Building a nest egg: Five steps to a retirement corpus


Retirement is the best time to cherish your memories and enjoy your life the way you have wanted it to be. Often it is seen that retirement planning takes a back seat as we are too engrossed in our day-to-day activities. 

Planning for your retirement is one of the most critical activities of your life. We cannot take it lightly, as we know financial well-being is our backbone at a stage when regular income is not guaranteed. A retirement corpus ensures you can take care of yourself and your dependents without seeking help from others. Retirement is also the time when borrowing from lending institutions becomes difficult, and you can only depend on your financial investments to meet your requirements.

You, therefore, must choose the right investment instruments to help you achieve your retirement goals. Some of the important factors that you need to keep in mind while selecting the investment options for retirement include age at the time of starting the investment, risk appetite, return expectation, and liquidity requirement. Also, consider inflation and taxation while opting for investment products for retirement. 

To help you in your retirement planning, you can choose five attractive investment options in the current market scenario.

Equity mutual funds SIP
Investing in equity mutual funds through a systematic investment plan can allow you the benefit of Rupee cost averaging in the long term. The longer you invest, the better Rupee cost averaging benefit you get, especially during the volatile market. There are different categories within equity mutual funds, for example, large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, etc. Each equity mutual fund category carries a different level of risk and accordingly offers a return. You may select the schemes in sync with your risk appetite and return expectations.

Adhil Shetty, CEO, Bankbazaar suggests, “Start investing in the equity mutual fund as early as possible in your career because that’s the stage when you have lesser financial responsibilities, and you can take higher risks. Gradually with an increase in age as you get closer to retirement and a drop in your risk appetite, you may start switching allocation from equity class to less risky investments. Investing in equity mutual funds is one of the best options to beat inflation and create wealth for your retirement.”

Public Provident Fund (PPF)
PPF is one of the few investment products available in the market that offers completely tax-exempt returns. It has a floating interest rate and 80C tax benefits. The returns on your PPF investment will rise or fall in line with the interest rate environment. When you invest for your retirement, you may not want to disturb the corpus prematurely. PPF has a lock-in requirement of 15 years; therefore, it ensures that the accumulated corpus is not disturbed before maturity. 

PPF offers Exempt-Exempt-Exempt (EEE) tax benefits to its investors. EEE translates to an exemption of tax on the amount you invest, exemption of tax on the interest you earn every year, and tax exemption on the maturity amount you receive. So PPF also proves to be a highly tax-efficient investment. You can invest up to Rs 1.5 lakh every financial year in the PPF account. Allocate funds to PPF investment depending on your risk appetite and liquidity requirement.

Bank FD with laddering strategy
Bank FDs are one of the safest and most popular options available. Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance that covers up to Rs 5 lakh on your deposits (principal plus interest) in a single bank. So if you keep a deposit of up to Rs 5 lakh each in different bank accounts, they will be covered by the insurance for your deposits in each bank separately. When you invest towards retirement, you’ll also need easy access to liquidity and a great level of safety. FD could be one of the best options for this purpose.

Since the current market scenario indicates a chance of a hike in interest rates shortly, you should go for an FD with a laddering strategy instead of creating a single FD for the same tenure. It would help if you spread FDs to different maturities with equal maturity intervals in the laddering strategy. For example, you can put in Rs 5 lakh in 5 parts, i.e., Rs 1 lakh each for the maturity of 1 year, 2 years, and so on up to 5 years. At the maturity of each FD, you can put the corpus for the next 5 years if you want to continue with the laddering strategy.

National Pension System
Post-retirement, you’ll require a regular monthly income. Therefore investing in the National Pension System (NPS) can be a good option for this purpose. Investing in NPS allows you tax deduction benefit up to Rs 50000, u/s 80CCD, which is over and above the tax benefit of Rs 1.5 lakh available u/s 80C. NPS allows you to allocate funds into equity and debt asset classes depending on your risk appetite. Being a market-linked investment, NPS should help beat inflation in the long term.

NPS allows 60% of the corpus as lump sum payment on maturity, while the remaining 40% of the corpus has to be compulsorily used to buy an annuity. Invest in NPS to the extent it doesn’t disturb your liquidity position and diversify your portfolio. Do note that annuity returns tend to be poor and comparable to an FD, and completely taxable. Also, this sum will be locked in for the rest of your life. 

Invest directly in equity
When you start investing early in your career with a focus on building a big retirement corpus, you can also go for direct investment in the stocks of different companies. Long-term investment with a good selection of stocks can help you earn an excellent return on investment. Depending on your risk appetite, you may decide the size of the fund allocation to direct shares. Always keep your portfolio adequately diversified and perform detailed research before selecting a stock for your portfolio. As your age increases and gets closer to retirement, you may reduce the exposure to direct shares to lower the risk simultaneously.

 Apart from the investments mentioned above, you can also invest in Sovereign Gold Bond (SGB), gold ETF, index fund etc., to diversify your retirement portfolio in sync with your risk appetite and return requirement.

Protecting Your Health 

Health issues can wash away your investments. That is why health insurance is a must to protect your investments and ensure you continue to live a healthy life. Along with planning your investments for retirement, you must also get adequate health insurance to cover the hospitalization expenses until you retire and beyond your retirement age. As you get older, you become more susceptible to health risks. As you get older, you may not want to exhaust your retirement corpus towards the hospitalization expense. So, ensure that you carry an adequate health insurance cover for your retirement.


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