Which mutual fund category should I invest in when retirement is 20 years away?

It depends on your risk-taking ability. Index funds, of course, along with a sprinkling of mid- and small-caps for some added edge.

If your retirement is 15-20 years (or more) away, it is a no-brainer that you should not rely solely on your provident fund (PF) for retirement savings.

If you want to beat inflation and have a retirement corpus that doesn’t expire before your time, you need to have some allocation in equities. The best way to invest in equity is through Equity Mutual Funds (MFs).

But which fund should you choose when you are investing for 15-20 years?

Equity MF Categories Suitable For Retirement

If you are a conservative investor, you should stick to large-cap funds. That too is a passive large-cap index fund and not an active large-cap fund. This is because most active large-cap funds today find it difficult to beat index returns.

Since one cannot churn their portfolio every year by chasing the best fund, it is better to skip active large-caps altogether and keep your core equity allocation in large-cap index funds (or ETFs). Just one or two Nifty 50 or Sensex index funds are sufficient. You need not invest at all in other equity fund categories.

If you are a balanced investor, you can have schemes from categories like large-cap funds, flexi-cap funds and large and mid-cap funds. For Large Cap Fund, choose the Nifty 50 Index Fund. Since flexi-cap and large and mid-cap categories of funds have different investment strategies, one can hold more than one scheme of these categories in one’s portfolio. A suggested approach is an equity allocation of 40-50 per cent in Nifty 50 index funds, and the remaining 50-60 per cent in flexi-cap and large and mid-cap funds.

If you are an aggressive investor, your equity allocation will be higher anyway. Hence, apart from the above-suggested fund categories like Nifty50, flexi-cap, and/or large and mid-cap funds, you can also make some allocation to standalone mid-cap and small-cap funds.

For an aggressive investor, it is suggested to allocate 30% to the Nifty 50 + Nifty Next 50 Index Fund, 30-40% to Flexi-Cap Fund and 30-40% to Mid-Cap + Small-Cap Fund.

Most investors do not require mid-cap or small-cap funds as any such exposure is adequately provided by flexi-cap funds. But considering the high return potential of these funds over the long term, and assuming the investor is mature enough to digest the upcoming volatility, as suggested above, aggressive investors can invest around 30 per cent in these fund categories. Huh.

As you can see, unless you are a conservative investor, it is best to have a mix of active and passive mutual funds.

If you are a new mutual fund investor looking to start investing for your retirement, start with large-cap and flexi-cap funds. If you also want to save tax, choose ELSS funds with a high large-cap allocation (check market-cap allocation using the tool here). Once you understand how equities work and have gained a few years of experience, you can also add mid-cap and small-cap funds to the mix.

Solution Oriented Funds

Solution Oriented Funds are a separate category of Mutual Funds introduced by SEBI. This is to meet financial planning goals such as retirement. The managers of these funds are free to choose the strategy based on the age of the investor. The plans have a lock-in period of five years.

While the intention behind this category is fine, you don’t need them. Also, given the lock-in, what if the solution-oriented fund you choose does poorly? You will not be able to switch to other funds till the end of the lock-in period. It is best to avoid this category altogether and stick to the open-ended funds mentioned above. They do a great job.

Don’t take a buy-and-forget approach

Once you have started investing in equity funds for retirement, you still need to ensure that you review your portfolio regularly. While index funds demand less attention, active fund categories like flexi-cap, mid-cap, etc require regular review. If the chosen funds are not performing well for an extended period (say 1-2 years), then you should switch them. Therefore, make sure you review your retirement portfolio at least once a year.

Source: moneycontrol

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