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September 28, 2012

When we talk about retirement, the few options that come to mind are PPF, NSC, FD etc. However, the pension funds offered by mutual fund houses rarely get a mention. Financial expert Renu Pothen put a light on the various Pension plans offered by MF houses that can make as a good option for investors who are looking to plan their golden years

Author : Dr. Renu Pothen



Author: Dr. Renu Pothen, Research Head, India

This article was published in on Tuesday, 25 September 2012

Recently, a 25 year old sent us a query on how he should go about planning for his retirement and what are the funds that should be included in his portfolio to achieve the above said target. This came as a pleasant surprise as the questions that are normally posed by investors are on the lines of “How much should I invest every month to buy a home, car or for child’s education, marriage, etc”.

Retirement planning is a very important aspect of the financial planning process and investors are definitely beginning to realize the importance of the same. This can be seen from the fact that during the year 2011-12, around 16% of the total financial savings of the household sector is being diverted into provident and pension funds as per RBI's Annual Report 2011-12. This is not considering the amount of investments that will be going into insurance schemes and other options with the intention of building a retirement corpus.

For those investors who have still not thought about retirement, I am putting forward a simple math which will show the importance of planning for retirement from a young age. For instance, if an investor starts investing INR 5000 every month, from the age of 25 years and if we assume that the retirement age is 55 years, then the retirement corpus accumulated after 30 years would be in the range of INR 1 crore. This is assuming a conservative rate of 10% annually. On the other hand, if the investor started investing INR 5000 every month from the age of 35 years, then at the rate of 10% per annum, the accumulated corpus would be INR 37 Lakh. These numbers speak for themselves and hence should ring a bell in the minds of all those investors who have not yet planned for leading a peaceful life during their retirement years.

When we talk about retirement, the few options that come to mind are Public Provident Fund (PPF), National Savings Certificate (NSC), Insurance Plans, Fixed Deposits, etc. However, the pension funds offered by mutual fund houses rarely get a mention as can be seen from the low corpus that these funds have garnered in a span of more than 15 years. In this context, my endeavour is to touch upon these schemes and let investors know the strategies that they follow and their track record till date.

UTI Retirement Benefit Pension Fund was the first fund to be launched in this space in 1994 followed by Templeton India Pension Plan in 1997. After a gap of 15 years, Tata Mutual Fund came out with a retirement savings fund in November 2011, with an altogether different positioning as compared to the veterans. As far as the investment strategy goes, the funds from UTI and Templeton Fund houses follow a similar strategy i.e, they invest around 40% of their assets in equities and the rest is allocated among debt instruments. As for the equity allocation, majority of the portfolio is concentrated in large cap stocks and on the fixed income side, corporate bonds have received the maximum allocation. However, Tata Retirement Savings Fund has taken a different route as far as investing strategy is concerned as can be seen from the fact that it has three options. In the progressive plan, the minimum equity exposure is 85%, while in the moderate and conservative plans; the minimum exposure to equities is in the range of 65% and 0% respectively. This scheme has a unique auto-switch facility whereby the investments made in the progressive plan will be automatically switched to moderate plan, once the investor attains the age of 45 years. Similarly, at the age of 60 years, the investments in the moderate plan will be shifted to the conservative plan.

The biggest selling point that UTI Retirement Benefit Pension Fund and Templeton India Pension Plan have is that after the Equity Linked Savings Schemes (ELSS), these are the only 2 funds in the mutual fund industry, which are considered as tax saving instruments under Section 80C of the Income Tax Act. However, these funds have not been able to attract much of investors’ attention as there is very less awareness on these products and the performance has definitely not been upto the mark. Hence, fund houses will have to pull up their socks and put better numbers on the table so as to attract more investors into these schemes. A restructuring of the same would also be a step in the right direction to bring them into the limelight. A disadvantage that these funds have is that if an investor is entering into the same at the age of 25, then more than 50% of his corpus is being locked in debt instruments. However, normally an investor of this age should actually have maximum allocation to equity funds. This is the point on which the Tata fund scores over the other two. A restructuring on the above lines would also make it more attractive as compared to other retirement options available in the market.

To conclude, pension funds offered by the mutual fund houses are definitely a good option for investors who are looking to plan for their golden years. However, veterans in this category will have to do some restructuring so that investors can confidently park their savings for retirement. Finally, Tata Retirement Savings Fund looks promising, as this is one of the few pension schemes which have a maximum exposure to equities in the initial stages and later on moves into the fixed income instruments. However, the scheme is just about to complete 1 year and hence there is not much past performance to ride on.

Disclaimer:iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.


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