Caught up in the hustle and bustle of one’s work-life, many of us have a dream of retiring early and spending some quality time with family and friends. The good news is that realising such a dream and retiring with a fat bank balance to take care of the golden years is very possible. The easiest way to create a huge corpus for a long term goal such as retirement is to start saving early. There are three distinct advantages of starting early-One, one needs to save smaller amounts rather than investing a big amount, secondly, the power of compounding works in the best possible manner and thirdly, any course correction becomes possible as the goal is still far away.
Once convinced that you need to plan your retirement at the earliest, get down working with some numbers. One needs to calculate the amount of savings required to arrive at a corpus that can fetch a regular income during the retirement years. There are several retirement calculators that can help one to figure out the amount of savings required.
Now, the question that comes to the forefront is, where should one save for retirement? Before knowing that, remember that your retirement portfolio needs to be a dedicated portfolio with funds earmarked only for your retired years. This will not only bring in the focus and discipline but also ensure that one’s retirement is on track or not.
A portfolio consisting of investments in equity mutual funds and NPS could be adequate enough to see one through the early retirement. One may begin to save in both of these investments and ensure that the growth is meant for long term goal such as retirement.
Let us look at an illustration to figure out how early starters have the advantage:
Three colleagues of different ages (30,35 and 40 years) wish to retire at 60 with a corpus of Rs 2 crore. But, look at what each of them had to save and how compounding worked wonder for the youngest. The youngest of age 30 had to save Rs 3000 per month while the oldest at age 40 had to save Rs 14000, assuming both are able to generate an annualised growth of 15 per cent per annum. The difference is on account of starting early as the youngest had 30 years to grow the funds while the oldest had 10 years less of time-frame. The 35-year old has to save Rs 6500 each month to create a corpus of Rs 2 crore over the next 25 years.
To start with, one may diversify across 2-3 equity mutual fund schemes, one of which can be a large-cap fund. A large-cap mutual fund scheme comprises of stocks of companies which represent the top-rung firms in the country. Being diversified in nature, a large-cap fund takes care of the risks in the economy in its fold. Some of the blue-chip companies across the financial sector, manufacturing, infrastructure, information technology, pharmaceuticals etc which have been well-researched by analysts and offers adequate liquidity supported by high volumes mark the stature of the large-cap funds.
With retirement still some years away, adding a mid-cap fund should also serve the purpose well. Those companies which are showing promising growth and have the potential to becomes the leaders in their market-segment in future represents the mid-cap funds. Compared to large-cap funds, the volatility in mid-cap schemes is perceived to be more and hence the risk appetite of the investor plays an important role. Still, some allocation in mid-cap funds can work as a kicker in generating a decent return over the long term.
Also, some portion of your savings can move into the dedicated retirement scheme called NPS. Saving through NPS ensures funds are directed towards retirement and a pension becomes payable. For early retirees, while MFs comes handy as they are flexible but NPS ensures pension for life from age 60.
As far as NPS is concerned, it represents more of a passive form of investing, but choosing the right mutual fund scheme, be it a large-cap or a mid-cap scheme and reviewing their performance is equally important. A mix of retirement savings in mutual funds and NPS can work well to help one retire early with a sizeable corpus to bank upon.
Source: The Financial Express (The author is Chief Marketing Officer, Bajaj Capital)