How can I choose a mutual fund that meets my retirement needs?
3 min read
How can I choose a mutual fund that meets my retirement needs?
Retirement is a phase of life that everyone will go through one day. After years of hard work, retirement should be a golden time to travel, spend time with family and friends, or pursue hobbies you love. With so much on the line as you plan for your future, choosing a mutual fund that meets all of your needs is absolutely essential. The right mutual funds investments help you accumulate enough resources and savings for a comfortable retirement.
Choosing the right mutual fund to live a happy and stress-free life post-retirement isn’t impossible if you know what criteria to consider. Discussed below are some useful tips to select the right mutual funds to achieve your retirement goals and live the life of your dreams!
- Identify your goals and timeframe
Calculate the retirement corpus you need to live the same lifestyle in your golden years. Estimate your expenses, income, liabilities, and plan accordingly.
Now set your retirement deadline. If you have several decades until retirement (such as 20-30 years), you can invest in mutual funds that invest in high-growth stocks. If you are closer to retirement age, you can choose a fund that focuses on income-producing assets such as bonds or dividend-paying stocks.
- Evaluate the fund’s investment objective
This means understanding the primary goal or purpose of the fund and how it aligns with your own investment objectives.
Different types of mutual funds have different objectives. For instance, growth funds have capital appreciation as their primary goal. Debt investments prioritise generating a stable income for investors with low risk. Hybrid funds offer a balanced approach, investing in both stocks and bonds to achieve moderate capital appreciation and income generation. Moreover, tax saving mutual funds like Equity Linked Savings Scheme (ELSS) helps in capital appreciation and reduce tax liability.
By understanding the fund’s objective, you can determine whether it supports your retirement goals or not.
- Check the expense ratio
Total expense ratio (TER) represents the cost of running the mutual fund. This cost includes everything from management fees to administrative expenses. The higher the expense ratio, the more money you will have to pay for the mutual fund expenses. Over time, a high expense ratio can reduce your investment returns and the amount available for your retirement savings.
Thus, choose mutual funds with lower expense ratios and better return potential so that more of your investments grow and compound over time.
- Passive vs. active management
Passive funds, such as index mutual funds, aim to replicate a specific index and have lower expense ratios because they require less research and analysis. Active funds are actively managed and monitored by fund managers who make individual stock selections in order to beat the market. They generally have higher expense ratios and risks but offer an opportunity to earn higher returns.
If you want a low-cost investment option, eliminate market timing, avoid human bias, and don’t want regular monitoring, a passive fund may be a good choice. However, if you have specific goals or return expectations and prefer a more hands-on approach, an active fund with a skilled manager may be a better fit.
- Evaluate the fund’s past performance
While past performance doesn’t guarantee future returns, it can indicate how the fund has performed over a specific period. Analysing a fund’s returns during different market conditions gives you an idea of how it may perform in similar situations in the future, which can help reduce risk. Make sure to compare a fund’s performance to its benchmark index to see if it has outperformed or underperformed.
To wrap up
Choosing the right mutual funds for your retirement planning needs thorough consideration, research, and analysis. You need to evaluate your goals, finances, risk tolerance, investment horizon and then look for mutual funds that fit those criteria.
While these useful strategies and tips can help you select mutual funds for your retirement needs, it is equally beneficial to consult a financial advisor. With their guidance and valuable insights, you create a personalised retirement plan and implement a diversified investment strategy to minimise risks and optimise returns.
