Retirement funds: Align equity-debt mix with risk appetite and horizon

Investors are increasingly planning for old-age security through retirement plans of mutual funds. The assets under management (AUM) of these funds surged from Rs 8,408.96 crore on August 31, 2019, to Rs 30,394 crore on August 31, 2024, an increase of 261 per cent, according to data from the Association of Mutual Funds in India (Amfi). In a recent note, ICRA Analytics attributed this rise to growing healthcare costs, the nuclearisation of families, and longer life expectancy.

Diverse offerings 

Retirement schemes come with a lock-in of five years or until retirement age, whichever comes earlier. Fund houses offer multiple plans of these funds, with a varied mix of bonds and stocks. No restrictions related to the market cap of equities or ratings of bonds apply to these funds.

Their risk-return profiles can vary widely. Equity-focused schemes may perform better in a bull market, while debt-oriented ones may offer greater stability during volatile periods.

Long-term compounders

Due to the lock-in, these schemes should be viewed as long-term wealth compounders. “The retirement labelling encourages consistent contributions and long-term strategies,” says Abhishek Tiwari, chief business officer, PGIM India Mutual Fund.

Competitive advantage 

While the Public Provident Fund (PPF) offers assured tax-free returns, it offers low liquidity during the initial 15-year tenure (less so once it is extended in five-year blocks). In the National Pension System (NPS), buying annuities at retirement is mandatory.

Retirement schemes offer market-linked returns. “Retirement funds typically offer higher potential returns and flexibility compared to PPF, NPS, or pension plans,” says Chintan Haria, principal, investment strategy, ICICI Prudential AMC.

Investors in these funds face no restrictions regarding how they can use their corpus on maturity. They can buy an annuity from an insurer or set up a systematic withdrawal plan (SWP) for regular income. “After the lock-in, one can stay invested, redeem, or opt for an SWP,” says Ashwin Patni, head of product & alternatives, Axis Asset Management Company (AMC).

How are they taxed? 

Schemes that invest over 65 per cent of their assets in debt are taxed at the investor’s slab rate, while others are taxed at 12.5 per cent. For equity-oriented schemes with at least 65 per cent in stocks, an exemption of Rs 1.25 lakh on long-term capital gains (LTCG) is allowed in each financial year.

Start early 

Investing early is crucial to building a robust retirement corpus. “One should begin investing in retirement mutual funds in the 20s or 30s to benefit from compounding. A systematic investment plan (SIP) of Rs 5,000 per month for 30 years at a 12 per cent return can grow to Rs 1.75 crore,” says Haria.

Aggressive investors with a longer horizon should favour equity-heavy plans of retirement funds. “Those with 10-15 years until retirement should have a higher equity allocation, while those closer to retirement should opt for a balanced mix of debt and equity,” says Tiwari.

Instead of using funds labelled ‘retirement plans’, one can also use diversified equity schemes and hybrid schemes to fund the retirement goal. Invest in all these plans through SIPs and systematic transfer plans (STPs).

Ideally, retirement should be funded by a mix of products, including retirement funds of mutual funds, NPS and PPF. “Building the retirement kitty with a mix of retirement products ensures one can combine the best of these options to suit one’s retirement needs,” says Patni.