Investors who don't want to be bothered by asset allocation and rebalancing of portfolio as they grow older could look at schemes like the recently-launched Tata Mutual Fund's Retirement Savings Fund.
However, they should remember that the benefits would accrue only if they stay invested for a long period, say 10-15 years. In fact, even the fund house wants to discourage mid-way exit and has imposed an exit load of five per cent in the first year. Thereafter, it comes down over the years and becomes one per cent in the fifth.
Tata Mutual Fund President and CEO Sachin Sachdev says the aim of the fund is to ensure that investors stay in the scheme in the long run. "The fund is specifically designed keeping in mind the young and middle aged working generation," he added.
The scheme offers three different plans, on the basis of age and risk preferences. The minimum investment amount for the fund is Rs 5,000 and the minimum monthly commitment has to be Rs 500 a month.
The 'progressive option' will be for investors under the age of 45 years and will have 85-100 per cent of its assets in equity instruments. The 'moderate' option is for investors in the age group of 45-60 years and will have 65-85 per cent in equity-related instruments. The 'conservative plan' will invest only in debt-related instruments and is for investors over the age of 60 years. The performance of these three schemes would be benchmarked against the BSE Sensex, Crisil Balanced Index Fund and Crisil MIP Blended Index, respectively.
Young people (30 years or below) will benefit more from such schemes because of the high exposure to equity and compounding effect that will help accumulate more.
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An important part of the scheme is that it has an "auto-switch" feature that takes care of the debt-equity rebalancing in consonance with age. When an investor reaches 60, there will be an automatic and systematic withdrawal system that will provide regular cash flows. It comes with two options - monthly (one per cent of market value of investment as on the date of completion of 60 years) and quarterly (three per cent of market value of investment).
The scheme is similar to pension fund schemes being offered by fund houses, like UTI's Retirement Benefit Pension Fund or Franklin Templeton's India Pension Plan.
From the point of view of cost, compared to a pension scheme of an insurance company, Tata's product is better at an annual expense ratio of 2.5 per cent. Expenses in an insurance product could go up to as high as 15 per cent. The New Pension Scheme (NPS), however, is a much cheaper instrument.
On the tax front, the automatic systematic withdrawal route will attract taxes like a debt fund (10 per cent with indexation benefits and 20 per cent without those).
If one takes the growth option, the taxation will, again, be in line with a debt fund. If the dividend option is chosen, there will be no tax on the investor. The fund house will deduct a dividend distribution tax.
In comparison, in NPS, there is a tax benefit on the corpus. However, returns from NPS are likely to be lower because even the most aggressive scheme can invest only 50 per cent of the money in equities and that too in index funds only. On the whole, only long-term investors should look at this scheme. The new fund offer, which opened on October 7, closes on October 21.