Let’s be honest: there’s no single magic fund that will carry you through retirement. What works is a mix. A portfolio that survives the ups and downs for years and years, and one you can actually live with, is more likely to outperform a smart one-fund portfolio. How to put one together, then? Consider it to be three jobs, all of which are dealt with by different kinds of funds.
Job One: Grow Your Money With Equity
When retirement is 10, 15 or 20 years down the road, it’s the time for equity to take center stage. In the long run, one of the few remaining options to beat inflation is to invest in the best mutual funds for retirement. The cost of goods increases, and so do the savings.
Two categories are popular for this job:
- Flexi-cap funds: The fund manager may switch between large, mid and small companies as he sees fit. Allows you to have flexibility without having to make those calls yourself.
- Large-cap or index funds: These follow big, established companies. An index fund is the simplest version. It copies a market index, so it’s low-cost and easy to understand.
Equity will have rough years, and that’s normal. Starting early gives you time to ride them out.
Job Two: Keep Things Steady With Hybrid and Debt Funds
As retirement gets closer, the question changes. Instead of “How much can I grow?” it becomes “How do I protect what I’ve built?”
That’s where hybrid and debt funds come in:
- Conservative funds mix debt with a smaller portion in equity, which is called conservative hybrid funds. They cushion the fall during market declines and provide a bit of growth.
- Short duration debt funds are not as interest rate sensitive and therefore can be a less volatile mutual funds investment option for a steady income.
- Equity funds are a combination of equity, arbitrage and debt to reduce the volatility.
These aren’t headline news items, but they are the stuff of a good night’s sleep when markets seem to be alive and kicking.
Job Three: Build Discipline (Optional)
Others can’t seem to stay out of retirement funds. For those who feel that way, supported retirement plans can provide assistance. They are typically accompanied by a lock-in period that prevents you from withdrawing funds in times of panic or shopping spree. To select one, first compare the lock-in periods, fees, and the types of securities in the fund. While history is good for showing impressive returns, it doesn’t do so for the future, so do not choose a fund based on its history.
Putting It Into Practice
You don’t need a complicated plan. Here’s a simple way to start:
- Start a SIP. Instead, an SIP is a plan where you invest a regular sum every month, and you don’t have to wait for the “right time” to invest.
- Match the mix to your age. If you have 20 or more years left, you may opt for a higher equity allocation in your hybrid funds, and a greater equity allocation in the equity funds. Your own split will mirror your level of discomfort with risk.
- Shift gradually. New contributions are to be made towards the conservative hybrid and short-duration debt funds within five to seven years of retirement.
- Watch the costs. A “small” fee of only 0.5% a year will take a substantial bite out of 20 years of savings.
- Check in once a year. Rebalance if one side of your portfolio has become too large.
Don’t Forget Taxes
There are tax differences for various funds, and the laws may change. See the current tax status of each category you may be thinking of or consult a tax expert, and keep more of what you work for.
The Takeaway
All you need to build a good retirement portfolio is a little common sense. It requires growth, stability and a plan that you will follow. Combine the three, keep it affordable, check it from time to time and let time and compounding do the rest. Investments in mutual funds carry market risks, and if you are not sure of your beginning, you must consult with a well-versed financial advisor.
