Investors across age groups and risk appetite can invest in these schemes, experts tell Priyadarshini Maji and Tinesh Bhasin.
Illustration: Uttam Ghosh/Rediff.com
When an investor wants to put money in equities for tax-savings, equity-linked savings scheme (ELSS) is an obvious choice. But rarely anyone thinks of retirement schemes from mutual funds.
In this long-term instrument, too, investors get Section 80C, but they have a longer lock-in of five years.
While they may appear to be similar to ELSS, fund houses say they serve two different purposes.
"Retirement funds are for the long-term goal of preparing for one's retirement. ELSS is for wealth creation along with tax savings. Investors looking out for a dedicated investment avenue for their retirement savings should look at retirement funds, as they are created keeping both pre- and pose-post retirement needs," says a Tata Asset Management spokesperson.
Some fund houses have different plans under the retirement funds to address different risk appetites and life stage of investors.
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 already retired.
"If a person is going to need 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 investor withdraw the fund. After three years, the tax is low as one gets indexation benefit," says Malhar Majumder, partner and consultant, Positive Vibes Consulting and Advisory.
If an investor is in his thirties or forties, employee provident fund would be significant.
If there's a shortfall in Section 80C and you can look at equity or equity-oriented retirement scheme if the goal of the savings is to create a retirement kitty.
Investment advisors also say that those who don't like 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 as retirement fund as a category is 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 five years. But earlier, the government didn't offer tax benefit on these schemes until 2014.
The lack of track record was one deterrent for investors earlier. But the performance of most these funds are at par with its other peers and they have also fared better than their benchmark.
If you look at three-year returns from equity funds in 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 is at par with other options available to investors.
"But these funds are also not popular because they charge an exit load until investors turn 60 to discourage people from exiting early," says Himanshu Srivastava Senior Research Analyst, Manager Research, Morningstar India.