Can mutual funds help you get regular income?
Usually, investors who are retired or are nearing retirement seek a source of regular income. Can mutual funds become one such source? Let’s find out.
Retirement planning consists of two phases, one is the accumulation and the other is the distribution phase. The accumulation phase also called a pre-retirement phase, is the period when an investor begins planning and saving for his/her retirement. On the other hand, the distribution phase which is also known as the post-retirement phase is the period when investors actually utilize the accumulated corpus that they have saved during the accumulation phase with a proper plan in place.
In general, the average life expectancy in India is 70 years, whereas the life expectancy of the urban population is around 80 to 90 years. This, therefore, gives birth to the longevity risk. Hence, to overcome this it is important to plan for your retirement in the early stages of the accumulation phase. The more early you start, the more amount you can accumulate over the period. Having said that, we still have no such social security in place that can very well take care of your financials during the post-retirement phase.
Planning retirement with mutual funds?
For most retail investors, a mutual fund offers products that suit their requirements as well as can combine them to create a portfolio that suits their risk profile. In order to plan for regular income post-retirement, you can use bucket strategy, wherein you can divide your distribution phase into three major buckets such as short-term, medium-term and long-term spanning three years, the next seven years and for the remaining years, respectively.
The short-term bucket can consist of a good mix of corporate bond funds, liquid funds and short-duration funds. A medium-term bucket can consist of a good mix of equity and debt funds, wherein you can consider index funds and large and midcap funds for equity and corporate bond funds and short-duration funds for debt. Aggressive investors can consider midcap funds instead of large and midcap funds. Moreover, conservative investors can have a balanced advantage fund as their equity allocation. With a long-term bucket, moderate to aggressive investors can take an additional risk by having equity skewed portfolio. That said, we recommend avoiding smallcap funds, but aggressive investors can allocate not more than 15 per cent of their portfolio in smallcap funds.