The Mutual Fund Show: Planning For Retirement And Children’s Education

Sachin Relekar: For both, retirement and child education, you are talking about very long-term goals. In this, you want an instrument in which ideally you can start with a low amount, tax efficient vehicle and want the instrument to be available in case of an emergency. Per se, mutual funds offer all these three distinct advantages. I don’t think there is any asset class, be it real estate, gold, etc., which matches the same characteristics that a mutual fund can give you. So mutual funds can play an ideal role in achieving these financial goals over a 10-15-year period.

Saravana Kumar: NPS has its own advantage and challenges. In NPS, you get a tax benefit. Beyond Rs 1.5 lakh under Section 80C (of Income-tax Act, 1961), you get an additional Rs 50,000 tax benefit. Mutual funds come under Section 80C, which means up to Rs 1.5 lakh, you can claim a tax benefit. For NPS, after retirement, whatever money we are getting, that is taxable. Mutual fund has a lock-in period, but that is meant for a very short duration, not a long tenure.

Sachin Relekar: The discussion should not be NPS versus retirement plan. You take the entire tax advantage till you require saving which needs to be much higher than you are saving in a tax saving instrument. Because your retirement goals are 15 years. If we take the example of simple inflation of 7 percent, your current expenses will quadruple by 15 years. So, the amount of money which you need to save is a lot higher. So, having done your tax planning by investing into ELSS (equity-linked savings plan) and NPS, you will still require a mutual fund or a retirement plan which will help you get there, if you want to continue the same lifestyle which you have today at the end of retirement. So, the corpus which you require by then will be much higher.

Sachin Relekar: Because tax saving is huge. Thirty percent of money which you are saving is huge money. So, you are getting Rs 60,000 benefit per annum. I am taking marginal tax rate. Everyone will have a different tax rate. For Rs 2 lakh, you save Rs 60,000 and it’s a good amount if you plan to invest over the years, that also could result in a good corpus. I am not saying one versus the other. Obviously mutual funds will come with a better track record in terms of returns.

Saravana Kumar: Twenty years ago, the retirement plan was to invest in gold or real estate or fixed deposit or recurring deposit. So, gold and real estate is highly liquid and the return is much lower, whereas if I invest in a bank FD, over a period of time, it could give you an average of 7-7.5 percent. Over 20 years’ time I could build a corpus of around Rs 20 lakh. But if I invest in equity-linked mutual fund schemes, I get an additional Rs 10-15 lakh. Secondly, mutual funds are actively managed. Better managed mutual funds schemes could give better returns compared to other assets like NPS or gold or real estate.

Sachin Relekar: It’s basically a plan which comes into play when your earning profile has plateaued and thereafter it declines. Let’s say, if you are 50 years old and you will retire at 60 and thereafter you don’t have an earning profile. Or you will have very small earning profile. So, if you have planned ahead and built that corpus, SWP will keep on giving you a steady flow of income which will substitute your salary. At the same time, the corpus you had built will remain intact because that remains invested. So, that makes up for what you are withdrawing, provided SWP has a smaller percentage that you are drawing from. That’s a methodical way of planning for post-retirement income.

Saravana Kumar: In a children’s scheme, basically investors are looking at children’s education. Today, college education in India costs about Rs 4 lakh per year. Assume someone at the age of 30 has a one-year old child, when the child reaches the age of 18, assuming 4 percent inflation every year, what costs Rs 4 lakh per annum could rise to Rs 28-29 lakh. So the person at the age of 30 should start investing in a scheme.

Compared to other assets, mutual funds offer children’s schemes where it is predominantly invested in the equity side. In LIC Mutual Fund Children’s Schemes, it has 70 percent in equity and 30 percent in debt. In the last one year, it has given 10-10.5 percent average returns. So that meets the investor’s requirement. Considering inflation, it could take care of the child’s education going forward. So, if the person starts saving Rs 3,000-4,000 per month right from the age of 30, assuming his child to be one-year old, by the time the child turns 18, the person would have accumulated a corpus of about Rs 20-22 lakh, with which he can fund his child’s education for the next five years.

Sachin Relekar: This is a pure large-cap fund and we don’t invest in smaller companies. Investors who are of conservative mindset and have moderate risk appetite and a longer-term horizon, more than 3-5 years, I would recommend it for them. That’s what the track record has been, a steady kind of performance.

Nirav Panchamatia: It’s time that we as investors evolve and rise up the maturity scale. While investing if you tag a goal to your investment, the perspective changes. I have invested in long-term equity funds for both my daughters and I have a 10-18-year horizon. It depends on the age of my daughters. The biggest corpus you need is when your children are in first year of college. Till then, you can manage through your day-to-day income. So, the day your first child goes to first year till your second child gets settled in life, you keep writing cheques. So, that is called the redeeming phase and investing phase is when your children are at school or till the 12th standard. That is when you should be investing and you should go for the long hall and go for aggressive funds.