5 Equity and debt investments for planning your retirement corpus

A recent study in India showed that the average number of life goals per person has increased from 5 in 2019 to 11 in 2023. A vital finding of the survey is that retirement life goals have taken precedence. In 2023, 71% of people nurture retirement-related goals compared to only 35% in 2019.

Clearly, retirement planning has become a key priority for most individuals. If you are one of them, this article will help you understand some of the best equity and debt investment options for building your retirement fund. 

What is retirement planning?
 

Before exploring the best equity and debt investment options for building a retirement corpus, you must understand the systematic retirement planning approach. Building a retirement fund will require you to take the following steps:

1) Future expenses: 
 

Calculate your expenses in the first year of retirement based on your current monthly expenses, expected inflation, and the number of years left for retirement.

2) Retirement corpus:
 

 Calculate your retirement corpus based on expenses during the retirement years, retirement life span, the expected rate of return on the corpus.

3) Monthly investment: 
 

Calculate the amount to be invested every month during your working years to build the retirement fund based on your risk profile, equity and debt investment options, investment time horizon, and expected rate of return on the investment portfolio.

Now that you understand the steps for building the retirement corpus, consider the following equity and debt investment products.

Equity and debt investment products for building a retirement fund
 

While evaluating retirement investment options, you should follow appropriate asset allocation. You should consider equity and debt investment products among others. Various asset classes take turns to outperform each other. You don't know which asset class will outperform next year and in the future. Hence, you should build a diverse portfolio comprising equity and debt investments.

Some of the equity and debt investment products that you should consider for building the retirement fund include the following:

1) Employees’ Provident Fund (EPF)
 

EPF is highly popular among salaried individuals for building the retirement corpus due to the following reasons:

a) Convenience:
 

 The employer deducts a certain percentage of your salary and passes it on to the Employees’ Provident Fund Organisation (EPFO). The EPFO manages the money on your behalf by investing it in various financial products.

b) Tax benefits:

 The amount invested in the EPF is eligible for deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs 1,50,000, whichever is lower.

c) Safety: 
 

The EPFO is a part of the government, so the EPF money has a sovereign guarantee and is safe.

d) Interest rate: 
 

The interest paid on the EPF is announced by the EPFO annually and is credited to the accounts of the subscribers.

You can keep contributing to the Employees’ Provident Fund till your retirement. Hence, it is an excellent add-on to equity and debt investments and a great way to diversify savings.

2) Public Provident Fund (PPF)
 

While the EPF is a great retirement tool for salaried individuals, it is not available for businesses and self-employed individuals. For these individuals as well as the salaried, the Government provides the Public Provident Fund (PPF). You can open a PPF account with a post office, a public sector bank, or a specified private sector bank.

PPF is very flexible regarding the amount you can deposit, and when and how many times you can deposit in a financial year. The maximum amount that can be deposited in a financial year is Rs 1,50,000. PPF also qualifies for deduction from taxable income under Section 80C. The interest earned and the maturity proceeds are also tax-free.

The PPF interest rate is announced by the government every quarter. For example, the interest rate for the April to June quarter, the interest rate is announced at the end of March. PPF is thus a floating interest rate product.

Public Provident Fund has a tenure of 15 years. It can be extended for 5 years at a time, multiple times. It is, therefore, an excellent tool for building a retirement corpus due to its long tenure. 

3) Debt mutual funds
 

Apart from EPF and PPF, the other fixed-income products that you can consider for building your retirement fund are debt mutual funds- a significant part of equity and debt investments. Within the debt mutual fund category, you can consider schemes based on your risk profile. Some of these include:

a) Gilt funds: 
 

These funds have to invest a minimum of 80% of their total assets in government securities. From a credit risk point of view, these funds are safe to invest in. However, they do carry interest rate risk. Individuals with a low risk profile may consider investing in these funds.

b) Corporate bond funds: 
 

These funds have to invest a minimum of 80% of their total assets in corporate bonds with the highest credit rated instruments. Although the credit risk in these funds is relatively lower, it is still higher than with gilt funds. Individuals with a low to moderate risk profile may consider investing in these funds.

c) Credit risk funds: 
 

These funds have to invest a minimum of 65% of their total assets in corporate bonds with a credit rating lower than the highest rating. The credit risk in these funds is relatively higher than in gilt funds and corporate bond funds. Individuals with a high-risk profile may consider investing in these funds.

4) Equity mutual funds

Equity mutual funds are among the most popular equity and debt investments. They invest in equity shares of various companies based on their objective. They have the potential to give inflation-beating high returns and create wealth for you. Over time, they work on the principle of compounding and are an excellent option for building a retirement fund comprising diversified equity and debt investments. 

Equity funds carry high risk and are suitable for individuals with a high risk profile. You should invest in equity mutual funds with a minimum investment horizon of 5 years or higher.

Within equity funds, you can choose from the following options:

1. Broad market capitalisation funds (large, mid, small, flexi, and multi-cap funds)

2. Index funds based on indices such as Nifty 50, Nifty Next 50, Nifty Midcap 150, and Nifty Smallcap 250 indices

3. Funds based on sectors, themes, smart-beta indices

4. Equity-linked Savings Scheme (ELSS) for tax saving

5. International equity funds for exposure to global equities

When you are young and have a high-risk appetite, you may put a larger portion of your equity and debt investment portfolio in equity mutual funds. With every passing year, you may do portfolio rebalancing, reducing the equity component and increasing the debt component.

IDFC FIRST Bank provides personalised investment solutions for various mutual fund schemes. You can choose from various types of equity, debt, hybrid funds, etc. You can make a lump sum investment or start a SIP.

5) Other investment products
 

Apart from equity and debt investment products, consider including other financial products in your retirement portfolio, such as:

a) Gold mutual funds: 
 

Gold is a hedge against inflation and a safe haven during times of uncertainty. Apart from the equity and debt investments, consider allocating a small percentage of your portfolio to gold by starting a systematic investment plan (SIP) in a gold mutual fund. The other option is to buy Sovereign Gold Bonds (SGBs) through IDFC FIRST Bank. You can buy them online at a discounted price. These pay 2.5% interest p.a. and are exempt from long-term capital gains (LTCG) tax on maturity.

b) Real Estate Investment Trusts (REITs):
 

 These give you exposure to rent-yielding commercial real estate assets. In the short run, REITs can provide you with cash flow in quarterly distributions. Over a long period, REITs have the potential for capital appreciation. You can invest in REIT units with a minimum investment of as little as Rs 500.

c) Infrastructure Trusts (InvITs):

These give you exposure to commercial assets such as roadways, power transmission lines, etc. Like REITs, they can provide quarterly distributions and capital appreciation. You can invest in InvIT units with a minimum investment of less than Rs 200.

Also read: Planning for retirement? Here's what you are most likely to spend on

Retirement planning: Make money work for you during your working years 

Retirement planning is a long-term process. You should start investing towards it early, preferably as soon as you start working. When you choose the right equity and debt investment products and give them time to grow, the magic of compounding works in your favour. Also, starting early helps you accomplish the retirement goal by investing a smaller monthly amount. Making your money work hard for you during your investing years will enable you to enjoy the fruits of it during your retirement years.

Disclaimer

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