5 Steps To Build A Mutual Fund Retirement Portfolio

  Author: Naveen Kumar

Mutual funds, especially equity funds, which invest your money in equities, can play a great role in helping you accumulate ample retirement savings. This is because equities typically provide high growth for your money over the long term i.e. over 8-10 years or more.  To harness the advantage of mutual funds, you need to invest in a combination of mutual funds or create a mutual fund portfolio. Over a period of time, one can build mutual fund portfolios for major future needs like retirement. Here are five steps you need to take in order to build a mutual fund portfolio earmarked for retirement.

Step 1

Calculate your needs

Calculate the retirement savings you need. You can use online retirement calculators or get a financial advisor to help you. Needless to say, this figure will need to factor in inflation over time since inflation will corrode the purchasing power of your retirement savings. With an annual inflation rate of 7 per cent, the purchasing power of your money comes down by almost 50 per cent in just 10 years.

Step 2

Plan your investment

With a target in hand, you need to start making regular investments. As we have mentioned, a significant amount, if not all of your investments, will need to be in equities in order to benefit from the long term growth they provide over 8-10 years or more. This makes it perfect for retirement investments since you invest over two decades if you start early in work life.

Step 3

Zero down on mutual fund schemes

You can begin with a tax saving equity linked savings scheme (ELSS) where you not only get tax deduction of upto Rs 1.5 lakh annually but also get to make equity investments for retirement. This could be the first step. You can follow this with investments in diversified equity funds as your income increases. You may also invest in mutual fund retirement plans offered by fund houses. In all cases, choose schemes with a proven performance track record over one, three and five years.

Step 4

Build a diversified portfolio

Invest in 2-3 equity schemes to diversify your retirement portfolio. Diversification reduces risk associated with a particular scheme and its investment strategy, among other things. Keep on the lookout for new investment opportunities.

Step 5

Keep a track of investments

Review your portfolio at least once in a year. Switch to other equity funds if there is consistent underperformance of any scheme over 18-24 months compared to its benchmarks and peers.