expenses, may rise with age. It is the investments that would be ultimate financial lifeline and offer the much-needed financial freedom.

Hence, to be financially independent even after retirement one cannot ignore investment in suitable avenues.

Mutual Funds are well placed to take care of this requirement. The best part about investing in mutual funds to build a retirement corpus is that allocation in different asset classes can be tailor-made to suit individual’s needs. While the returns are not fixed or guaranteed (they are market-linked), well-managed funds still have the potential to generate reasonable returns and help in building a decent retirement corpus.

There are a various types of mutual fund schemes available — equity-oriented, debt-oriented, hybrid, and so on. Within each of these are a host of sub-categories with a distinct investment mandate.

[Read: What are the Different Types of Mutual Funds?]

Here are the 4 types of mutual funds to help you build a respectable retirement corpus:

1. Equity Mutual Funds

For those individuals whose retirement is at least 7-10 years away, it means they are in the accumulation phase of their life. With sufficient time in hand for retirement, such individuals can afford to take higher risks to earn higher returns. This means they can build an aggressive portfolio by allocating around 75-95% of the investible corpus in equity mutual funds.

As the name suggests, equity mutual funds invest predominantly in equities (stocks) of listed Indian companies. SEBI has mandated that a scheme must invest at least 65% of its assets in equity and equity-related instruments to be qualified as an equity mutual fund.

Equity Mutual Funds invest the money pooled from investors into stocks of various companies spread across a range of sectors to create a diversified portfolio. Depending on its pre-defined investment objective, an equity mutual fund may invest predominantly in large-cap, mid-cap, or small-cap stocks, or across market caps. Equity mutual funds have the potential to generate inflation-beating returns in the long run and can be a suitable to compound your wealth remarkably over the long run.

For retirement planning investors can consider investing in a mix of Large Cap Funds, Flexi Cap Funds, Value Funds, Mid Cap Funds, and Small Cap Funds. The allocation in each of these can be decided based on an individual’s investment objective, risk appetite and the investment time horizon before the goal realises.

Below are some of the top performing equity mutual fund schemes in their respective categories based on 3-year returns.

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Returns are CAGR in percentage as of September 08, 2023
Monthly SIP of Rs 5,000 over a 5-year period in Direct plan – Growth option considered
(Source: ACE MF, data collated by PersonalFN) 

Click here to check out of some of the best equity mutual funds to invest in 2023.

2. Debt Mutual Funds

Debt Mutual Funds are schemes that predominantly invest in fixed-income generating instruments such as corporate bonds, government bonds, certificates of deposit, treasury bills, etc. These funds aim to provide diversification and stable returns as they are less volatile compared to equity mutual funds.

The prevailing interest rate environment is one of the most crucial factors that affect the performance of a debt mutual fund. Apart from this, the credit quality and the maturity of the underlying securities in the portfolio can impact their returns.

Indian mutual funds offer different categories of debt funds carrying different maturity and credit profiles to suit investors’ needs.

The bond funds that may be suitable for retirement needs are Liquid Funds, Banking & PSU Debt Funds, Dynamic Bond Funds, Corporate Bond Funds, and Gilt Funds.

This category is particularly suitable for investors who are nearing their retirement and want to protect their capital from market volatility. Investors whose retirement is still many years away from their retirement can also consider allocating some portion of their assets in debt mutual funds to cushion the impact of volatility in the equity market.

For those nearing their goals the allocation to debt mutual funds can range between 40-50% or more, while others may consider allocating up to 30% in the category based on their risk appetite and investment horizon.

Below are some of the top performing debt mutual fund schemes in their respective categories based on 3-year returns.

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Returns are CAGR in percentage as of September 08, 2023
Monthly SIP of Rs 5,000 over a 5-year period in Direct plan – Growth option considered
(Source: ACE MF, data collated by PersonalFN) 

Click here to check out some of the best debt mutual funds to invest in 2023.

3. Hybrid Mutual Funds

Hybrid Funds are mutual funds that aim to strike a balance between growth and stability by investing in two or more asset classes such as equity, debt, and gold.

The idea is to create a balanced mix that aims to offer the growth potential of equities, while also adding some safety with low-correlated assets such as bonds to protect the investment from sharp swings in the market. They’re suitable for investors looking to diversify their portfolios while still maintaining a certain level of growth potential.

For retirement planning investors can choose from different Hybrid Mutual Fund categories such as Conservative Hybrid Fund, Aggressive Hybrid Fund, Dynamic Asset Allocation Fund, and Multi Asset Allocation Fund.

Below are some of the top performing hybrid mutual fund schemes in their respective categories based on 3-year returns.

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Returns are CAGR in percentage as of September 08, 2023
Monthly SIP of Rs 5,000 over a 5-year period in Direct plan – Growth option considered
(Source: ACE MF, data collated by PersonalFN) 

These funds are suitable for investors looking to diversify across asset classes through a single fund. Those following an aggressive investment approach can consider equity-oriented hybrid funds such as Aggressive Hybrid Funds while those with a conservative strategy can opt for debt-oriented hybrid funds such as Conservative Hybrid Funds.

4. Gold ETFs

A Gold ETF is a passively managed mutual fund scheme that aims to track the domestic price of physical gold by making direct investments in gold.

It offers investors an innovative and cost-efficient way to invest in gold without having the hassle of physically holding it. On purchase of a Gold ETF, units are allotted to the investor. The units purchased are backed by 0.995 finesse of physical gold.

Thus, the investor can own gold without having to worry about making charges (as in the case when purchasing gold in a physical form), storage hassles, risk of misplacing/theft, concerns regarding purity, etc.

The investment objective of a gold ETF is to generate returns broadly in line with the domestic price of gold and gold-related instruments subject to a tracking error.

Notably, not all asset classes move in the same direction at all times. There have been years when equities have disappointed investors and gold has fared better, proving to be a hedge. The historical position of gold, its performance during times of crisis, its hedge against inflation, a geopolitical diversifier, carrying no default risk, and being very liquid have been viewed as some of the highly relevant factors.

Gold ETF provides investors with an excellent way to diversify their investment portfolio and adopt prudent asset allocation.

Investors may consider allocating up to 10-15% of their investible corpus in Gold ETFs.

Below are some of the top performing hybrid mutual fund schemes in their respective categories based on 3-year returns.

Past performance is not an indicator of future returns. The securities quoted are for illustration only and are not recommendatory.
Returns are CAGR in percentage as of September 08, 2023
Monthly SIP of Rs 5,000 over a 5-year period in Direct plan – Growth option considered
(Source: ACE MF, data collated by PersonalFN) 

Import factors to consider before you invest for your retirement:

To achieve the desired retirement corpus, it is vital to calculate the adequate amount to be invested for your post-retirement needs. The earlier one starts investing, the smaller will be the amount to be invested regularly and the bigger would be the corpus at the end of goal period. Investors can use the Retirement Calculator to calculate the amount they will need to invest for their retirement goals.

Aim to contribute regularly and invest systematically for retirement. A systematic/regular investment through SIP not only helps investors take advantage of rupee cost averaging but also helps ensure that the investments get more time to potentially grow. Investors can start by investing a small amount regularly via SIP and then step up SIP contributions every year in line with the hike in income.

To conclude:

As a ground rule, if an individual has many years left before they retire, they can follow an aggressive approach by investing predominantly in equity-oriented mutual funds. On the contrary, if they are just a few years away from retirement, it will be prudent to take limited exposure to equity mutual funds and consider schemes that take exposure to other, relatively safe asset classes such as debt funds and gold.

If individuals invest sensibly by diversifying their investments across asset classes and investment avenues after recognizing their risk profile and investment horizon, it can pave the path to retiring rich.

To build a sizeable retirement corpus, get started right away! Do not wait for long thinking there is enough time. Remember, the early bird catches the worm.

This article first appeared on PersonalFN here