Do you need dedicated mutual funds for your retirement planning?

Everyone is planning for retirement these days. That too, very early in life. ETmutualfunds.com receives many messages on our official Facebook page from young investors asking whether they have chosen the right mutual fund schemes to save for their retirement. Many seem to believe that they need some special mutual fund schemes, something like a retirement mutual fund scheme, for the job.

Guess what? There are indeed retirement mutual fund schemes available in the market. Seven asset management companies, including HDFC AMC, Principal MF, Franklin India MF, Tata MF Reliance Mutual Fund and UTI AMC, currently offer dedicated retirement schemes that you can use to build your nest eggs. The Retirement Funds category has offered an average return of around 9.2 per cent, 13.8 per cent and 11.32 per cent in three-, five- and 10-year time periods respectively.

Sebi defines a retirement scheme as an open-ended retirement solution oriented scheme having a lock-in of five years or till retirement age, whichever is earlier. These schemes usually come with a lock-in period and they also qualify for tax deductions under Section 80C.


But do you really need them?
Most mutual fund advisors do not seem to be much in favour of these solution-oriented plans, especially for their young clients.

“We do not recommend investors to go for retirement mutual funds. Young investors especially should go for aggressive equity funds as they have time in their hand. Also, they must be investing in provident fund, which will keep increasing with increase in their salary over time. This will take care of the debt portion for them,” says Sridevi Ganesh, CFP, Chamomile Investment Consultants.

Many mutual fund advisors believe that investors can choose an equity scheme based on their risk profile to create a retirement corpus. For example, an aggressive young investor can choose a midcap scheme, while his conservative counterpart can bet on large cap schemes or aggressive hybrid scheme. Similarly, a moderate risk-taker can bank a multicap scheme with a good performance record to create wealth over a long period.

Mutual fund advisors say conservative investors or those who lack discipline may choose these funds if they cannot manage their portfolio allocation on their own.

“Investors who do not have advisors, retirement funds make sense because there is a lock-in and so they will stay invested for the long term,” says Shweta Jain, founder and CEO, Investography.

“Also, when a name is associated with the fund, an investor will generally use the fund for that purpose only. So, it makes sense for those who lack discipline,” she adds.

Most of the retirement plans are managed as balanced funds or hybrid funds with an exposure to both equity and debt. According to mutual fund advisors, pure equity schemes that invest their entire corpus in stocks are like to generate more returns that these hybrid schemes. They claim investors will be better off with a combination of equity and debt as compared to the retirement specific mutual funds.

“Mostly, you will not use your whole retirement corpus at one go. So, retirement funds are expected to give you moderate returns in the long term. Moreover, equity funds will attract a capital gain tax of 10 per cent, whereas, if we look at provident fund and public provident fund, the returns are tax free. This way, the post-tax returns in an equity +debt combo will be better than those on most of the retirement funds which are managed as hybrid schemes,” explains Ganesh.