Retirement Funds Vs Equity Funds

The decision of whether to invest in an equity fund or a retirement fund is a matter of personal preference and financial goals. For example, a retirement fund is suitable for long-term goals such as saving for retirement. However, if you are targeting growth and comfortable with higher risk, then you can invest in equity funds. The decision as to what type of investment vehicle you should choose also depends upon your diversification needs. Here is a comparison of Retirement Funds Vs Equity Funds to help you make informed investment decisions.

What is a Retirement Fund?

After years of hard work, you wish to finally enjoy your retirement without worrying about how much to spend. There are many ways for an individual to save money, but you must also invest it wisely to meet your financial goals. Retirement funds offer financial security to individuals who are interested in safeguarding their financial future. They provide a reliable source of income after retirement until death.

Most individuals are unsure about how to get ready financially for the post-retirement days without sacrificing their present. Retirement funds, also known as Pension Funds help them invest for the future. The income these investments generate is in the form of interest, which accumulates over time. The collected amount is given as a fixed payment each month when the time for your retirement comes.

The design of this investment plan helps people save for their later years or potential long-term care costs. Besides steady returns, these investments comprise low-risk securities to ensure that your money does not go missing overnight. 

What is an Equity Fund?

Equity Funds invest in the shares for different companies and are also known as Growth Funds. The fund manager tries to offer great returns by spreading the investment amount across companies. He picks companies from different sectors or with varying market capitalizations. Typically, these investments generate better returns than term deposits and debt-based funds. But their performance depends on various market conditions like sector growth rates and competitive landscape between firms. Therefore, they also have an element of risk associated.

Market capitalization is a basis for classifying equity funds. It considers the value of a company’s equity in the capital market. Your returns from equity investments will depend upon the manager investing in stocks. An Active manager scans markets for stocks to buy. While a Passive manager tries to mirror popular indices like Sensex or Nifty Fifty index funds. A profitable equity fund builds your investment portfolio by investing in the stocks of companies across different industries. It simply means your money can be invested anywhere from e-commerce platforms to food and beverage producers. Equity funds also come with sectoral or theme-based funds. These investments are limited to sectors of their specialization, such as infotech or infrastructure.

Who Should Invest in Equity Funds?

Mutual funds are a popular investment vehicle because they offer the diversification, liquidity, and lower fees. However, when investing in mutual funds, you must be aware of your financial goals. It will help you decide the type of fund you must invest in. You can pick from long-term equity or short-term bond investments. Mutual funds typically provide stability over the course of time, but investor outlook is changing these days. Owing to an increase in market volatility, investors looking for higher returns are opting for riskier assets. They like to put their money in stocks or alternative investments like real estate.

There are two very important factors in deciding which type of investment is best for you. The first factor is the length of your investing horizon. While the second factor is the amount of risk you want to take with your investments. So, a mutual fund or bond fund is suitable in case you are investing for a short-term goal. It involves lesser risk too. But for long-term investments like retirement savings, you can invest more aggressively in equity funds. The benefit is that they will beat inflation over time by providing higher returns than other types of accounts. Though you can also invest in money market accounts or bonds for protection against losses. But these instruments do not offer returns as good as equity.

Differences Between Retirement Fund and Equity Fund

Following are the key differences when we compare Retirement Fund Vs. Equity Fund:

Instruments

Retirement funds mostly invest in government securities because their main focus is security and less risk profile. Equity funds are more focused on equities and equity-related instruments, just like derivatives, etc.

Returns on Investments

Retirement funds mostly provide either fixed returns which are pre-declared or lump sum to that range only. Equity funds relatively provide higher returns when we compare them to debt funds in the longer-term horizon.

Risk

Retirement funds are low-risk instruments. Equity funds are moderately high to higher risk instruments.

Taxation

In the Retirement fund, any contribution up to Rs. 150,000 is allowed as a deduction under Section 80CCC of the Income Tax Act. A tax of 15% is applicable on capital gains from equity funds held for less than 12 months. Long-term capital gains (more than 12 months) of up to Rs 1 lakh are tax-exempt and taxed at 10% thereafter.

Tax Savings

The main objective of the retirement fund is tax saving as well as creating a corpus. In an equity fund, you can save taxes by investing up to Rs 150,000 in a year in ELSS schemes.

Suitability

Retirement funds are safe investment options with low risk. Equity funds are for long-term investments suitable for investors with moderate to high-risk appetites. Equity funds may help reach your long-term financial goals.

Retirement Vs Equity Fund Which is Better?

Retirement should not be a concern for the next few decades. However, it is important to start saving early and investing in various schemes to achieve your desired retirement benefits later. Unfortunately, most people only think about their current needs without thinking of their needs when they are old and retire. Retirement is a long-term goal and ideally, an investor should diversify their portfolio across different fund houses. For instance, if you invest in your retirement plan’s aggressive variant without leveraging any extra features. When you compare it with other schemes, you might also want to invest in open-end funds. These funds have no lock-in period, allowing you to withdraw money whenever you need it.

Furthermore, you must also take care of your short-term goals. Paying off debts or saving up enough cash at your young age helps you ensure monetary stability later. These come in handy when, as a retiree, you have less working capacity due to old age. Both funds work as per your needs and you must choose the one that meets your needs better. The results will depend on your investment horizon and risk appetite.

Check Out Difference between Equity Shares and Preference Shares

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