If you are young and feel that it is not important to plan for your retirement so early, you are wrong. The early you start investing, the more years you have in hand to build a retirement corpus. Retirement is a stage where you need more money than you think you need. People are convinced that by the time they retire they will be free of their financial responsibilities. However, that is not true at all. Some liabilities like house loan, you daughter’s wedding and so on may still exist. Also, if you are not a government employee then you may not be eligible for pension. To make things worse, if your employee doesn’t have a Provident Fund account on your behalf, you may not have any lumpsum corpus in hand after you retire.

Such people who do not any planning for retirement should consider investing in retirement mutual funds.

What is a retirement fund?

A retirement fund is an open ended mutual fund scheme which invests in equity and debt to build a commendable corpus over the long term for retirees. These funds usually come with a minimum lock-in period of five years or till the investor attains retirement age (whichever is earlier).

Retirement funds are available in aggressive, conservative, and dynamic plans thus catering to the investment needs of investors with various risk appetites. For example, investors with a very high risk appetite may consider investing in a retirement fund that invests more in equity. An investor with a medium risk appetite may invest in a dynamic plan which invests in equity and debt instruments equally. Whereas, an investor with a low risk appetite may choose a retirement fund which invests more in debt and less in equity to minimize overall investment risk and generate stable returns.

Do retirement funds offer tax benefit?

As per Section 80CCC of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1.5 lakhs in a retirement fund and seek tax exemption on the sum invested.

How are capital gains earned from retirement funds taxed?

Capital gains derived from retirement mutual funds are subject to tax deduction. While government back retirement funds are tax free, investors will have to pay tax for returns earned through investments in retirement mutual fund schemes. The tax applicable on the annuity which the investor will withdraw will depend on the tax slab which the investor falls under.

Consider starting a monthly SIP in retirement funds

If you wish to invest in retirement funds to build a commendable corpus for your sunset years, you may have to start a SIP. Systematic Investment Plan or SIP is a simple and easy investment process where the investor can decide an investment sum and continue investing this sum till their investment objective is accomplished. Investors can even increase their SIP sum to allow themselves to earn higher returns than anticipated.

To build a large retirement corpus, one may have to remain invested for at least 15 to 20 years. Starting a monthly SIP will inculcate the discipline of regular investing. Once you automate SIP investments, the investment sum will be automatically debited from your savings account and electronically transferred to the retirement fund. Investors will receive units in quantum with the existing NAV and in the long run can benefit from rupee cost averaging.

Another advantage which investors have is that they can make the most out of retirement calculator a free online tool where one can get a rough estimate on the capital gains which they will receive by investing in retirement mutual funds via SIP.