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Building a retirement corpus is one of the primary goals of working individuals. And an increasing number of people are now turning towards mutual funds to make sure that their post-retirement life is hassle free.
Association of Mutual Funds in India (Amfi) data recently revealed that 28 retirement schemes managed assets worth Rs 26,265 crore (April 30, 2024). Baroda BNP Paribas Retirement Fund is the recent entrant in this category.
“Though there are many traditional ways to accumulate for one’s retirement goal using existing options like Public Provident Fund (PPF), pension funds and National Pension System (NPS), choosing a mutual fund retirement scheme gives better participation in equities that are actively managed and provides more flexibility to investors,” says Ravi Kumar TV, founder, Gaining Ground Investment.
What is on offer?
The mix of equity and bonds can vary considerably in retirement schemes. “Retirement funds invest in equity, debt and Reits/Invits — asset classes that are better poised to beat inflation in the long run than traditional investment options,” says Pratish Krishnan, fund manager and senior analyst, Baroda BNP Paribas Mutual Fund.
These funds come with a lock-in of five years or up to the investor’s retirement age, whichever is earlier.
Nomenclature matters
Though retirement funds can be similar to pure equity diversified schemes or hybrid funds in composition, the nomenclature of “retirement” can help investors manage their emotions.
“The retirement label is crucial. It nudges investors to mentally separate and prioritise their savings for retirement, leveraging the concept of mental accounting. It encourages consistent contribution and long-term investment,” says Ajit Menon, chief executive officer (CEO), PGIM India Mutual Fund. The withdrawal provisions are simpler, with no restrictions on withdrawal after the lock-in is over. Investors can opt for a systematic withdrawal plan to create a regular income after retirement or withdraw a lump sum. Purchasing an annuity from an insurer is another option.
“Retirement funds provide investors the flexibility to decide the monthly income they would like to withdraw post-retirement against certain retirement options that require a compulsory annuity to be bought with 40 per cent of the corpus upon retirement,” says Krishnan. (NPS has a compulsory annuity provision).
Be prepared for volatility
Retirement funds that are equity-heavy will be impacted by market volatility. “An equity-oriented scheme can witness drawdown in the short term. If one has a larger allocation to equity in the withdrawal phase after retirement, it is advisable to have an emergency fund parked in safer asset classes or in a bank to tide over the volatile period,” says Menon.
Tax impact
Taxation depends on the nature of the portfolio. If the portfolio has 65 per cent or more allocation to stocks, long-term capital gain tax of 10 per cent applies. For schemes with 35 per cent and less than 65 per cent in stocks, the capital gain is subject to indexation benefit and is taxed at 20 per cent rate after holding for a minimum of three years. In all other circumstances, gains are taxed according to the slab rate.
Make an early entry
A retirement fund can be helpful for all age groups, but ideally one should start investing early to beat market swings and gain from compounding. “Since retirement is the only financial goal for which you do not get a conventional loan, one must prioritise it as soon as one starts earning an income. Even if someone starts investing late for retirement, they can achieve the desired corpus with a top-up systematic investment plan (SIP), by increasing contributions yearly,” says Menon.
These funds are suitable for long-term investors who understand market risks and are prepared to embrace volatility. “If one has just started their career, investing in these funds can create significant wealth by the time of retirement. Those who are
nearing retirement can also choose funds having a hybrid asset allocation,” says Ravi Kumar.
