A mutual fund retirement plan is very beneficial and useful for every person.

  • The ideal investment planning for retirement is in Mutual Funds as they have
    • Low cost
    • Offer tax-free equity funds
    • Tax-efficient debt funds return
    • Transparency, and
    • Liquidity
  • Mutual funds are best for long-term financial planning.
  • These are pension plans and are the annuity that is brought to generate income during retirement. These annuities are functionally similar to pensions and so, they are also known as pension plans.
  • Investors mostly prefer Pension plans who receive a large sum as superannuation benefit after retirement.
  • The investor chooses to invest the proceeds in a pension plan to secure safe and regular income-generation for the rest of his life.
  • Various agencies provide pension plans. Mutual Funds Investment is a smart way of future planning for retirement.

Mutual Fund Retirement Plan?

  • Mutual funds are now offering various pension plans which are hybrid in nature having investments in both debt and equity component.
  • It collects the money from several investors and invests the pooled money in equity and debt markets.
  • Equity exposure is in the range of 40% which is lower as compared to balanced funds (65% to 70%).
  • Investors have the option of investing in lump sum amounts or to route through a systematic investment plan (SIP).

 How do Mutual Funds Pension Plans Operate?

  • Mutual fund pension plans operate like a mutual fund scheme in which investors invest throughout their working life into debt and equity which generates income post-retirement.
  • Investors are discouraged from withdrawing funds before their retirement and the standard retirement age is taken as 58 years.
  • Post-retirement, at one’s discretion, the investor has the option of making a lump sum withdrawal or go for regular income (annuity payments).
  • After withdrawals, the balance units, in either case, remain invested and continue to grow.

The Pros and Cons of Mutual Fund Pension Plan

  • Investment in Mutual Fund Online pension plans has great capital appreciation potential and investment is a disciplined one.
  • Generally, the investment corpus has 40% exposure to equities so, a good is expected in the long-term.
  • There are few drawbacks such as heavy exit load in case of pre-withdrawal taxation of returns which makes the investment slightly less alluring. However, it is compensated by a jumbo margin if the equity investment performs well in the long run.

Tax Benefits

If the investors abide by a 3-year lock-in period as is applicable for other schemes, these plans provide tax rebates up to INR 1 Lakh u/s 80C. This is normally, underutilized by investors so far.

Who Should Invest?

Mutual fund pension plans are pension plans with a unique feature. It is very much different from other retirement plannings, such as the PPF, NSC, and tax-saving FDs which are pure debt instruments while these plans have the kicker in the form of equity portion. Although this equity kicker makes it risky, it comes with huge capital appreciation potential. Eventually, all the pure debt instruments mentioned above offer a return in the range of 8% which might not be good enough to build a sizeable corpus as inflation will erode the corpus.

  • Mutual fund pension schemes, on the other hand, offer inflation hedge in the form of equity investment having the potential to offer much higher returns. If you are willing to take a slightly higher risk, you can go for mutual fund pension schemes as the performance of existing plans have been more than satisfactory.
  • If you are planning your retirement, you have more options in the form of retirement products from mutual funds which are far better than the existing products.
  • The expense ratio of these products will be higher than the national pension scheme (NPS) but cheaper than insurance products.
  • The major 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 (SWP) to meet your regular cash flow needs. Since a part of the withdrawal is your principal, it will be more tax-efficient as well.
  • As compared with the NPS or products from insurance companies Mutual funds’ pension products also offer greater liquidity. You can withdraw your accumulated corpus after the lock-in period i.e. 3-5 years by paying a small exit load if you haven’t reached the retirement age of 58 or 60 years.

Should you buy it?

  • Equity mutual funds invest in shares of companies, so, they generally give potential returns over the long run as compared to debt funds. Nonetheless, since equity funds are also volatile, there is a possibility of losses and negative returns.
  • When the market fluctuates the debt funds are generally considered as a good investment. But in times when markets are booming, equity funds are a feasible source to seek more returns.

Related Post: How To Represent Mutual Funds Return?

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