Many people are against the idea of investing your retirement fund in equities. This mainly concerns how a person’s stomach for risk in their investments could change over the years. You have less to lose when you are young, and equity investments might suit you best. But once you hit retirement, your primary source of income usually stops. So then, putting whatever corpus you have in a high-risk investment option is usually frowned upon. But what about using equities to build your retirement fund. That is a whole different story, and it could be the most beneficial way to build a retirement fund. Let us dig deeper and examine the same.
Importance of building a retirement fund
Retirement is a time when you need a lot of peace. While many factors could contribute to the same, there is no doubt that financial health is the main element. What ensures your financial health at a time when there is no constant flow of income is a very large corpus. Building the same is the goal for every retirement plan.
Now, there are a lot of ways you can build it. The most used way would be to use a conservative investment option like a pension fund plan to build the same. While it is still valid, you might miss out on certain factors only equities can offer. Although it depends on your risk appetite as well, below are some reasons why equity investments could work as a great tool to build your retirement fund.
1) It gives higher returns
Equities are historically known to give you the most returns of all the investment options. Multiple factors play a role here, but the most critical point is that equity investments use market growth.
Let us look at Sensex, the index that tracks the top public companies’ stocks in India. Even though there were several ups and downs, the same has grown over 65% in the last five years as of mid-June 2022. That means if you have invested Rs.100 in it, it would have grown to Rs.165, considering there is no compounding.
2) Compounding
But then comes the magic of compounding. In investment terms, compounding is when the returns you generated are reinvested into the corpus, and the combined corpus starts to earn returns from the next day. For instance, suppose your return is Rs.100, and your corpus is Rs.1000. Then, your corpus of Rs.1100 earns returns from the next day, not Rs.1000.
3) It is highly liquid
Stocks are highly liquid. When the demand is proper, they are as liquid as money. That means you can redeem them to pocket some money at any time. Here, we are trying to make a retirement fund- yes. But emergencies can happen at any time, and money is of great importance at that time. In such scenarios, your investments might come to your rescue. If your investments are liquid, like equity funds, it can help you even more.
When should you switch from equity investments?
Retirement fund building is a chore that lasts till your retirement. Hence, constant monitoring is needed. Additionally, when you are young, you have less to lose, and your primary focus would be on capital appreciation. But slowly, as you reach your middle age, you might now have a considerable corpus, and the focus shifts to capital protection as well. At that point, it is a wise idea to think about other investment options also.
Proper planning and perseverance is the key to success in equity investments. However, starting early is equally important. Hence, if you are yet to start your retirement fund building with equities, there is no better time than now.