Should you buy Mutual fund (MF) pension plans?
Mutual fund pension plans are those whose objective is to grow your money and provide pension (regular income) during your retirement. What are the MF pension plans and should you opt for such MF pension plans? What are its features and risks involved in such plans?
What are MF pension plans?
MF pension plans provide dual benefit of getting tax savings under section 80/C (Upto Rs 1 lakh) and provide retirement savings (Except for Tata retirement savings fund). Currently there are three schemes which are offering these MF pension plans.
- UTI Retirement Pension plan
- Templeton India pension plan
- TATA Retirement savings fund
MF Pension plans existence:
Out of these 3 MF pension plan schemes, UTI Retirement pension plan and Templeton India Pension plan are existing from 1990’s and also provide tax saving advantage under section 80/C (up to Rs 1 lakh). Tata retirement savings fund has been floated just couple of years ago which comes without tax saving advantage. All three offer systematic investment plans.
Asset allocation of these MF pension plans:
UTI retirement pension plan and Templeton India pension plan invest 40% in equity, mostly into large cap stocks and balance of 60% in debt related instruments such as corporate bonds and government securities. Tata retirement savings fund on other hand offer 3 options. Progressive Plan, which invest up to 85% in equity and balance in debt portion. This plan is applicable for an investor up to 45 years of age. Moderate and conservative plan where it invests 0 to 65% in equity and balance in debt related instruments. The moderate plan would be applicable for an investor between 45 years to 58 years of age. After retirement, the plan shifts to conservative mode.
What is the cost of exit load?
Exit from such MF pension plans costs heavy for investors. While you go for tax saving options, you have to anyway lock the investments for 3 years lock-in period.
For UTI retirement pension plan, if you are choosing to invest without tax saving option and want to redeem these mutual fund investments, you need to pay a hefty cost of 5% within one year and 3% if you withdraw 1-3 years and 1% if you want to redeem after 3 years.
For Templeton India pension plan, there is flat 3% exit load up to 58 years of age.
Similarly Tata retirement savings fund, there is an exit load of 3% (0-3 years) and 1% after 3 years.
However no exit load is applicable, if you want to take out your investment after 58 years of age for any of the above pension funds
What about the withdrawal after retirement?
You can use systematic withdrawal plan either by monthly, quarterly, half yearly or annually to get fixed income. You can also withdraw entire investment without any exit load.
How does this compare with other tax savings or retirement options?
Other tax saving options like PPF, NSC of tax saving FD’s provides around 8% annual return (apart from tax benefit) which would be very less post considering inflation effect. The returns on MF pension plans are higher comparing to these investment options provided you invest for long term.
How does this compare with other insurance pension plans?
If you look as investment or retirement objective, MF pension plans has more weight age comparing to insurance pension plans. Insurance pension plans charge higher charges in early stages of insurance plans.
Drawbacks of MF pension plans
It is not compulsory that every year you should invest in MF pension plans. You should invest a minimum amount of Rs 10,000. This plan does not mandatory force investors to do retirement planning every year.
Unlike other tax savings or retirement investment option (PPF, NSC etc.,), there are no guaranteed returns.
Currently there are only 3 MF pension plans, two of them exist from long time and one has been added couple of years back. Hence there is no much competition among these mutual fund schemes to provide better services.
Current returns over the last 5 years
- UTI Retirement Savings – 7.5% p.a. annualised returns in last 5 years
- Templeton India pension plan – 6.6% p.a. annualised returns in last 5 years
- TATA Retirement savings fund
– Progressive – 5.3% p.a. in last one year
– Moderate – 5.8% p.a. in last one year
-Conservative – 5.8% p.a. in last one year
Concluding thoughts: I do not see much difference between MF pension plans and balanced mutual funds. The balanced mutual funds also invest similar portion in equity and balance in debt related instruments. The end investment objective may be different and you should invest for long time on these MF pension plans to gain more returns. Alternatively you can create your own investment asset allocation and invest in largecap, diversified, debt mutual funds instead of investing in these MF pension plans.
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