Given the advancement of medical science, there is a tremendous rise in life expectancy, which makes it prudent for you to create an adequate retirement corpus that could last up to 25 years or more after retirement. Doing so would allow you to sail through this last phase of life without any hiccups.
To achieve the goal of building an adequate retirement corpus, two things are necessary – prudent retirement planning and an adequate fund investment in equity mutual funds. Read on to understand what an equity mutual fund is and why you must invest in it for an adequate retirement corpus.
What is an equity mutual fund?
An equity mutual fund, also known as growth fund, invests in stocks and shares of companies. They are either active or passive in nature. In the case of active equity mutual fund, a fund manager simply scans through a market, performs research on businesses and companies, assesses performance and looks out for prudent stocks for investment. In the case of passive equity mutual fund, the manager of the fund ensures to form an investment portfolio that mirrors the popular market index i.e., NIFTY 50 or Sensex.
Moreover, equity mutual fund can even be divided depending on market capitalisation like large cap, small cap, mid cap, etc. Also, this fund can be classified into sectoral/thematic and diversified. In the latter, the fund invests in stocks throughout the whole market spectrum while in the former it is restricted to just a specific theme or sector, say, infrastructure or infotech. Thus, an equity mutual fund invests in company stocks and shares with the aim to offer higher returns than debt and professional management benefit to retail investors. Also, it offers the advantage of diversification to your retirement portfolio. This means, if your debt investments in your retirement portfolio witnesses a downfall, then equity investments may compensate for the losses.
What are the benefits of adding equity funds to your retirement portfolio?
- Improves liquidity
Many equity funds do not have any lock-in stipulation. It means you can liquidate a few or all your equity units at any time, without any penalty. So, in the case of any medical emergency owing to increasing age, you can always fall on your equity investment for quick money.
- Saves tax
Even senior citizens are required to pay tax on capital gains on their investments. However, you can save on the tax liability by investing in tax saving equity funds like ELSS (equity linked savings scheme). Such funds have a lock-in of only three years, which is the shortest as compared to PPF (public provident fund) having a lock-in of 15 years and NSC (national savings certificate) or 5-year FD (Fixed Deposit) with a lock-in of five years. ELSS provides a tax benefit of up to Rs 1.50 lakh as per Section 80 C. Again, in the scenario of long-term capital returns, ELSS funds attract no tax for a long-term gain of up to Rs 1 lakh and for a gain of over Rs 1 lakh, a tax of flat 10 per cent is charged.
- Professionally curated and diversified
As a fund manager handpicks and diversifies the stocks as per experience and market assessment, your investments are in the best hands. These experts aim to curate your investments in a way that provides maximum returns.
Given the benefit of diversification, professional management, transparency, and liquidity offered by equity funds, they are no doubt the best asset class to invest in to create an adequate inflation beating retirement fund.