Building a superannuation corpus

With multiple options, investors across age groups and with varying degrees of risk appetite can invest in retirement funds

When an investor wants to put in money in equities for tax savings, equity-linked savings schemes (ELSS) are an obvious choice. But rarely does anyone think of retirement schemes of mutual funds. In this longterm instrument, too, investors get Section 80C benefits, but they have a lockin of five years compared to three in the ELSS.

While they may appear to be similar to the ELSS, fund houses say the two products have different purposes. “Retirement funds are for the long-term goal of preparing for one’s retirement. The ELSS is for wealth creation along with tax savings. Investors looking for a dedicated investment avenue for their retirement savings should look at retirement funds, because they are created keeping both pre- and post-retirement needs in mind,” said a Tata Asset Management spokesperson.

Some fund houses have options under retirement funds for investors in accordance with the levels of risk they are willing to take and their age. Tata Asset Management and HDFC Mutual Fund have three — equity plan, debt-oriented hybrid fund, and equity-oriented hybrid fund.

Many financial planners have been using debt-oriented retirement funds for individuals who are either close to retirement or have retired. “If a person needs the money after four-five years, we suggest debt-oriented retirement funds. Along with tax benefits at the stage of investment, they also don’t let investors withdraw the fund.

After three years, the tax is low because one gets indexation benefits,” said Malhar Majumder, partner and consultant, Positive Vibes Consulting and Advisory.

If an investor is in his thirties or forties, the employee provident fund would contribute a significant portion to the Section 80C benefit. If there’s a shortfall, one can look at equity or equity-oriented retirement schemes if the goal of the savings is to create a retirement kitty. Investment advisors also say that those not interested in the 50 per cent equity cap in the National Pension Scheme can also look at retirement funds as an alternative. These funds are, however, not yet popular because retirement funds as a category are relatively new. Most funds don’t even have a five-year track record. Only funds from UTI Mutual fund and Tata Mutual Fund have been in existence for over five years. The government didn’t offer tax benefits on these schemes until 2014 and that's why only a few investors looked at these schemes in the past. The lack of track record was another deterrent for investors earlier. But the performance of most of these funds are at par with their peers and they have also fared better than their benchmarks.

If one looks at three-year returns from equity funds in the retirement category, Reliance Retirement Fund and Tata Retirement Savings (progressive plan) have 10.68 per cent and 13.25 per cent returns, respectively. When you compare this to average returns from multi-cap funds, which are at 11.09 per cent, and even ELSS, at 10.97 per cent, the performance of retirement funds appears to be at par with other options for investors.

“But these funds are not popular also because they charge an exit load until investors turn 60 to discourage people from exiting early,” said Himanshu Srivastava, senior research analyst, manager research, Morningstar India.