New Fund Offer . SBI Retirement Benefit Fund NFO: A new ‘nest egg’ offering

Retirement planning is one of the key parts of managing one’s personal finance. In India, the National Pension System (NPS), a voluntary contribution scheme, offers market-linked returns and aims to provide for monthly pension after retirement.

NPS has a lock-in of up to the age of 60. Further, upon attaining the age of 60, at least 40 per cent of the proceeds needs to be utilised for the purchase of an annuity product and the balance is paid as lump sum to the subscriber.

The mandatory requirement to purchase annuity is with a view to provide for monthly pension after retirement.

Mutual funds in India also offer retirement schemes that provide market-linked returns, but at a slightly higher expense ratio than the NPS.

These fundshave a lock-in period but only for five years or until completion of 65 years of age, whichever is earlier.

After the lock-in, you are free to withdraw the lump sum or can opt for a systematic withdrawal plan (SWP) under which a fixed sum of money can be redeemed periodically.

The difference between retirement mutual funds and other fund categories is that the former comes with a lock-in of five years and has the option to auto-transfer your money to lesser risky asset allocation plans on reaching a specified age.

SBI Mutual Fund recently launched an open-ended retirement scheme —SBI Retirement Benefit Fund. The NFO closes on February 3.

Similar to NPS and many other retirement funds, SBI Retirement Benefit Fund also offers choices of asset allocation plans based on the investor’s risk profile (see table below).

Note that, unlike NPS, investments in newer retirement mutual funds are not eligible for Section 80C tax benefits (some of the older funds qualify for the tax break).

In the case of SBI Retirement Fund, while the conservative and conservative hybrid funds are treated as debt schemes, aggressive and aggressive hybrid plans are considered equity schemes, for the purpose of taxation.

Investment strategy

Based on the risk appetite, the investor can choose the respective scheme.

Or, one can also opt for the ‘auto-transfer’ option that facilitates automatic adjustment of portfolio based on your age. As age increases, the individual’s exposure to equity tends to decrease.

However, on every transfer, tax will be applicable since will be moving from one scheme to another.

According to the fund manager, the equity portion of all the schemes will be invested significantly in companies which have a track record of profit growth at a consistent rate and good management.

This will be the core portion of the equity portfolio and will comprise 50-100 per cent of equity allocation.

A portion of the equity investment (0-50 per cent of total equity portion), called satellite, may also be invested in companies based on business cycles, macro-economic factors and businesses whose valuations are in anomaly with fundamentals, for alpha-generation.

The equity investment of the fund will be market- and sector-agnostic.

For the debt portion, the aggressive and the aggressive hybrid plans will invest in only AAA rated PSU and sovereign bonds.

In the case of conservative hybrid and conservative funds, the debt portion will be invested in instruments with a Macaulay duration (the time an investor would take to get back all his invested money in the bond) of 4-7 years.

These funds will have exposure to non-AAA rated instruments to an extent.

However, this exposure will be limited to 10 per cent and 25 per cent for conservative hybrid and conservative funds, respectively.

Every plan may also have exposure to gold exchange-traded funds (ETFs), real-estate investment trusts (REITs)/infrastructure investment trusts (InVITs) and foreign securities, subject to limits.

Peers

There are currently about eight mutual funds that offer retirement-oriented schemes.

Among them, only four funds — from Franklin, Nippon India, Tata and UTI — have a track record of more than or equal to five years.

The long-term performance of most of these schemes have been modest (see table below).

While retirement funds do provide some conveniences, investors should note that they can also invest in regular fund categories over a long term to build a retirement corpus.