Accumulating adequate wealth to cater to the retirement purpose is one of the most important financials goals in an individual’s investment journey. Apart from traditional investing products such as NPS, PPF and insurance-based products, mutual funds (MFs) also provide an offering by the name of ‘retirement funds’. This product comes under the solution-oriented funds category of MFs. In our edition dated April 17, we attempted to provide an explainer on children’s funds, another sub-category of solution-oriented funds. Similarly, here we provide a low-down on retirement funds.

Options available

The retirement fund category has total assets under management (AUM) of about ₹20,199 crore, spread across 26 funds. Typically, fund houses provide multiple variants of retirement schemes based on the level of approach they take. For instance, ICICI Pru has come up with four variants — Hybrid Conservative (tilted towards debt), Hybrid Aggressive (tilted towards equity), Pure Equity and Pure Debt. ABSL Mutual Fund offers investors schemes positioned as per investors’ age: ABSL Retirement Fund 30s, 40s, 50s and 50-plus plans; here the debt allocation increases in the portfolio with higher age. Also, investors can choose an option wherein, based on their age, the plan would automatically be switched. Other fund houses such as Nippon India, HDFC, SBI, Tata and Axis provide multiple variants while fund houses such as Union (equity-oriented), UTI (conservative hybrid), LIC (equity-oriented) and Franklin India (conservative hybrid) have single variant.

How they work

Retirement funds typically come with a lock-in period, which means one can’t redeem their investments before five years or till the investor reaches the retirement age (60-65 years), whichever is earlier. However, during unforeseen circumstances, redemption might be allowed on a case-to-case basis. One can invest either on a lump-sum basis or through systematic investment plan (SIP) on a periodic basis. Similar to the registration for a regular MF scheme, investor needs to submit documents such as PAN and bank’s cancelled cheque for KYC purposes. Schemes of certain fund houses such as HDFC, Franklin India and UTI are eligible for the tax break under Section 80C of the Income Tax Act, wherein investors are allowed tax deduction of up to ₹1.5 lakh of investment in these schemes, as per AMC’s scheme information document.    

Performance

Of 26 funds in the category, only 11 funds have been in existence for more than five years. Of these 11 funds, three equity-oriented funds have given returns ranging 9.9-18.7 per cent over the last five years; the with highest being HDFC Retirement Savings Fund – Equity Plan and the lowest being Nippon India Retirement Fund – Wealth Creation. There are three aggressive hybrid-based retirement funds with returns ranging 11-14.9 per cent over the last five years — the highest being HDFC Retirement Savings Fund and the lowest being LIC MF ULIS. There are five conservative hybrid based funds — all of which have returned around 8-9 per cent CAGR during the period.

What you should do

Though investing through ‘retirement MFs’ might enable financial discipline due to the lock-in feature, there doesn’t appear to be any other significant advantage compared to other regular MF schemes.

Unlike other open-ended MF schemes, this fund doesn’t face redemption pressure due to lock-in feature, which theoretically provides the fund manager more leeway to hold high-conviction bets. However, this has not been the case practically as returns of these funds aren’t significantly different from their respective counterparts in comparable categories.

The lock-in feature has a downside, too. If you find the scheme to be underperforming, you can’t switch to another retirement fund scheme. You can build retirement corpus with ELSS funds which have lesser lock-in period of three years, tax benefits under old tax regime and better track record than funds in retirement funds category.

Ultimately if you’re a disciplined investor, an easier way to provide for your retirement goals would be to systematically invest (SIP) in a suitable flexicap equity fund (source scheme) during your young age. You can also go for an aggressive hybrid fund if you have no prior experience in equity funds.  Then, as you grow old, you can gradually transfer certain amount from the source scheme to hybrid or debt-oriented schemes to protect gains. So, if you want a one-stop and hands-free solution, you can go for retirement funds with automatic switch option.

Points to note
Retirement MFs are part of solution oriented category
There is a lock-in of five years
The category has limited track record
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