Swamy, a 27 years old professional is looking to invest for his post-retirement years. He wants to invest in a good pension plan so as to generate safe and regular income for the rest of his life. There are various options used for retirement planning, such as the PPF, NSC and tax-saving FDs but Swamy is interested in exploring the pension plans being offered by Mutual Funds. So he meets Rao, a mutual fund advisor to understand the various options available to him.
Rao: Well, when it comes to retirement planning, there are two stages. The first is the accumulation stage where one has to start saving and investing for creating a retirement corpus and the second is the distribution period in which the corpus created is used to generate income for rest of life.
Swamy: Ok. So what about Mutual Fund Retirement Plan?
Rao: Along with so many other investment options, mutual funds help in amassing a corpus required for leading a peaceful retirement life. Mutual funds generally invest in equities and fixed income products. Retirement plans of mutual funds are categorised under ‘Solution oriented schemes’. These schemes are floated by various Asset Management Companies and carry names so that one can easily identify a scheme. All schemes are diversified across sectors and market caps.
Swamy: Are mutual funds’ retirement products better when compared with traditional products?
Rao: The better returns offered by these funds can enhance the retirement corpus and can form investment avenue for retirement planning along with the other traditional options. Most of the mutual fund retirement schemes are debt-oriented hybrid schemes that take some exposure to equity normally 25% to 40%. But recently there are plans launched with flexibility to invest 100% into equity. The presence of equities gives these investments better return prospects over traditional products.
Swamy: How does Mutual Fund retirement plans work?
Rao: Here one doesn’t have to buy an annuity like traditional insurance plans. The investors can invest a lump sum or small amounts systematically every month to attain a corpus at the time of retirement. After retirement, one may opt to systematically withdraw required amount from this corpus (on a monthly basis) to meet the post retirement expenses. Retirement funds normally have a lock in period of 5 years.
Swamy: How can I choose best mutual fund plan for retirement?
Rao: Retirement plans in mutual funds differ only in the allocation of equity and debt. If one investor is capable of shouldering high risk, then he can opt for scheme with higher allocation in equities. But if one is near to retirement age, it is better to opt for debt oriented plans to stay safe.
What are the tax implications?
Under these plans, same as ELSS MF schemes, one can avail tax benefit under Section 80 C up to Rs.1,50,000 of investments made under these schemes.
Gains on equity mutual fund plans held for more than one year are treated as long-term capital gains (LTCG) and taxed at 10 per cent. However, this gain is exempt up to Rs 1 lakh in a financial year.
For debt plans, short-term gains are added to your income and are subject to tax as per the income tax slab. Long term capital gains are taxed at the rate of 20% after indexation.