Planning for your sunset years is essential. Retirement planning and financial planning go hand in hand. When you are making a financial plan and prioritizing your short term and long term goals, retirement planning should top the list of your long term goals. That’s because when you are young, you do not need that much money to survive. But when you retire, you are living on a fixed budget. Your only source of income will mostly be from a pension scheme and whatever money you accumulated through Employee Provident Fund (EPF). But will this much money actually be enough for you to remain financially independent during your post retirement life?

Here’s why we feel retirement planning is essential to attain financial freedom:

Savings is more important than wealth

If you feel that you are wealthy enough at this point of time in your life and do not have to worry about the future, you may have to reconsider that opinion. Financial freedom is far more important than wealth. That’s because there are no restrictions when it comes to spending money. Today you have a crore in your bank account, tomorrow you may only have a few lakhs and a week later, a few thousands. Wealth is only temporary and if you really want to attain financial stability and freedom, you may have to start saving more often. If your outflows are superseding your inflow or your income, then we have some serious problems to address.

You need to take care of your and your family’s health expenses

Of course you children will be all grown up and independent by the time you retire. You might not have to take care of them, but you have to take care of your as well as your spouse’s expenses. And the biggest expense during old age is healthcare. Healthcare related expenses have been on the rise. So just imagine how much an occasional visit to the hospital would cost twenty years from now. If your employer doesn’t offer reimbursement for its retired employees and if you do not have a solid health plan, you need to have a wealthy retirement corpus to take care of all your medical expenses. For this, attaining financial stability is of utmost importance.

Continue with the same standard of living

At this point of time, you and your family might have gotten used to a specific standard of living. You can afford to live this way and enjoy the luxuries of life because you are earning and have a decent job. But have you thought about what you are going to do when you retire? With no salary incoming, how are you planning to manage to continue to live the way you do now? You have to get used to living on a fixed budget. Is your family willing to do that? If you want to make sure that you continue living the way you do even after you retire, you need to make sure that you build a wealthy retirement corpus.

Now that you realize the importance of financial freedom, have you thought of how you are going to achieve it? One way to go is investing in solution oriented mutual funds. Mutual funds can be one of the ways to systematically invest. Thanks to a powerful investment tool like Systematic Investment Plan (SIP), one can now invest small fixed amounts at systematic intervals and continue doing so till their investment objective is achieved. If you do not know how much money you need to invest regularly in order to attain financial freedom, you can take the help of an online SIP calculator. However, mutual fund investments do not guarantee returns. So investors are expected to determine their risk appetite before making the final investment decision.

Mutual fund investments are subject to market risks, read all scheme related documents carefully

The coronavirus pandemic has taken the world by surprise and dismay. Numerous people have lost their lives as well as their jobs because of this pandemic. That’s because the novel coronavirus has not just affected the physical health of the nations, but has also had an adverse effect on the global economy. Since the last three to four months, there has been a strict lockdown in the nation. Businesses, industries, offices, schools everything was shut. This caused an adverse effect on the mutual fund industry as well. For many months, the portfolio of several investors were constantly under threat.

Several incurred losses and out of fear of losing even further, many investors withdrew their mutual fund investments. Now what these people did, was it a good idea? Or should they have remained invested in mutual funds even though their portfolio had incurred losses? To understand this, we need to first find out what mutual funds are and how they work.

What are mutual funds?

Mutual funds are a pool of professionally managed funds that invest in Indian as well as foreign economies. Mutual funds carry a diversified portfolio. A single mutual fund unit is a combination of multiple company stocks. SEBI, the regulator of mutual funds in India describes them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”

What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the various money market instruments like equity, stock, bonds, call money, government securities, company fixed deposits, debentures, etc. Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV. The performance of a mutual fund depends on the performance of its underlying assets and the sectors and industries in which it invests.

Should investors continue investing in mutual funds even during the COVID-19 pandemic?

Some mutual funds like equity funds are designed for long term investments. Some funds like ELSS come with a predetermined lock period of three years. This means that investors cannot redeem their ELSS fund units before the lock-in period. In this scenario if you prematurely withdraw from your mutual fund investments, it is you who is going to be at loss. That’s because investors will have to pay a penalty for redeeming their ELSS units. Plus if you withdraw your other ELSS investments in a rush, imagine the additional tax that you will have to pay on all those withdrawals.

Also, equity mutual funds do not tend to get affected by the daily market upheavals. They are made for the long run and hence, one should not worry is their portfolio is temporarily affected. In fact, this is an opportunity for investors to invest more and buy more units since most of the NAVs have gone down. This is the best opportunity to benefit from rupee cost averaging. Historically, mutual fund investments like equity funds have given better results when one remained invested in them for five years or more.

In fact, investors should continue investing in mutual funds via SIP without worrying about the ongoing pandemic. They can even make the use of an online SIP calculator to get a rough estimate of their accumulated wealth from their current monthly investment. The main thing for investors to remember is to not panic. Continue systematic investments and you might be able to get closer to your ultimate financial goal.

Although equity mutual funds are the most sought after mutual funds by Indian investors, those are not the only mutual fund investment option available. There are some funds that invest in securities other than equity, like in government bonds, corporate securities, call money, certificate of deposits. These fixed income securities are known to general regular income. Mutual funds that invest in such money market instruments for income generation are referred to as debt funds. As per market regulator Securities and Exchange Board of India (SEBI), there are sixteen sub categories under debt funds. This categorization has been done for investors to be able to distinguish between the different schemes and choose what fits their interest.

Corporate bond fund are one such debt fund category preferred by those investors who carry a moderate risk appetite. That’s because a corporate bond fund allocates at least 80 percent of its total assets in AAA and AA+ rated bonds. As per data released by Association of Mutual Funds of India, corporate bond funds received an overall investment of a whopping Rs. 11,910 crore since the month of July, 2020. The ongoing coronavirus pandemic has led market volatility to its peak, thus forcing a lot of investors to rebalance their mutual fund portfolio with corporate bond funds. Debt funds that invest in lower credit rating bonds generally do so with the hope of seeking higher capital gains. However, such investments may not be able to withstand turbulent market conditions and hence investors prefer shifting to corporate bond funds as they invest in bonds with a far better credit rating.

But that doesn’t make corporate bond funds a completely safe investment option. After all they are mutual funds and we all know of the fact that investments made in mutual funds do not offer guaranteed returns. This is why investors are expected to determine their risk appetite before making an investment. Apart from this, they should also take a look at the past performance of the fund to get a fair idea about whether the fund holds the potential to help them with their investment objective. Now if you are someone who has been a conservative investor and looking to shift from those investment avenues to something contemporary, they can consider investing in corporate bond funds. Not only do these funds carry a diversified portfolio, but they also hold the potential to offer better returns as compared to traditional investments.

The ongoing pandemic has made banks reluctant to offer credit to companies with low credit ratings. Hence, investing in corporate bond funds makes a lot of sense at this point of time at least. Corporate bond funds have been performing better than other debt fund categories simply because they hold the majority of their assets in high rated company bonds. So instead of investing in funds that invest in low rated bonds with the hope of fetching higher returns, investors should focus on generating consistent returns. Because mutual fund investments should generally be avoided who have a short term investment horizon. Long term investments shun the possibility of investments getting affected by daily market upheavals. To invest systematically in corporate bond funds at regular intervals one can start a monthly SIP. A Systematic Investment Plan allows investors to invest a small amount every month and help them get closer to their investment objective gradually and steadily. One can even take the help of an online SIP calculator to get a rough estimate of their capital gains through their monthly SIP investments. If you feel that you need further assistance in making an investment decision, seek the help of a financial advisor.