Mutual funds can help fund your retirement

What is the corpus you want to create? What is your tolerance for risk? And, crucially, how many years are left till your retirement? Find out what experts suggest.

When it comes to mutual funds, two things stop people: Either they are not planning for their retirement, or they prefer to invest in fixed interest instruments that promise capital protection, though the earnings may be relatively low compared to financial tools like mutual funds that are inherently volatile. Now, caution is always a good thing, but unless you make adequate investments in the present — despite the risk — your retirement is likely to be a financial mess. So let’s address the how.

A lot depends on your investment objective. What is the corpus you want to create? What is your tolerance for risk? And, crucially, how many years are left till your retirement? Experts suggest the following:

Pick a figure: Unless you have decided your retirement corpus, hitting on the right mutual fund is not possible. It’s called having a financial goal. And you can have more than one. Another way of looking at this is to think of the milestones you want to achieve, like retiring at 40 or an making an emergency fund for contingencies. Adhil Shetty, Chief Executive Officer, BankBazaar, an online marketplace for financial products, puts this in perspective and said, “Investing is not about putting funds in a bucket and forgetting about it. The entire point of investing is to ensure you have funds for your life goals. So you need to plan your investments just like your life goals and give them enough time to grow.”

Judge your appetite: All investment involves risk. Choose among mutual funds investing in stocks, debts, government securities, or commodities markets depending on your risk appetite. A way to judge the risk level of a mutual fund is to check how frequently its returns change every year. Mutual funds with large variation in returns are deemed more risky owing to their fluctuating performance. Higher risk means increased volatility of returns.

Know the expense ratio: Asset management companies charge money to run mutual funds. A percentage of the asset’s value goes towards the payment of fees and operational expenses of such companies. Expense ratio refers to the per unit cost incurred for managing a mutual fund scheme. It’s important that you invest in mutual funds with lower expense ratios said Sahil Arora, director (Investments), Paisabazaar.com, a virtual debt syndication service. “As the operating expenses of a fund are met from the assets managed by it, a lower expense ratio would mean that most of your money would remain invested in the fund,” he said. The ideal expense ratio is somewhere between 0.5 per cent and 0.75 per cent. An expense ratio more than 1.5 per cent is considered high. In some mutual funds like debt funds, which have limited chances of giving high returns it pays better to keep the expense ratio low.

Avoid high turnover rates: Did you know that the turnover rate of an MF portfolio matters? Turnover ratio refers to the percentage of the portfolio bought and sold every year. Kaustubh Belapurkar, director (Portfolio Specialist), Morningstar India, an investment research and management services firm said, “You can find the portfolio turnover ratio in the monthly factsheet and the annual report. A higher number indicates significant changes are being made in the portfolio, which could indicate an inconsistent investment process or change in investment strategy.” There is no ideal turnover ratio for an MF. However, if a mutual fund is turning over at a rate between 20 per cent and 30 per cent, you might want to pay closer attention to how the fund is being managed.

Diversity always pays: Do not invest all your earnings in one mutual fund alone. If you are unsure of how the stock market works, investing in diverse mutual funds helps. Raj Khosla, founder and managing director, MyMoneyMantra.com, a financial services marketplace said, “A well-diversified portfolio includes a dash of equity, debt funds as well as cash equivalents. Never put all eggs in one basket.”

What’s more, the market value of your assets matters. A greater fund size, i.e Assets under Management or the total market value of the assets managed under the mutual fund depicts more trust by investors.