What funds must I invest in for retirement planning? What funds are ideal for my children's education planning?
Mutual funds are ideal investment options for retirement and child planning. However they must form only a part of such portfolios. Here's why. Capital protection is one of the foremost requirements of a retirement or education fund. And there is not a single mutual fund that carries a capital guarantee on your principal amount. For this reason you cannot afford to ignore instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC) and the like. These instruments offer a decent risk-free return on investment. However, these may not suffice for your post retirement or child planning needs. For this reason you could look at equity-oriented mutual funds to boost returns. But when considering equity instruments, take cognizance of one's time horizon of investment. The longer you can stay invested, the more equity allocation you can afford. Hence, if you are 27 years old and plan to retire at 60, you can invest the bulk of your portfolio in equity oriented schemes. This is true for planning children's education as well. If your child is 16 years old and you need the money in two years, you should completely avoid equity funds.
As you near your goal, you ought to start redeeming your equity investments and re-invest these in safer debt-oriented instruments. Hence when you are about 56-58 years old, you can institute a systematic withdrawal plan and re-invest the money in safer instruments. The category of balanced funds is especially useful for such life stage planning. These funds invest at least 65 per cent of the corpus in equity and the rest is in debt instruments. Hence when the equity segment of the fund does exceedingly well, the fund rebalances the portfolio, booking profits in equity and transferring to debt. Thereby your risk exposure is kept in check.
This article was originally published on November 27, 2007.
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