Retirement planning is the process of listing your financial goals for retirement and identifying ways to achieve them in the best manner possible. This does not mean merely keeping your savings idle. You also need to invest in the right avenues for your money to grow substantially. Your investment strategy for retirement would depend on factors such as your risk appetite, current expenses, investment horizon and the final corpus required.

Typically, retiring from work means a cessation of income. But expenses continue to grow, like before. In fact, due to inflation, your costs may increase by the time you retire.

Let's consider some essential expenses you need to account for:

1. Regular day-to-day expenses
2. Medical expenses (if and when any medical issues arise)
3. Hobbies and travel
4. On-going financial requirements of the family (children’s higher education, marriage and the like)

A well-planned retirement strategy can ensure your needs are met while also helping your children meet specific financial expenses.

However, financial planning for retirement in India needs more than just a push. Most Indian parents view their children to back them financially during retirement. This can be an unwise move, for the simple reason that upon retirement, one may not be economically independent anymore. You would have to depend on somebody else to meet your expenses constantly. To avoid this issue, start investing for your retirement during your working years.

There are numerous investment avenues and pension schemes such as the Public Provident Fund (PPF), tax-saving fixed deposits, life insurance policies and the National Pension Scheme (NPS). For decades, Indians have invested in these traditional schemes as part of their retirement plan. These investments are generally low-risk options and offer steady returns. However, today, the scene has opened up to include attractive retirement plans that can build wealth and help you save tax. One such important avenue is to opt for  Equity Linked Saving Scheme (ELSS) for retirement planning.

Equity Linked Saving Scheme (ELSS) is a type of mutual fund scheme that invests predominantly in equities or equity-related products. These funds help you save tax every year and also provide you with the opportunity of growing your money in the long run. ELSS funds are also regarded as tax saving mutual fund.

Every year you can avail a tax deduction on investments up to Rs.1.5 lakh under Section 80C  of the Income Tax Act. Besides, ELSS investments offer a lock-in period of just three years, which is one of the lowest lock-in period among all other tax-saving avenues. PPF, for instance, comes with a lock-in period of 15 years. With a brief lock-in period (as in the case of ELSS), you can have the freedom to liquidate your assets and meet your financial goals as and when they arise.

When it comes to returns, ELSS funds have the potential to provide high returns compared to trad itional tax saving avenues like fixed deposits and Public Provident Fund. This is because the returns on ELSS are linked directly to the stock market.

This might get you wondering whether ELSS funds are risky. The definite answer to this question is yes. ELSS funds come with a degree of risk as it is a market-linked instrument, meaning they invest a substantial portion of the funds into equities.

However, you can mitigate this risk by investing in ELSS for the long term. This strategy can lower your risk and also give you the opportunity of enhancing your returns substantially. And since retirement is a long-term goal, ELSS is an investment avenue you should consider.

1. A minimum of 80% of the fund’s assets are invested in equity and equity related instrumen ts
2. Minimum investment limit is Rs. 500
3. There is no maximum limit. You can invest any amount you wish.
4. Get a tax-deduction of Rs.1.5 lakh under Section 80C of the Income Tax Act.
5. A lock-in period of three years
6. You can choose either the growth or dividend option at the time of investing.
7. High returns are possible, but at the same time, returns may not be guaranteed.

Easy investments

The process of investing in ELSS funds is quite easy. Once you open an account with a mutual fund house, you can invest either through a lump sum or through systematic investments periodically. You also have the option to increase or decrease the investment amount over time based on your financial goals.

And while there is no upper limit on how much you can invest every month, you can begin by investing a minimum of Rs. 500 in these tax saving schemes. This can help to build investment discipline and enhance your retirement corpus. You can start by investing small amounts early in your career. And with a rise in your income over the years, you can proportionately increase the SIP  amount.

Diversification

Markets move up and down. And as an investor, you don’t want to risk losing your investments during an economic slump. But, since ELSS funds usually invest in a wide variety of stocks and sectors, these schemes can offer you with good diversification in a simple and cost-efficient manner. 

Professional management

ELSS funds are managed by professionals known as fund managers. They are experts with considerable experience in the stock market and can control the fund based on extensive market research. The primary goal of fund managers is to provide you with the reasonable returns on your investment. So, when you invest in ELSS, you don’t have to be concerned about tracking the market on a day to day basis.

Several fund houses offer ELSS schemes. To decide on a particular plan, you can make the right investment decision by visiting this checklist.

Past performance of the fund

Take a look at the fund’s performance over the past few years for consistent returns. Also, check out how the fund has performed across different market cycles. However, consider that past performance is not a definitive indicator of good future performance. Most people invest in a fund based on its historical performance without studying other factors.

Risks

Since ELSS funds invest directly into equities, they are exposed to market risks. However, some stocks and sectors come with higher risks compared to others. Blue-chip stocks, for instance, carry lower risk than small-cap stocks. Hence, you may want to identify your risk appetite and investment goals and look for ELSS funds that match your investment sensibilities.

Expense ratio

Expense ratio is the annual fee a fund house charges for scheme related expenses. While these fees can differ from one fund to another, SEBI mandates that management costs cannot exceed 2.25% of a fund’s average assets under management (AUM). Hence, the higher the expense ratio, lower could be your returns. Compare a fund’s expense ratio among similar performing funds to ensure your costs stay levelled throughout the duration.

Fund rating

These days, many certified credit agencies provide ratings on mutual funds periodically. This includes ELSS funds too. These agencies rate mutual funds based on various factors such as returns, risk and asset management. A fund that has higher scores compared to its peers is considered better than the rest. So, while you research into funds, also take a look at these ratings before you invest.

This brings us to: Where should you invest for your retirement: ELSS, PPF or tax-saving fixed deposits?

Let’s compare these instruments.

ELSS offers one of the shortest lock-in period of just three years. This can give you the much-needed flexibility to withdraw your funds during an emergency. And while they come with a high-risk factor, they provide you with the opportunity of earning better yields in the long run.

Conclusion

Your retirement can give you the much-needed free time to travel the world, explore your hobbies or just relax at home and spend time with your loved ones. If you are looking to make the most of your golden years, it can be a good idea to start on a retirement plan today.

Given its duration to help fulfil a long-term investment goal, ELSS can be a suitable option. It provides you with tax benefits in the short-term and a high-yield potential in the long-term. To assuage concerns of risk, you could consider investing a part of your monthly investment in ELSS and the rest in a traditional low-risk avenue. This way, you can stand to benefit from reasonable returns and stability.

DISCLAIMER

Investment in ELSS is subject to lock in period of 3 years from the date of allotment of units. Investors are advised to consult their tax advisor in view of individual nature of tax benefit. Investors are requested to note that tax laws may change from time to time and there can be no guarantee that the current tax position may continue in the future. The comparison of ELSS Vs other traditional savings instruments has been given for the purpose of the general information only. Investment in ELSS carry higher risk, does not guarantee returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. Franklin Templeton Mutual Fund / Franklin Templeton Asset Management (India) Private Limited will not accept any liability/ responsibility/loss incurred on any investment decision taken on the basis of this information