Mutual fund retirement plans – what’s on offer?

Building your own retirement kitty is a must in a country like India where there is no social security to fall back upon for most people. Given the rise in inflation and increase in life expectancy, it is important to ensure that your corpus does not fall short of post-retirement expenses.

At present, there is a wide range of both traditional and market-linked retirement products that can help you build your nest egg. Aside from options such as Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Pension Scheme (NPS), and retirement plans and unit-linked pension plans (ULPPs) offered by life insurers, a few mutual funds also offer plans for this specific purpose.

Under the solution-oriented retirement category, 10 mutual fund companies — Aditya Birla Sun Life, Axis, Franklin, HDFC, ICICI Prudential, LIC, Nippon India, Principal, Tata and UTI — offer retirement plans with different options across equity and debt portfolios.

Investments made in these schemes (including each SIP instalment) are subject to a lock-in period of five years or till retirement age, whichever is earlier.

Among the above, the retirement plans offered by five mutual fund companies — Franklin, HDFC, LIC, Nippon India and UTI — have been approved by the Centre as pension funds for the purpose of clause (xiv) of sub-section (2) of Section 80C of the Income Tax Act, 1961. According to this provision, investment made by the eligible investor in these schemes will qualify for income tax deduction up to ₹1.5 lakh in a financial year.

What’s on the cards

The retirement plans offered by mutual funds are structured to suit the needs of investors based on their risk profile and life stage. They invest in a mix of equity and debt.

While the schemes of LIC, Franklin and UTI ( that were launched in the early 90s) offer only one plan, the others (launched over the last 10 years) offer multiple plans catering to the needs of different investors at different stages of their life. For instance, Tata Retirement Savings Fund offers three plans — Progressive, Moderate and Conservative — that allocated around 94, 82 and 28 per cent into equities (as of June 2020) respectively. According to Tata Mutual Fund, the three schemes are suited for young, middle-aged and retired investors, respectively.

There are a total of 25 schemes under this category and many of these have only limited track record. Comparison of performance among these schemes may not be appropriate as they follow different asset allocation strategies.

However, we have classified the retirement funds into four sub-categories based on their allocation to equity assets. They are equity funds (85-100 per cent), equity funds (65-85 per cent), hybrid funds (0-40 per cent into equity) and pure debt funds (nil equity).

Equity funds (85-100 per cent)

Six schemes (see table) focus on young people and aim to provide long-term wealth creation by investing at least 85 per cent in equities. These schemes are suitable for high-risk investors.

Performance, as measured by the three-year rolling returns calculated from the NAV history of the past five years, shows that Tata Retirement Savings-Progressive Plan outperformed others by delivering a compounded annualised growth rate (CAGR) of 11.8 per cent. Other top schemes HDFC Retirement Savings–Equity and Nippon India Retirement–Wealth Creation delivered CAGR of 7.7 per cent and 6 per cent respectively. Meanwhile, large-cap funds and Nifty 500–TRI delivered 8.1 per cent and 9.7 per cent during the period.

Though they follow the multi-cap approach while managing the portfolio, most of the schemes tilt towards large-cap stocks. However, Tata Retirement Savings–Progressive, Aditya Birla SL Retirement Fund–30s and Principal Retirement–Progressive allocate a higher portion to mid- and small-cap stocks.

Equity funds (65-85 per cent)

Nine schemes aim to provide both growth and protection by investing 65-85 per cent in equities and the remaining in debt. They are suitable for middle-aged and investors with a moderate risk profile. Performance, as measured by the three-year rolling return data shows that Tata Retirement Savings-Moderate generated 10.4 per cent CAGR. Other top-performing schemes are HDFC Retirement Savings–Hybrid Equity and LIC MF ULIS that delivered 9 per cent and 7.7 per cent respectively. Meanwhile, the aggressive hybrid funds category delivered 6.3 per cent.

The equity portion of these schemes has a multi-cap focus with large-cap bias. On the debt side, most of the schemes have held maximum exposure in government securities and higher-rated quality corporate debt papers.

Hybrid funds (0-40% into equity)

These conservative plans aim to shield capital by investing at least 60 per cent of the assets in debt and up to 40 per cent in equities. These schemes are suitable for investors nearing retirement and also retirees. Conservative investors who want to shift a part of their investment from high-risk assets to relatively low-risk funds can consider these schemes. The top-performing schemes here are Tata Retirement Savings–Conservative, HDFC Retirement Savings–Hybrid Debt and Franklin India Pension which delivered CAGR of 7.4, 6.5 and 6.4 per cent respectively, on three-year rolling return basis. Meanwhile, the conservative hybrid funds category generated 6 per cent return during the period.

In all schemes, at least two-thirds of the equity portion is in large-cap stocks. The debt portion of most of the schemes is skewed towards G-Secs and high-rated corporate bonds.

Pure debt funds

Only two schemes — Aditya Birla SL Retirement–50 Plus and ICICI Pru Retirement–Pure Debt — are currently available in the pure debt funds segment of retirement mutual funds. They have a short-term NAV history of less than two years. Investors can wait for a while till these funds prove their mettle.

Retirement MFs versus other products

Investors can also consider the top-performing open-ended mutual funds across categories to be part of their retirement kitty. However, the lock-in feature in the retirement funds brings in discipline and patience among retail investors.

Unlike other retirement products, investors in NPS and ULPPs are required to allocate a sizeable portion of maturity amount to purchase annuity plans. But investors in retirement mutual funds can withdraw the full corpus after five-years of lock-in or on attaining the retirement age; this gives more flexibility in deciding the end-use.

Retirement plans offered by mutual funds also have options such as trigger facility (for instance, upon completion of 45 years of age, investments shall be switched automatically from progressive plan to moderate plan of Tata retirement plan; however, capital gains tax shall be applicable). All plans enable systematic investment, systematic transfer and systematic withdrawal options.

AMCs such as Aditya Birla Sun Life, Axis and Nippon India provide life insurance cover which comes at no extra cost to the investor. Called century SIP, Aditya Birla Sun Life Mutual Fund allows you to get a life cover of up to 100 times (maximum ₹50 lakh) the monthly SIP amount. Axis MF’s iPlus SIP and Nippon India SIP Insure offer insurance cover on long-term SIPs — in the unfortunate event of the demise of the investor, the insurance cover will take care of unpaid instalments of SIP committed by the investor.

Lock-in period

Investments in MF retirement schemes (including each SIP instalment) is subject to lock-in of five years or till retirement age, whichever is earlier.