Retirement Planning: What are the different types of mutual funds to build retirement corpus?

Investing wisely during your employment years can be a great tool to build a substantial retirement corpus. However, since there are so many options it could be confusing to choose the right investment instrument.

One of the most popular investment options for retirement income is mutual funds as they offer higher return compared to other options. As there is a wide range of mutual funds available in the market, it could be a daunting task to choose the right mutual funds while you are planning for retirement.

Here's a list of four different types of mutual funds that could be part of your investment portfolio for retirement.

Types of mutual funds for retirement planning

Equity Mutual Funds: It can be a great option to invest in equity mutual funds as they offer significantly high returns and are ideal for investment even if you have just seven to 10 years left before retirement. Moreover, in the last few years before retirement, you can explore higher risks for higher returns to add more funds to your retirement corpus. You can build a large retirement corpus if you choose to invest a considerable amount of your savings in equity mutual funds.

Equity mutual funds invest in the equity market and make profit from increase in stock price. The fund managers diversify your portfolio by investing in several companies across different sectors. For retirement planning, you consider diversifying your investment by choosing a mix of Small Cap Funds, Large Cap Funds, Mid Cap Funds, Value Funds and Flexi Cap Funds.

However, while planning remember that these long-term equity mutual fund investments attract a 10 per cent tax capital gains tax  

Debt mutual funds: These funds operate by investing in instruments that promise fixed income that include government bonds, corporate bonds, treasury bills etc. Debt mutual funds generally provide reliable and stable returns by diversifying your investment across several instruments.

They aren't as volatile as the equity mutual funds and offer low risk with stable returns. It could be a good option if you don't want high risk investments. For retirement planning, you can consider debt mutual funds, such as Banking  and PSU Debt Funds, Corporate Bond Funds, Liquid Funds, Dynamic Bond Funds, and Gift Funds.

However, they attract higher capital gains tax compared to equity mutual funds and you would have to part with 20 per cent of the income generated towards capital gains tax. Therefore, it's essential to estimate the potential returns while you are planning for retirement corpus.  

Hybrid mutual funds: These funds offer a blend of higher and stable returns by investing in equity, debt and gold. It is an excellent investment option for retirement planning as the risk is mitigated due to the diversification of portfolio across various sectors. If you have a long investment horizon before retirement, go for hybrid mutual funds.

Hybrid mutual funds utilise the stock market's growth potential and manage the risks by investing in both debt and equity assets.

For your retirement fund, you can consider investing in Aggressive Hybrid Fund, Multi Asset Allocation Fund, Conservative Hybrid Fund and Dynamic Asset Allocation Fund.

Gold ETF:  These mutual funds invest in gold bullion. It is a great investment option for those who want to consider investing in an instrument for a stable and low risk return. It can be a great risk management tool for retirement years if you have chosen high-risk investments like equity mutual funds.

The prices of gold are unlikely to decrease in the long-run, thus, it can offer stable returns. Therefore, during retirement planning, one can explore gold funds offered by banking sector behemoths, such as HDFC Bank, Axis Bank and ICICI Bank.