Should you opt for the new retirement funds?

Between the new schemes and existing pension funds from mutual fund houses, the latter seems like a better option for conservative investors

Mutual fund (MF) houses are lining up new retirement funds that combine a host of benefits such as tax breaks and asset allocation strategies that could supplement an individual’s income in their twilight years. Not only do these funds come with a higher exit load to dissuade investors from exiting early, they also have an initial lock-in. Nevertheless, should these be a part of your retirement investments?

First let’s take a look at what these funds offer. HDFC MF has applied to Sebi for a Retirement Savings Fund which is an open-ended notified tax savings-cum-pension scheme with no assured returns. Reliance MF is also looking at a similar product — Reliance Retirement Fund. These schemea could be eligible for tax breaks subject to the funds being notified by the Central government.

HDFC MF’s new fund comes with four plans – equity, hybrid-equity, hybrid-debt, and an income plan. The equity plan will invest a minimum of 80 per cent of the scheme corpus in equity and the remaining in debt. On the other hand, Reliance has a lock-in of five years and comes with an exit load of one percent if an investor redeems from the fund before the age of 60. Exit loads in equity diversified funds from MFs are usually nil if you exit after a year.

Pramerica MF, too, plans to launch a similar product without any tax breaks. “Tax benefit may not always be important when saving for a goal like retirement, which is one of the biggest priorities of individuals as per one of our surveys. It will start with a minimum 85 per cent equity allocation, which will decrease by two per cent every year till the time it reaches 20 per cent,” explains Vijay Mantri, MD & CEO, Pramerica Asset Managers. Here too exit loads are higher if you redeem early. Mantri feels the retirement funds have a place in the retirement portfolio for product diversification.

On the other hand, UTI MF and Franklin Templeton are currently offering pension funds. These are hybrid debt funds which invest up to 40 per cent in equity and the rest in debt. As these schemes are for your retirement planning, they come with a huge exit load to dissuade investors from exiting prematurely. For instance, UTI MF has an exit load of five per cent if the investment is redeemed within one year. Franklin’s scheme is notified under Section 80 C with a lock-in period of three years.

Certified financial planner Malhar Majumdar feels the retirement funds are more in line with asset allocation fund which are already there in the industry. “These schemes seem to be in line with the existing pension funds, and therefore may not offer any differentiation as compared to existing schemes,” he says.

Experts also say that if one has to choose between new pension schemes and the existing ones, the latter could work out a tad better for conservative investors or for those who have a smaller investment horizon. Or, such investors could choose New Pension System (NPS) for limited equity exposure and a much lower cost structure.

For high risk-taking investors, experts advise investing in an equity diversified fund via the systematic investment plan (SIP) route. As you approach retirement, shift the money to a monthly income plan or a debt fund for capital safety. A mix of equity and debt instruments can earn better returns.