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How can a 42-year-old earning Rs.1 lakh per month with existing investments in PF, PPF, and NPS, retire at 50 with a monthly income of Rs.50k?

Ramalingam Kalirajan |7363 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 12, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Bala on Jul 04, 2024Hindi

Hi Sir, I am 42 Years Old working in Private firm.. I would like to retire at the age of 50 yrs.. I earn 1 lakh per month and can invest 50k after expenses..I have a Property of 50L worth for living..Have 20 L in PF and 4 L each in PPF and NPS and would like to continue the investments in EPF/PPF/NPS until my retirement.. Iam new to Mutual fund world and planning to start investing 50k with YOY step up for the next 8 years and later go with SWP for fixed monthly Income.. Can you please help to know the best mutual fund categories to start investing and also suggest the best fund names for each category (Growth + Direct Plan) with the investment horizon of 8 yrs... It would be more helpful if you could suggest based on the risk I can take, factoring in my age and years left for retirement..

Ans: Retiring at 50 years old is an ambitious goal, especially with eight years left until you reach that milestone. You have a stable monthly income of Rs. 1 lakh and plan to invest Rs. 50,000 monthly. You also have investments in PF, PPF, and NPS, which are good for long-term stability. However, as you are new to mutual funds, it's important to approach this strategically to meet your retirement needs.

Evaluating Your Current Financial Position
Before diving into mutual fund investments, let's evaluate your existing assets and their roles in your retirement plan.

Property Worth Rs. 50 Lakhs
You own a property worth Rs. 50 lakhs for living. This is a significant asset, providing you with a place to live post-retirement. However, it does not contribute directly to your retirement income. The focus should be on building financial assets that generate regular income.

Provident Fund (PF), Public Provident Fund (PPF), and National Pension Scheme (NPS)
Your current investments in PF, PPF, and NPS are great for long-term wealth creation. These are low-risk, tax-efficient investments that provide financial security. Continuing contributions to these funds until retirement is a wise decision. However, they might not be sufficient to provide the desired retirement corpus alone. This is where mutual funds come into play.

Setting the Right Investment Strategy
Given that you are 42 years old and plan to retire in eight years, your investment strategy should focus on growth with a balanced approach to risk. Here’s how you can structure your mutual fund investments:

Equity Mutual Funds
Equity mutual funds are essential for growth, especially with an eight-year investment horizon. However, since you are approaching retirement, it’s important to balance between high-growth potential and risk.

Large-Cap Funds: These funds invest in well-established companies with a strong track record. They are less volatile compared to mid-cap and small-cap funds, making them a safer choice as you approach retirement. Large-cap funds should form the core of your equity portfolio.

Mid-Cap Funds: Mid-cap funds offer higher growth potential but come with higher risk. Given your eight-year horizon, you can allocate a portion of your investments to mid-cap funds. However, the allocation should be balanced to avoid excessive risk.

Multi-Cap or Flexi-Cap Funds: These funds invest across large-cap, mid-cap, and small-cap stocks, providing diversification within a single fund. They offer a balanced approach, combining stability and growth. Multi-cap or flexi-cap funds can be a good choice to add diversity to your portfolio.

Balanced or Hybrid Funds
As you are new to mutual funds, balanced or hybrid funds can be a good starting point. These funds invest in both equity and debt, providing a balanced risk-reward ratio. They offer stability with a potential for growth, making them suitable as you approach retirement.

Equity-Oriented Hybrid Funds: These funds have a higher allocation to equities, providing growth potential while still offering some stability through debt investments.

Debt-Oriented Hybrid Funds: If you prefer more stability, you can opt for debt-oriented hybrid funds. These have a higher allocation to debt, reducing the risk while still providing some equity exposure.

Debt Mutual Funds
As you near retirement, it’s crucial to start building a portion of your portfolio in debt funds. Debt funds provide stability and are less volatile than equity funds. They are essential for preserving capital and generating regular income.

Short-Term Debt Funds: These funds are less sensitive to interest rate changes and offer stable returns. They are suitable for building a secure corpus as you approach retirement.

Dynamic Bond Funds: These funds actively manage duration based on interest rate movements, offering flexibility and the potential for better returns compared to traditional debt funds.

Implementing a Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is the most effective way to invest in mutual funds, especially with a monthly investment of Rs. 50,000. SIPs help in averaging out the cost and reduce the risk of market volatility. Here’s how you can structure your SIPs:

Start with a Balanced Allocation: Begin by allocating your SIPs across large-cap, mid-cap, and balanced funds. This approach ensures that your portfolio has a mix of growth and stability.

Year-on-Year (YOY) Step-Up: As you plan to increase your SIP amount annually, this will significantly boost your corpus over time. A YOY step-up ensures that your investments grow in line with your income, maximizing the benefits of compounding.

Planning for Post-Retirement Income
Once you retire at 50, your focus will shift to generating a regular income from your investments. A Systematic Withdrawal Plan (SWP) from mutual funds can provide a steady monthly income while keeping your investments intact. Here’s how you can plan for this phase:

Shift Focus to Debt Funds: As you approach retirement, gradually increase your allocation to debt funds. This shift reduces risk and ensures a stable income post-retirement.

Consider Hybrid Funds for SWP: Balanced or hybrid funds are suitable for SWP as they offer a mix of stability and growth. They can provide a steady income while still allowing for some capital appreciation.

Plan the Withdrawal Rate: It’s important to plan your withdrawal rate carefully. Withdrawing too much too soon can deplete your corpus. A CFP can help in determining a sustainable withdrawal rate based on your retirement needs.

The Disadvantages of Direct Mutual Funds
You mentioned considering direct funds, which have lower expense ratios. While they might seem cost-effective, direct funds require active monitoring and management. If you are new to mutual funds, this might be challenging. Investing through a Certified Financial Planner (CFP) provides professional guidance, periodic reviews, and adjustments to your portfolio, ensuring it stays aligned with your goals.

Final Insights
With eight years left until retirement, you are in a good position to build a robust retirement corpus. Your current investments in PF, PPF, and NPS provide a strong foundation, but adding mutual funds to your portfolio will help achieve your goal of retiring at 50 with a secure financial future.

Start with a balanced investment strategy, focusing on large-cap and balanced funds, and gradually shift towards debt as you near retirement. A Systematic Investment Plan (SIP) with a year-on-year step-up is an effective way to grow your investments, and planning for a Systematic Withdrawal Plan (SWP) post-retirement will ensure a steady income.

Finally, working with a Certified Financial Planner (CFP) can provide the professional guidance needed to navigate the complexities of mutual fund investments, ensuring that your portfolio is well-managed and aligned with your retirement goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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