Best Mutual Funds for Your Retirement Portfolio

As they say, the grass is always greener on the other side of the fence. The people living in many emerging markets aspire to live a lifestyle of their developed-world counterparts.

The present times have exposed the pitfalls of living a carefree lifestyle and not taking important financial goals such as retirement planning seriously.

As you might be aware, equity markets have been very volatile of late due to many reasons. But among them, the main one is inflation or rising costs of living, right from food to fuel, from housing to medicines, and many other items.

Developed markets such as the US and Europe are also facing challenging times with inflation at a multi-decade high. This has nudged central banks to raise their policy rates to tame inflation.

The scenario looks scary for those who are going to retire soon. Most of them have worked most of their life in a non-inflationary environment.

But now, with inflation playing a spoiler, many individuals are left to wonder: Will my retirement savings last till my last breath?

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While interest rates on deposits are moving up, you still can't bank upon them for their retirement needs. This is due to the paltry real returns (the interest rate minus the inflation rate) and the fact that interest earned is taxable.

Even small savings schemes, except for a few such as the Public Provident Fund (PPF) and Senior Citizens Savings Scheme (SCSS), aren't really fetching positive real returns.

Given that, it is important to take some calculated risks and invest in the best mutual funds to earn positive real returns.

Solution-oriented retirement funds offered by mutual fund houses are an option for your retirement portfolio. However, you can't solely depend on them.

A myth exists that with a Solution-oriented Retirement Fund, you will not need to draw a personalised asset allocation plan for retirement.

But the fact is that if you chart out an asset allocation best suited for you and invest in worthy avenues, you can earn real returns. This will enable you to accomplish your goal of blissful retirement.

Besides, the fact is, Retirement Funds have a lock-in of 5 years or your retirement age, whichever is earlier. Thus, if the Retirement Fund you choose underperforms, you will be unable to switch to another worthy scheme until the completion of the lock-in period.

Pension funds offered by insurance companies, especially the ones that lure you to buy annuities with your accumulated corpus, also may not be the best-suited products for you.

First, annuities are taxable.

Second, most insurance companies invest mainly in high-quality debt instruments to be able to pay your pension every month or at a stipulated interval. But the result is that the yield or the return you earn is sub-optimal.

In other words, dedicated pension funds offered by life insurance companies as well as solution-oriented Retirement Funds aren't the best options for you.

And have you ever thought about possible underperformance?

For instance, if you invest Rs 20,000 in a Retirement Fund offered by an insurance company and if it underperforms a plain vanilla equity mutual fund scheme just by 1%, it will cost you Rs 68 lakh in 25 years.

So, what is a better option then?

Well, there is no dearth of financial products to plan your retirement. But among them, mutual funds, particularly equity-oriented mutual funds, are a promising choice.

Recognise your age, risk profile, the time in hand before you hang up your work boots, and the kind of corpus you need to live a blissful retirement. Then you can choose among the best equity-oriented mutual fund schemes. You will need to pay attention to the asset allocation best suited for you.

Don't get too aggressive and invest only in equity. Don't get too conservative and invest in only debt. Follow a sensible approach.

Even if you are a few years away from retirement, you can't ignore equity funds. Ideally, you can allocate around 25%-30% from the investment pool to the best diversified equity-oriented mutual funds in such a case.

If you see a swift rally in equities, it may accelerate compounding and possibly beat inflation.

In general, avoid sector/thematic funds for your retirement portfolio. You would be better off with various sub-categories of diversified equity mutual funds.

Typically, you may consider Large-cap funds, Large & mid-cap Funds, Mid-cap Funds, Value Fund, and an Aggressive Hybrid Fund.

The allocation to these funds should be done by assessing your risk profile, current age, the time before you retire, and the corpus you wish to build.

Here are the best mutual funds for your retirement portfolio.

Table: Schemes that may be suitable for your retirement planning

Mutual Fund Schemes	Returns (% CAGR)
	3 Years	5 Years	7 Years
Parag Parikh Flexi Cap Fund	21.40	17.23	15.72
Kotak Emerging Equity Fund	20.33	14.18	15.94
Canara Rob Bluechip Equity Fund	14.83	13.96	12.83
ICICI Pru Value Discovery Fund	18.59	13.41	12.26
Mirae Asset Hybrid Equity Fund	11.86	11.87	-

Data as of 29 June 2022
Direct Plan and Growth Option considered
Past performance is not indicative of future returns
(Source: ACE MF, PersonalFN Research)

All mutual fund schemes mentioned in Table 1 have a proven track record of consistent performance. Not only have they managed to beat inflation consistently over the past 5-7 years, but their performance has been superior within their respective categories as well.

Even when the broader markets have corrected by nearly 15% from the top, these schemes have lost only in the range of 5% to 10% which denotes their outperformance.

Fund management styles of these funds are distinct and complement one another. For instance, Canara Robeco Bluechip Equity Fund gives you optimum exposure to largecaps. It plays safe and avoids unnecessary churning of the portfolio.

Kotak Emerging Equity Fund on the other hand invests in the potential bluechip companies of tomorrow.

And Parag Parikh Flexi Cap Fund not only follows a value-oriented approach to invest in the domestic markets, but it also gives you significant exposure to overseas equities, especially to hi-tech stocks listed in the US. ICICI Pru Value Discovery Fund is primarily focused on investing in large and mid-cap companies quoting below their intrinsic value.

Mirae Asset Hybrid Equity Fund is an aggressive hybrid fund that offers you about 25%-35% exposure to debt.

In other words, these 5 funds can help you optimally diversify across asset classes, marketcaps and management styles. Thus, they form a perfect combination for your retirement goal.

Given the market correction stock valuations are attractive. If you have a lump sum, you could consider investing in a staggered manner for your retirement.

Also, if you have more than 7-10 years left for your retirement, you can think of investing in these best equity mutual funds through a Systematic Investment Plan (SIP) route. This will make timing the market irrelevant.

It will instead help you focus on time in the market (with inherent rupee-cost average mitigating the volatility), instil the discipline of saving and investing regularly, and potentially help in building a respectable retirement corpus.

Along with equity allocation, consider holding around 10%-15% in gold. It would prove to be an effective portfolio diversifier and hedge or safe haven when equity markets hit turbulence owing to macroeconomic and geopolitical uncertainty.

And after you retire with a respectable corpus, go for the Systematic Withdrawal Plan (SWP) option rather than withdrawing the corpus in an ad hoc manner to fund your retirement needs.

SWP allows you to withdraw a fixed amount at pre-determined regular intervals (monthly, quarterly, half-yearly, or annually) from equity funds you have invested in.

This facilitates better planning of withdrawals, enables rupee-cost average (as all units won't be withdrawn at one go), and in the meantime, helps you benefit from the power of compounding, potentially countering inflation.

It's best to avoid committing mistakes by following a sensible investment approach to planning your retirement.

Happy Investing!

Disclaimer: This article has been authored by PersonalFN exclusively for Equitymaster.com. PersonalFN is a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.