Investment funds can be very useful for retirement. They are a flexible financial product with multiple choices that can be used to support savings throughout life. However, it is also important to know how to use them and take advantage of their benefits.
An investment fund is a collective pooling tool. This means that different people put their money together to be invested with a specific strategy.
There are all kinds of products. From aggressive variable income funds, guaranteed funds, actively managed funds, to index funds, etc…
It is indeed an investment product that can be used to help retirement plans, but there are a few things to keep in mind.
Why are investment funds suitable for retirement?
First of all, flexibility must be taken into account. Funds are flexible products. This means that they can be easily and quickly transferred between each other. Therefore, it is possible to change our investments without much trouble.
For instance, if we have a very aggressive investment in an emerging market equities fund, but we want to take less risk, we can transfer that fund to a fixed income fund. These transfers have no tax impact and are carried out with almost no fees and with a single command.
In addition to flexibility, another important factor in the relationship between investment funds and retirement is also diversification. By definition, a fund is almost always diversified, as it invests in different assets. However, by being able to invest small amounts of money, it is possible to split the money into different funds. This further diversifies our investment holdings.
Finally, it is also important to appreciate that they are one of the cheapest products in terms of fees and expenses. Considering the number of years that the funds must be active to contribute to retirement, low fees are very relevant.
How to set up your fund investment properly before retirement
At the beginning of your savings, which must should copincide with the fist years of your working life, you can take more risks. The gap until retirement is long, so you can try to get more returns by taking more risk
As the years go by, risks should be reduced. So that, at the end of your professional life, you have minimal or no risk exposure in your investments.
A good composition could be:
Between the age of 20 and 40: active funds, equities, and mixed income with less presence of fixed income.
Between the age of 40 and 55: less aggressive funds, more mixed income, and fewer equities, with more fixed income.
From the age of 55 onwards: minimize equities, more fixed income, and even guaranteed funds.
On the other hand, it is important to bear in mind that funds are more effective when combined with other savings plans and retirement assets. The potential of a diversified investment is always greater than investing in a single product.