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As far as common financial goals are concerned, retirement should rank among top priorities for investors. Among a range of options available for investors to save for retirement, mutual funds are key products for such a long-term goal.
And there are dedicated retirement funds for investors to save for the long term. To be sure the earliest pension funds are decades old – from the houses of Franklin Templeton, UTI and LIC.
Other fund houses started rolling out retirement schemes well over a decade ago.
Although broadly focused on retirement as a goal, these funds come with different investment styles and mandates. They function essentially as equity, debt, and hybrid funds.
A few of these retirement funds qualify for tax deductions as well, while others don’t.
Bandhan Retirement fund is the latest new scheme to be rolled out. The NFO closes on October 12. Read on to take an informed call about retirement funds.
Retirement funds are mostly hybrid schemes
In the late 1980s, we had LIC Mutual Fund coming out with a LIC MF ULIS (unit linked insurance scheme). Though called a ULIS, it is a mutual fund.
In the early and mid-1990s, Franklin India Pension Plan and UTI Retirement Benefit Pension joined the bandwagon.
These two funds function as balanced hybrid schemes with Franklin and UTI sticking to less than 40 per cent equity exposure in the portfolio, with the rest deployed in debt and cash. LIC MF ULIS invests over 75 per cent in equities.
In the last decade or so, Aditya Birla Sun Life, Axis, HDFC, ICICI Prudential, Nippon India, SBI, Tata and Union launched their retirement funds.
Each of these fund houses rolled out multiple plans or schemes with their retirement funds. Aditya Birla SL offers plans based on age bands – 30s, 40s and 50s. The equity exposure is reduced based on the age band.
Other fund houses including Axis, HDFC, ICICI Prudential, Nippon India, SBI, Tata offer multiple plans. These are usually conservative hybrid, aggressive hybrid and equity-oriented funds. Typically, the equity portion can range from as low as 20 per cent and go up to 75-85 per cent. The rest is invested in debt. ICICI Prudential also offers a debt fund, while the 50s plan of Aditya Birla Sun Life mutual fund is also pure debt scheme.
Depending on the risk appetite of investors, they can choose the type of retirement fund that suits their needs. Based on time horizon, risk appetite and surplus, investors can choose the funds that have aggressive or conservative exposures to equities.
Deductions, taxation and lock-in
You get 80C tax deduction benefit for investments in the Franklin, UTI and LIC retirement funds. Up to ₹1.5 lakh can be invested for tax deduction.
The Franklin and UTI retirement funds have a lock-in period till the age of 58 and cannot be exited earlier. Franklin India Pension charges an exit load of three per cent for premature exits.
Franklin and UTI schemes are balanced hybrid funds with equity exposure of less than 40 per cent. So, long-term capital gains on holding for more than three years are taxed at 20 per cent with indexation benefits.
The retirement schemes of HDFC and Nippon India have deduction benefits under section 80C to the tune of ₹1.5 lakh. Other houses that rolled out similar schemes do not have any tax benefit as, apparently, market regulator SEBI has not given its consent- for the same.
The lock-in period for all these retirement funds is five years and no premature exits are allowed. Even in investments made via the SIP (systematic investment plan) route, each instalment is locked in for five years. In general, no exit loads are charged by these funds, given that premature exits are not allowed.
Taxation depends on whether a fund is equity-oriented or debt-oriented.
What should investors do?
Bandhan’s retirement scheme will be a dynamic asset allocation fund that allocates between equity and debt depending on the market conditions. The allocation pattern will be driven by a quantitative model that incorporates valuations, fundamentals (credit spread, currency valuation, real returns) and technical factors (volatility index).
The equity portion will have a blend of growth, quality, value and cyclicals. The debt part will be focused on building a high duration portfolio.
Bandhan Retirement fund looks to maintain equity portion above 65 per cent (including derivatives) to enjoy attractive taxation benefit.
In general, investors are better off saving for long-term goals via flexi cap and multi-cap funds. Aggressive hybrid funds may also help for those with relatively lower risk appetite.
However, if a lock-in and an exclusive retirement focus help, you can consider such funds. For pure equity and aggressive hybrid retirement funds, those from the HDFC and ICICI Prudential stables may be suitable.
Investors can wait for Bandhan Retirement fund to develop a track record before taking exposure.
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