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Deciding between retirement funds and stock funds is important for long-term financial planning. Both options cater to different investment needs and risk appetites, making it imperative that investors understand their unique characteristics.
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“The choice between retirement mutual funds and equity mutual funds depends on the financial objectives, risk tolerance and time horizon of the investor,” says Srinivas Khanolkar, head of products, marketing and corporate communications, Mira Asset Investment Manager.
Understanding Retirement Mutual Funds
Retirement mutual funds are specifically designed for long-term goals, offering a mix of stocks and debt, with an emphasis on managing risk as retirement age approaches. These funds focus on preserving capital and increasing income in later years by gradually shifting to safer assets such as bonds.
Benefits:
Risk Management: The portfolio becomes more conservative over time, reducing risk as retirement approaches.
Constant Returns: Offering a balance between stability and growth, ideal for risk-averse investors.
Understanding Equity Mutual Funds
Equity mutual funds invest primarily in stocks, which offer greater growth potential but greater volatility. Over a long-term horizon, equity funds can significantly outperform retirement funds, making them suitable for young investors looking to accumulate wealth.
Benefits:
High return: Historically, equity funds have provided good long-term returns.
Flexibility: Investors can choose different types of equity funds based on sector, market capitalization or theme.
Difference between retirement fund and stock fund
Return on investment
Retirement funds generally offer fixed or predictable returns. Equity funds, on the other hand, provide higher returns over the long term than debt funds.
the risk
Retirement funds have a low level of risk. Equity funds, however, involve moderate to high levels of risk.
Adequacy
Retirement funds are ideal for investors looking for safe, low-risk investment options. Equity funds, being long-term investments, are best suited for investors with moderate to high risk tolerance and can help achieve long-term financial goals.
tax
For retirement fund, any contribution up to ~150,000 is allowed as deduction under section 80CCC of the Income Tax Act. A 20% tax is applicable on capital gains from equity funds held for less than 12 months. Long-term capital gains (over 12 months) up to ~1.25 lakh are tax-free and taxed at 12.5% thereafter.
Choosing the right investment
“Diversified equity funds are the best bet because they have no lock-in period, so you have liquidity and control over your investments. On the other hand, retirement funds will fall into the category of solution-based funds, which have a lock-in for five years, so your portfolio will not be liquid for the next five years, and furthermore, your portfolio is mixed. of equity and debt, so you have no control over asset allocation. This is why diversified equity funds stand out as the best as they provide control over asset allocation, flexibility and liquidity,” says Chirag Muni, Executive Director, Anand Rathi Wealth Limited.
