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Thursday, May 21, 2009

Mutual Funds To Build Your Retirement Corpus

Recently-introduced New Pension Scheme (NPS)from PFRDA India has generated a lot of interest among people about retirement planning—especially among those employed in the private sector without a pension cover for retirement. Consultants say most queries about NPS often turn to questions like “do you think I should put extra money for retirement’’ or “do you think I will have enough money on retirement’’.

Checkout: NPS - New Pension Scheme From PFRDA India - What Is It & Analysis

Financial experts, however, insist that people must take retirement planning seriously. “Even those who take retirement planning earnestly often go for wrong vehicles, as the market is flooded with many products from mutual funds and insurance companies,’’ says a financial consultant. “Don’t go by the name of the product. Examine it and figure out whether the objective suits your purpose.’’

The point, he wants to make, is don’t sign up for any products with a “retirement’’ tag.

Most financial advisors prefer to use mutual fund schemes as a vehicle to build their clients’ retirement corpus. The choice of the scheme would depend on the risk-taking ability of the client, they say. However, almost everyone vouches for equity schemes as the best vehicle to build the retirement corpus. They use the historical returns provided by the stock market benchmarks like sensex (and of course the theory that equity beats all other asset classes in the long run) to buttress their claim.

However, experts are a divided lot. Some swear by bluechip schemes (frontline stocks), others by diversified schemes (invest across market cap and sectors) and a minority roots for mid- and small- cap schemes and index schemes (portfolio mimics the index it follows).

“When we talk about retirement, we look 15 years ahead. I think it makes perfect sense to go for an index scheme,’’ says a mutual fund manager, who believes it would become extremely difficult to beat market benchmarks as Indian markets become more sophisticated. His argument is built upon the experience in the US, where many active fund managers fail to beat the broad index. He also cites that they are the most cost effective.

However, many investment experts disagree with him. They claim it is easy to beat the broad market in a developing economy like India. “Active fund management can still yield good returns. One can still spot multi-baggers (stocks that give many times the returns over the purchase cost) in the Indian market,’’ claims an investment expert. “When you have time on your side, you can bet on small & mid-cap stocks. They are risky, but can potentially beat frontline stocks,’’ he says. But make no mistake. It is a high risk and (possible) high reward game, with many ups and downs.

May be that is why many investors prefer to take the bluechip or diversified route to build a corpus for their sunset days. The basic idea is that they don’t want to take any undue risk, but still would prefer a bit of active fund managing to make some extra returns. Those who bet on frontline stocks claim these stocks mostly drive the market, and it are safer to stick to them. Votaries of diversified schemes believe it is better to give the fund manager the freedom to invest across different market cap and sectors to benefit from the ups and downs. Finally, you do’t have to stick to a particular kind of scheme. You can always also use a combination if it suits your risk appetite and objective.
Source: TOI







Use an
equity scheme to build the corpus


Systematic
investment plan works the best


Bet on
bluechip if you want to play it safe


Index funds
work for passive investors


Small,
mid-cap stocks scheme means high risk-return


A
combination of schemes is also possible





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