Mutual Fund Pension Plans

20plan.png /%A pension plan is an annuity which is bought to generate income during retirement. Functional similarity of these annuities to pensions is the reason why they are also called pension plans. Pension plans are preferred by investors who receive a large sum as superannuation benefit post retirement. Investor chooses to invest the proceeds in a pension plan so as to generate safe and regular income for the rest of his life. Various agencies provide pension plans and in this article we will focus on pension plans being offered by Mutual Funds.

What is Mutual Fund Pension Plan?

Mutual funds also have started offering pension plans which are hybrid in nature having investment in both debt and equity component. Mutual Fund pension plans collect money from several investors and invest the pooled money in equity and debt markets. Equity exposure is in the range of 40% which is lower as compared to balanced funds (65% to 70%). Investors can either invest lump sum amounts or can choose the route of systematic investment plan (SIP).

 

How Mutual Fund Pension Plans Operate

Mutual fund pension plans operate like a mutual fund scheme in which investors invest throughout their working life. Pooled money is invested into debt and equity which generates income post retirement. Withdrawal of funds is discouraged before you retire and standard retirement age is taken as 58 years. Post-retirement, based on one’s discretion, investor can make a lump sum withdrawal or opt for regular income (annuity payments). The balance units post withdrawals in either case remain invested and continue to grow.

The Good and Bad

Investment in mutual fund pension plans makes you a disciplined investor and your investment has great capital appreciation potential.   As the investment corpus has 40% exposure in equities, handsome returns can be realised in long term. Having said that, heavy exit load in case of pre withdrawal, taxation of returns make the investment slightly unattractive. This negativity is beaten by huge margin if the equity investment performs well in the long run.

Tax Implications

There is a tax benefit attached to mutual fund pension plan investment which is underutilized by investors. These plans provide tax rebate up to Rs 1 lakh under Section 80C. If you opt for the tax rebate, you will have to abide by a 3 year lock in period as is applicable for other schemes.

Who Should Invest?

Mutual fund pension plans are pension plans with a difference. Most of the other options used for retirement planning . such as the PPF, NSC and tax-saving FDs, are pure debt instruments while these plans have kicker in the form of equity portion. Although this equity kicker makes it risky, it comes with huge capital appreciation potential. All the pure debt instruments mentioned above offer a return in the range of 8% which might not be good enough to build a sizeable corpus as inflation will erode the corpus in the long run.

Mutual fund pension schemes, on the other hand, offer inflation hedge in the form of equity investment having potential to offer much higher returns. If you have slightly higher risk appetite, you should opt for mutual fund pension schemes as the performance of existing plans have been more than satisfactory.

About the Author.

The author Bimlesh Singh is a financial advisor. He holds a Bachelor’s degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

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