Five-year lock-in facilitates long-term orientation in retirement funds

Investors unlikely to withdraw during market downturns or for other needs may do without them

Retirement funds are in the news as Bandhan Mutual Fund has unveiled its new fund offer. It has joined 26 other funds that collectively have assets under management (AUM) of Rs 21,289 crore. It is imperative for investors to check the suitability of these funds.
 

Retirement funds belong to the solution-oriented funds category. They have diversified portfolios containing both equity and debt. The equity exposure of these funds varies widely.

Five-year lock-in
 

A distinctive feature of these funds is that they come with a lock-in of at least five years or until the investor reaches retirement, whichever is earlier. “Data suggest that mutual fund investors, on average, stay invested for about two years. A lock-in of at least five years means they will stay invested for longer, enabling them to cope with volatility better,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
 

Retirement is a distant goal. While many begin to save for it, unforeseen circumstances and goals lead to money saved for retirement being utilised for other purposes. “When a person invests in a fund that is labelled a retirement fund, they are generally more reluctant to use the money for other purposes,” says Arvind A Rao, founder, Arvind Rao and Associates.
 

According to Sebi registered investment advisor (RIA) Deepesh Raghaw, “Unlike the National Pension System (NPS) and pension plans of insurers where 40 per cent and two-thirds of the accumulated corpus respectively must be utilised to purchase an annuity plan, retirement mutual funds do not have any concept of annuity purchase. Investors can withdraw the entire amount lump sum, withdraw gradually by way of a systematic withdrawal plan, or even purchase an annuity plan from redemption proceeds.”   

 

No access to funds  
 

One drawback of the lock-in feature is that investors cannot access the money during emergencies. Says Rao: “If a fund from this category underperforms, investors can do nothing while the lock-in period lasts.”  
 

Key checks to run  
 

The equity exposure of these funds ranges from 19.5 to 98 per cent, hence their returns are equally varied. “Do not make the mistake of selecting a fund from this category based just on past returns,” says Dhawan.
 

While younger investors should go for an equity-heavy fund, those approaching retirement should select one whose portfolio contains more debt. Says Ameen Ahmad, founder, Trading Game Strong: “Select a fund whose portfolio is aligned with your risk appetite and time horizon.”
 

Their AUM also varies widely — from Rs 24 crore to Rs 4,004 crore. Select a fund that has a meaningful corpus. “If the fund size is very small, say, less than Rs 100 crore, it may not receive the attention from the fund management team that it should,” says Dhawan. He adds that investors should also avoid an expensive fund. The median expense ratio of regular plans is 2.14 per cent and of direct plans is 0.97 per cent.
 

Rao suggests choosing a fund with a track record of at least five to 10 years. He also suggests reviewing the performance of other funds belonging to the fund house (since you are going to be with the fund house for several years).
 

As for tax deduction, Raghaw says: “Not all funds in this category may enjoy tax deduction under Section 80C (as all equity-linked savings schemes do), so check specifically whether the fund you are investing in does.”
 

Tax treatment at maturity will depend on the fund’s equity-debt allocation.
 

Who should opt for them
 

According to Dhawan, people who tend to panic when the markets go down, or withdraw money for other purposes out of their retirement savings pool, will find the lock-in useful. On the other hand, investors who are disciplined and can do their own asset allocation, or have an investment advisor who will rebalance their portfolio and help them stay the course on retirement savings, can manage without these funds.
 

People who cannot afford to lock in any of their money should also steer clear of them.