Retirement funds can nudge investors to save: Who should opt for them?

The disciplined ones can accumulate for this crucial goal, using equity, debt funds, and NPS

Eight leading mutual fund (MF) houses already offer retirement plans. SBI MF, the country’s largest fund house by assets under management, joined their ranks recently when it launched the SBI Retirement Benefit Fund (SBIRBF). 
 
Multiple fund options
 
These are open-end funds that come with a lock-in, which could be either five years or a certain age (65 in SBIRBF), whichever comes earlier. Each fund offers several plans — some fund houses offer two and some up to four. Each plan has a certain asset allocation.
 
In the case of SBIRBF, the four plans are: aggressive (equity allocation 80-100 per cent); aggressive-hybrid (equity allocation 65-80 per cent), conservative hybrid (debt allocation 60-90 per cent), and conservative (debt allocation 80-100 per cent).
 
Customise your plan
 
SBIRBF offers the ‘My Choice’ option, under which the investor can select a plan and stick to it for as long as he wants to. Also available is the auto-transfer option wherein his/her assets get moved to a lower-risk plan at a specific age. He/she can stay in the aggressive plan up to 40; in the aggressive hybrid plan from 40-50; in conservative hybrid from 50-60; and in conservative above 60.
 
Says Gaurav Mehta, fund manager, SBI MF, who will manage SBIRBF: “The four plans cater to different age and risk profiles. As the investor moves along them, his/her equity allocation reduces, allowing him/her to lock in gains by moving to a more conservative plan in the later stages of life.”
 
These branded, solution-oriented funds, offer another advantage.
 
“Investors tend not to use them for purposes other than retirement. On the other hand, if they own a generic hybrid fund, they can withdraw money from it to fund other goals,” says Vishal Dhawan, chief financial planner, PlanAhead Wealth Advisors.

Investors can also use the systematic withdrawal plan (SWP) option in them. In case of investors in the higher tax brackets, proceeds from SWP are taxed more favourably than interest income from other pension products. 
 
Limited to a single fund house
 
The investor should ideally be diversified across fund managers in his/her retirement portfolio. “One should ideally go with the best fund manager in each asset class instead of investing one’s entire retirement portfolio with a single fund house,” says Dhawan.
 
The expense ratios of such hybrid funds also tend to be higher than if the investor were to use a combination of an active or passive equity fund and a short-term debt fund.
 
Who should opt for them?
 
Investors who tend to liquidate their assets for other goals may go for these funds. Those who chase the highest-performing asset class should also opt for their diversified portfolios (along with the benefit of rebalancing).
 
Investors who can take their own asset allocation decisions, alter it according to age and changing risk profile, rebalance periodically, and not withdraw from their retirement corpus for other goals may build a retirement portfolio using a mix of simple active and passive diversified equity funds, and debt funds.
 
“A combination of open-end diversified equity and debt funds and National Pension System is a good alternative for building your retirement corpus,” says Dhawan.