Main Features of retirement mutual fund schemes
Many mutual fund houses in India, for example, HDFC, Axis, Tata and Nippon, have launched their retirement schemes in the past few years. While the features differ from scheme to scheme, some standard features of these schemes are as follows:
- Variants: These schemes have 2-3 variations based on the equity allocation in the scheme. For example, HDFC Retirement Savings Plan has three variants: equity, equity-hybrid, and debt-hybrid.
- Tax treatment: In case of withdrawal, the tax treatment depends on the equity allocation of the scheme. If the fund does not constitute an equity-oriented fund per income tax rules, the taxation will be per the rules for debt funds.
- Lock-in period: Schemes in this category come with a lock-in period of 5 years. There is no exit load on withdrawing money after 5 years.
- No requirement to purchase annuity: You can withdraw full money after the lock-in period. This is unlike pension plans of insurance companies, where you need to purchase an annuity out of the withdrawal proceeds.
- Mode of investment: You can invest lumpsum or through SIP. Both direct and regular plans are available.
- Insurance Cover: Some schemes bundle group life insurance cover with these schemes.
What you should keep in mind before investing in retirement mutual fund schemes
You should keep in mind the following points before investing in retirement mutual fund schemes:
- Diversification across fund houses and fund management styles: Putting all your money in one retirement mutual fund scheme is not a good idea. It is a good idea to divide your investment into 2-3 schemes, preferably having a different fund management style. This helps to reduce the fund manager and style risk.
- Don’t miss out on other promising investment avenues: Mutual funds are a great way to save for retirement. But don’t let that stop you from considering other promising avenues like NPS and PPF. PPF is entirely tax-free, comes with a government guarantee and is a valuable addition to the fixed-income portion of your retirement portfolio. Investment in NPS gives you an additional deduction of up to INR 50,000 over and above the deduction under Section 80C of the Income Tax Act.
- Check the tax status of these schemes: It is important to note that not all these schemes qualify for a tax deduction at the time of investment. Only select schemes like HDFC Retirement Savings Fund (launched in 2016) have been notified by the Income Tax Department for tax benefits under the Income Tax Act. Many of the recently launched schemes by various fund houses do not carry any tax benefit on investing.
- Lock-in period can backfire in dismal performance: A lock-in brings necessary discipline for long term financial goals. But it can also backfire since you don’t have an option to exit the scheme before 5 years in case of poor performance. In this context, it is much better to invest in open-ended funds wherein you can shift anytime if you note a dismal performance.
- Asset Allocation: While these schemes have different variants depending on the investor’s risk profile, most likely as an investor, you may have other investments like PPF, fixed deposits, etc., allocated towards this goal. This can make it very difficult to monitor asset allocation over the long term. Hence, it is better to have a separate allocation to equity and debt funds as per your asset allocation rather than have a one size fits all approach.
- Group life insurance cover: Some of these schemes provide you with group insurance coverage. However, these insurances are only valid till the time you are invested in the scheme. A better way is to have your own insurance cover and not fall for these products only because of the temptation of group life insurance coverage.