Go for retirement MFs, save on tax

Make your choice based on age and risk profile

Come March 31, and it is tax saving time. Some of the investment options that qualify for deduction under Section 80C on the debt side are five-year tax-saving fixed deposits from banks and post office and public provident fund (PPF). Among equity investments, ELSS is the option that comes to mind first. But there are also the retirement savings schemes from mutual funds that give the benefit of saving on tax as well as saving for long-term goals.

Retirement funds

These schemes are basically solution-oriented funds offering retirement planning options for investors, also qualifying for deduction under Section 80C. They are HDFC Retirement Savings-Equity, HDFC Retirement Savings-Hybrid-Equity, HDFC Retirement Savings-Hybrid-Debt, Reliance Retirement Fund-Wealth Creation and Reliance Retirement Fund-Income Generation, Franklin India Pension and UTI-Retirement Benefit Pension Plan.

Retirement funds cater to the needs of investors based on their age and risk profile. For instance, HDFC Retirement Savings Fund-Equity and Reliance Retirement Fund-Wealth Creation follow an aggressive strategy, investing more than 85 per cent in equities. This may be useful for younger investors who have a long time to go before they reach retirement age.

HDFC Retirement Savings-Hybrid Debt and Reliance Retirement Fund-Income Generation follow a conservative strategy, investing around 20-25 per cent of their assets in equities. This may be suitable for investors nearing retirement. HDFC Retirement Savings Fund-Hybrid Equity has invested around 65-70 per cent in equities. Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan have allocated around 40 per cent in equities and the rest in debt (partly in AA and below-rated debt). These may be suitable for investors with medium risk profile.

Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan have long history. They have managed to perform well over one-, three-, five- and 10-year periods. Over the last 10 years, they have delivered a compounded annual return of 8.7 and 9.4 per cent, respectively. The retirement funds from HDFC and Reliance stables are more recent launches. They have, however, delivered notable returns since launch, since the market itself has been on a bull run. Over the last one year, HDFC Retirement Savings Fund-Equity and Reliance Retirement Fund-Wealth Creation have delivered 34 per cent each.

Lock-in period

Like ELSS funds, which have a three-year lock-in, retirement funds are also subject to a lock-in. However, the lock-in period varies across funds. For funds belonging to HDFC and Reliance mutual funds, it is five years. Meanwhile, Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan are currently subject to a lock-in period of three financial years. However, considering the recent SEBI mandate of reclassification of funds, the lock-in period for these two funds are expected to be increased to five years.

Since it is meant to be a long-term saving, most retirement funds discourage early withdrawal of the corpus. HDFC and Reliance funds, for instance, charge an exit load of 1 per cent if investments are redeemed after the lock-in, but before 60 years of age.

Investors must also note the tax aspect. Equity-oriented funds (funds which invest more than 65 per cent in equities) will now attract 10 per cent long-term capital gains (LTCG) tax if they are sold after 12 months. Debt-oriented funds attract LTCG tax if sold after 36 months (here, five years due to lock-in), of 20 per cent with indexation.

Unlike ELSS that invests fully in equities and requires a higher risk appetite, some of the retirement funds are debt-oriented and suitable for investors with low to medium risk appetite. It can supplement other retirement savings options such as NPS. However, investors need to keep in mind that some of the funds here are new and don’t have a long track record of steady performance.

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