The Power of Diversification

We’ve talked about diversification before – it is key to creating a robust financial portfolio. But did you know that it is a powerful tool to create the best investment plan for retirement in India? Here are some reasons why – 

Tackling Risk – Diversification across various types of mutual fund classes helps spread out investment risk. And mitigating risk is important to creating long-term savings because it will help you protect your retirement investments as it softens some of the impact of unexpected market lows and its overall volatility.

Making Gains – All types of mutual fund classes offer unique gains. Combining different types of asset classes in your portfolio will offer you a more stable income stream. Combining different types of mutual funds to create your retirement investment plan will give you stability – as you have created different streams of income for yourself.

Being Liquid – Finding the best retirement investment strategy means balancing long-term investments with the need for liquidity. A diversified portfolio will allow you to access at least some of your funds when needed. Eventually, you can also set up Systematic Withdrawal Plans (SWPs) to create a source of monthly income.

Staying Flexible – A flexible portfolio – one that allows you to adjust your investment allocations – is ideal for a long-term retirement investment plan. A diversified portfolio offers you this flexibility, allowing you to alter your strategy to meet your financial and personal goals. For retirement – you want to look at income-generating mutual funds in the long run!

Keep Growing – Most retirement investment plans are focused on creating wealth over a long period of time – typically decades! So, if you are investing now for retirement, then you have time on your side! A diversified portfolio will allow you to unlock the long-term growth potential of various asset classes, ensuring optimized gains over time. This is why we always say that it isn’t about how much you are investing, but about how long you are staying invested!

So, when we say diversification is key to creating a lucrative retirement investment plan – we’ve got reasons to back it up!

The Power of Compounding

This brings us to the second power of investing in mutual funds – compounding! Do you know the long-term growth potential we just mentioned? Well, that growth potential exists because of compounding or compound interest – a useful ally in your journey to creating a retirement investment plan.

So, what is compound interest? In very simple terms – compound interest is the interest you earn on your interest. In slightly complicated, albeit more technical terms, compound interest is defined as the interest on a deposit, loan, or investment that is calculated based on both the initial principal and the accumulated interest from previous periods. 

Let’s take a look at this table, to understand what compounding means for your retirement investment options – 

We will work on the assumption that you are investing ₹100 in mutual funds, every year, towards your retirement investment plan. Here is how compound interest would apply to this investment – 

Table 1: Compound Interest

• In your first year, your returns are ₹10, i.e., 10% of ₹100. 
• Here ₹100 is your principal amount, and at the end of one year, you’ve got ₹110. 
• Then the compound interest of the mutual fund kicks in, and for the second year, your principal amount becomes ₹110. You will now make a 10% interest on this investment amount. And the pattern continues to infuse returns into your invested amount, while also earning you interest on it – all to create a substantial retirement investment!

All the best investments for retirement will tap into the power of compounding to help you accumulate wealth over time. In fact, the power of compounding is one of the main reasons we say that staying invested for longer is the best way to maximize gains!

The Power of Rupee Cost Averaging

The third and final power of investing – also having to do with long-term gains – is the principle of rupee cost averaging. It means averaging out the cost at which you are buying units of any mutual fund. The Systematic Investment Plan (SIP) option to invest in mutual funds is good for retirement because it can help you tackle some of the market fluctuations that can influence your purchasing power. 

Let’s take a look at these two tables – 

Table 1 Scenario – You have ₹6000 to invest over the next 3 months. You decide to invest it all today!

Table 2: Lump Sum Investing

Today, one unit of your selected Mutual Fund costs ₹100, which means you have now purchased 60 units of said fund, at ₹100 per fund, in the course of three months. 

Now let’s see what the rupee cost averaging model of investing looks like-

Table 2 Scenario – You have ₹6000 to invest. You decide to invest ₹2000 each month for 3 months.

Table 3: Rupee Cost Averaging

Today, one unit of your selected mutual fund costs ₹100 which gets you 20 units. But next month, the market drops, and you find yourself with 25 units, with the same investment amount! As a result, you end up with 65 units of your selected mutual fund at the end of three months.

You see why we call it a power – right? Rupee cost averaging through SIPs can help you optimize your investments over time, as it ensures that you are automatically buying more funds when the market is low, to counteract the effect a soaring market has on your investments.

So, diversification, compounding, and rupee cost averaging – are your three best friends in your investment journey for retirement. These three powers of investing can help you put together retirement investment options that will help you build a strong financial future.

FAQs

• What type of mutual fund is best for retirement?

Historically, equity funds have been one of the best mutual funds for retirement, as they created significant long-term wealth. But fixed assets funds have also been known to be useful for stability and income generation.

• How to select mutual funds for retirement?

Selecting a mutual fund for retirement depends largely on your goals, risk tolerance, and investment horizon. It is important to diversify your portfolio while selecting mutual funds for life goals like retirement.  

• Are mutual funds good for retirement?

Yes. Various mutual fund asset classes can be beneficial for retirement. Equity funds provide potential long-term growth. Debt funds invest in fixed-income securities, offering stability and income generation. Hybrid funds invest in a mix of equities and debt instruments, providing a balance between growth and stability. 

• What is compound interest?

Compound interest is defined as the interest on a deposit, loan, or investment that is calculated based on both the initial principal and the accumulated interest from previous periods. It is the interest you earn on your interest.

• What is rupee cost averaging?

Rupee cost averaging means averaging out the cost at which you are buying units of any mutual fund. So you buy more funds when the market dips, and buy fewer funds when the market soars. SIPs use the principle of rupee cost averaging to maximize your returns.