Cautious but true: Using debt funds for your retirement goals
Every person wishes to have a long and financially stable life, but merely wishing for them do not make these dreams come true. A comfortable retirement is the result of the right planning at the right time, and it must begin early with the right investments.
This article discusses the potential of debt fund investments in planning your retirement in a structured manner.
What are debt funds?
A debt fund is a mutual fund scheme, and it is quite different from an equity fund. Unlike an equity fund, a debt fund invests your money in fixed income instruments. These instruments include Government bonds, corporate bonds, money market instruments, corporate debt securities, etc. They all offer capital appreciation in a steady manner, and they are quite low on risk. Most investors use debt mutual funds to fund long term goals. Debt fund investments are best for retirement planning.
Consider a few reasons to invest in debt funds:
- They have a low-cost structure
- They offer stable returns over a long period of time and a high degree of safety – this makes them ideal
- They have high liquidity
- They offer regular income
In short, they are the perfect vehicle to help you get to your retirement goals if you invest in them much earlier than retirement actually comes around.
Your retirement goals…
Let’s now turn our attention to what your retirement should look like. Every person has a set vision for their retired life, and you must, too. Some retirees travel, others take up fitness and socialisation, still others indulge their hobbies, other take up classes to learn a new skill. It is a time to do the things that one was too busy for all their lives. By the time one retires, most of their familial obligations are over and they have some money and plenty of time to reclaim their lives.
However, this pleasant picture can get rudely disturbed if one does not have enough financial support in their retirement years. A lack of proper planning while one is still young and employed can often result in paucity of resources later. Once retirement happens, one’s income stops. Only savings and investments can help one live through their retirement comfortably.
Thus, if you have the foresight to invest in suitable instruments like debt mutual funds while you are still working and not yet in your 40s, you will accrue enough of a corpus that sees you through during retirement.
How to use debt funds for your retirement
* Start early. The earlier you start on your retirement planning, the more time you get to pick the most suitable options and align them as per your goals. Leaving retirement planning for later will result in mistakes being made, and the wrong instruments being chosen.
* Assess your risk appetite. If you are completely risk averse and want the safest route to get a monthly income and create a retirement corpus, then you should look at instruments like bank fixed deposits and PPF. If you have some risk appetite, you can explore debt mutual funds like PSU funds or corporate bonds, along with a few equity schemes. Other good debt funds to try are credit risk funds and long duration funds.
* Diversify the portfolio. A lot of people will advise you about putting all your money into debt fund investments. While this might work for some, it helps to be a bit cautious in this regard. Do ensure that the debt mutual funds can beat inflation when they mature. However, do note that debt funds normally do not beat the returns that equity funds can, over the same time frame. Some amount of equity schemes can help you accrue living expenses post-retirement, and also help you live comfortably in case you have a long-life span.
* Invest keeping your tax structure in mind. Those in the higher tax brackets can enjoy better taxation on the debt fund returns. However, these benefits kick in if you stay invested for three or more years.
What else can you do for retirement planning?
Apart from checking out the best debt and equity funds in India, you can take a few other measures to have a comfortable retirement, such as:
Save money. Create a separate retirement savings fund. When the money reaches a certain threshold, convert it into a fixed deposit for higher returns.
Curtail unnecessary expenditure. The more money you save, the more it will help you in the future. A good way to save money is to curb unnecessary expenses every month.
Monetise unused assets. You might have a large house that you don’t need – rent out one room to make a second income. Or rent out your car on the weekends to travel operators for assured income.