How to safeguard your retirement savings with a phased shift to mutual funds from stocks

As you approach retirement, the focus naturally moves from building wealth to protecting it. At this stage, the goal is not to maximize returns, but to minimize drawdowns that can erode years of accumulated savings. Equity exposure—particularly in volatile mid- and small-cap segments—can pose significant risks to capital when market corrections occur. Transitioning to more stable mutual fund categories such as conservative hybrid funds, short-duration funds, corporate bond funds, and banking & PSU debt funds can help cushion volatility while still generating reasonable income.

According to Akhil Rathi, Head – Financial Advisory at 1 Finance, the key principle is simple: capital safety must come first. “A large drawdown late in life takes far longer to recover and can disturb your peace of mind during retirement,” he notes. The process begins with mapping your financial milestones—what funds will be needed in the short term (2–3 years), medium term (3–6 years), and long term (7 years or more). Defining these timelines ensures you don’t lock away capital that you may soon need for expenses or emergencies.

Use STPs for a smooth transition

A Systematic Transfer Plan (STP) is one of the most effective tools for shifting from equity to debt without trying to time the market. Instead of redeeming your entire equity corpus at once, you can transfer funds gradually—say, over 12 to 24 months—into lower-risk mutual funds. This phased approach helps average out volatility, reducing the risk of exiting equities during a market dip and protecting your portfolio from sudden shocks. It’s especially useful during the early years of retirement, when portfolio withdrawals start and sequence-of-returns risk can have a lasting impact.

Structuring your new allocation

For near-term needs, safety and liquidity are top priorities. Allocate this portion to liquid funds, ultra-short duration funds, or short-term debt funds, which preserve capital and provide quick access to cash. These instruments offer modest but steady returns and serve as your emergency or income bucket.

For the medium-term bucket—money you might need in 3 to 6 years—corporate bond funds and conservative hybrid funds are suitable choices. They offer better yields than liquid funds while maintaining a lower risk profile. The limited equity exposure in conservative hybrid funds (typically up to 25%) adds a mild growth component without excessive volatility.

For long-term surplus funds—those that you don’t expect to touch for 7 years or more—it’s still prudent to retain some equity exposure. This isn’t about chasing high returns but ensuring your wealth keeps pace with inflation over the long haul. Even a 20–30% allocation to equity-oriented or balanced funds can provide growth potential, while the remaining 70–80% in debt-oriented instruments preserves stability.

Takeaway for investors

As you approach, capital protection must take priority, since any major loss can take years to recover and disrupt your financial peace of mind. The key is to align your investments with clear timelines—separating funds needed in the short, medium, and long term. A phased shift through Systematic Transfer Plans (STPs) helps you gradually move from equity to more stable mutual fund categories, reducing the impact of market volatility. For short-term needs, liquidity and safety should guide your choices—consider liquid or short-duration debt funds.

Medium-term goals can be supported by corporate bond or conservative hybrid funds, which balance stability and returns. For long-term surplus that can remain invested, a modest equity or hybrid exposure helps your portfolio stay inflation-adjusted. This structured approach ensures your retirement portfolio remains steady, flexible, and aligned with your evolving needs—protecting not just your wealth, but also your peace of mind in retirement.