Equity – A better ally in retirement planning

Everyone dreams of early retirement. While one can retire from work not from life. One has to meet the daily expenses, maintain the current lifestyle and also be prepared for the medical emergencies even during the post retirement stage. With the dominance of the nuclear family, rising cost of living and increasing life expectancy there is need to build robust retirement plan which helps to enjoy a secured stress-free life.  

Today there are host of investment options one can choose for the retirement planning ranging from traditional avenues like fixed deposit, Public provident fund (PPF), national saving certificate (NSC), Kisan Vikas Patra, RBI Floating Rate Savings Bonds, post office schemes. These avenues offer guaranteed returns but may not able to beat the inflation. Hence, it is important to invest in market linked avenues and most popular instrument is equities. Why equities? Equities suits the young population of our country which typically have long-term investment horizon and higher risk appetite. Equity has the potential to create wealth over long term. Equity represented by S&P BSE Sensex has delivered 11% annualized returns over 12-year period ended July 28, 2021. As seen in the chart below, despite the intermittent volatility in the long-term equity was a good performer.  In addition, long-term investing in equities helps to overcome the risk associated with short term market timing and helps to generate required corpus for the post retired life.

While investing in equities is crucial it is important to have higher equity exposure in the younger age and then gradually shift some portion of the portfolio to debt which can give safety and cushion against market volatility.  In addition, investing in equities can be done directly which can risky and calls for expertise. Instead choose mutual funds.

Equity mutual funds have variants catering to different risk appetites. Like for large cap funds for investors with moderately higher risk appetite, small and midcap, sector/thematic funds for investors with very higher risk appetite. There are multi-cap and flexi cap funds which invests across market capitalisation. Besides, there are focused, value funds or index and equity exchange traded funds.  Choice of these funds should be in line with the investor’s risk tolerance. Apart from wide universe funds do enjoy the perks of convenience, liquidity, diversification, professional management and systematic investment plan (SIP). 

Through SIP, investors can invest a fixed sum of money on a predefined frequency in the equity fund of their choice. Regular investing is a disciplined way to build the retirement kitty because investors can control their spending and allow their money to grow through power of compounding in the long run.  For instance, a monthly SIP of Rs 5000 assuming 11% rate of returns which is the 12-year annualized return of S&P BSE Sensex, investors can create a corpus of Rs 1.4 crore at the end of the 30 years.  So, it is always better to start planning for the retirement early which can give more time to your equity investments to grow.  Once the SIP is started resist the temptation to stop it during market downturns. Also attempt to increase the SIP investment amount with the rise in income.  Lastly, equity mutual funds are marked linked avenues and subject to risk and hence investors need to choose the funds wisely and hold their investments patiently over long term to enjoy the fruits in the retired life.