By Narendra Nathan | ET Bureau|Feb 15, 2016, 08.00 AM IST | Economic Times
If you have been thinking about planning your retirement, you now have more options in the form of retirement products from mutual funds. Even though Franklin India Pension Fund (FIPF) and UTI Retirement Benefit Pension Fund (UTI RBPF) have around for decades, the Income Tax Department has only recently allowed more such funds, with Sec 80C benefits, to be introduced. Retirement funds stuck in approval bottleneck. And after Reliance Retirement Fund (RRF), which hit the market in February 2015, now HDFC has launched its Retirement Savings Fund (HDFC RSF). But, are mutual funds’ retirement products better when compared with the existing products?
Let’s take a look at the newest retirement fund, HDFC RSF. This fund’s equity plan, which comes with a five-year lock-in period, is similar to an ELSS fund. “Since ELSS, with a lower lock-in period of three years, is available, why go for a scheme with a higher lock-in period and also a 1% exit load, if redeemed before the age of 60,” asks Manoj Nagpal, CEO, Outlook Asia Capital. Such products are also costlier because of their small size—small schemes charge a higher expense ratio. Except for UTI RBP, other schemes have much smaller assets under management (AUM). FIPF’s AUM, for instance, is just Rs 339 crore. The expense ratio of these products will be higher than the national pension scheme (NPS) but cheaper than insurance products.
The main advantage of mutual funds’ retirement products is that you don’t have to buy an annuity, as is the case with the NPS or pension plans from insurance companies. Instead, you can opt for a systematic withdrawal plan to meet your regular cash flow needs. Since a part of the withdrawal is your principal, it will be more tax-efficient as well.
Also, while the NPS restricts your equity exposure to 50%, with mutual fund products such as the HDFC RSF, you can take a 100% equity exposure. However, these products do not come with the additional Rs 50,000 in deduction, available to NPS. Mutual funds have asked for the extra tax benefit to be extended to their products, but whether or not this happens, will be known only when the Budget is presented on 29 February.
Mutual funds’ pension products also offer greater liquidity, compared with the NPS or products from insurance companies. You can withdraw your accumulated corpus after the lock-in period— 3-5 years—is over. You may have to, however, pay a small exit load, if you want to withdraw your corpus but have not reached the retirement age—58 or 60, depending on the product. Calculating the lock-in period also varies across funds. For instance, in the case of HDFC RSF, the lock-in for each instalment is calculated from the date of investment. So, the money you invest at the age of 59 can be withdrawn only at the age of 64.
Should you buy?
Experts feel these retirement products do not meet the requirements of the millennials. “The young generation wants to retire early, so pension funds should align with the aspiration of this generation,” says Nagpal. Also, the one-cut-fits-all strategy is not the ideal one, as each individual’s needs are different. “Instead of going for a pension plan from a mutual fund, investors should sit with their advisor and design a pension plan according to their needs,” advises Arun Gopalan, VP, Research, Systematix Shares & Stock.
Source : http://goo.gl/NpEorc