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\n\tWhat are retirement schemes?<\/p>\n
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\n\tRetirement schemes are solution-oriented mutual funds designed for long-term retirement planning. They come with a mandatory lock-in of five years or until retirement, whichever is earlier. \u201cThese funds typically combine equity and debt to balance growth and capital preservation over time,\u201d says Gaurav Kulshrestha, chief investment officer (CIO), Nexedge Capital.<\/p>\n
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\n\tMost retirement funds in India currently operate like hybrid funds, with asset allocation moving within pre-set bands for equity and debt. Fund managers adjust allocations within these bands according to market conditions. In some schemes, the portfolio becomes less risky and more debt-oriented as retirement approaches.<\/p>\n
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\n\tDifferent from diversified equity schemes<\/p>\n
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\n\tOne major difference between retirement schemes and diversified equity schemes is that the former work with sticky capital. The lock-in reduces redemption pressure on the fund manager.<\/p>\n
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\n\t\u201cUnlike diversified equity funds that primarily focus on generating higher returns, retirement schemes seek to build a more stable corpus while balancing risk,\u201d says Vinayak Magotra, product head and founding team, Centricity WealthTech.<\/p>\n
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\n\tImpose behavioural discipline<\/p>\n
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\n\tA key advantage of these funds is the behavioural discipline they impose. \u201cThe statutory lock-in prevents retail investors from panic-selling during market downturns,\u201d says Archit Doshi, senior vice president, PL (Prabhudas Lilladher) AMC. It allows compounding to work without disruption from short-term reactions.<\/p>\n
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\n\tSticky capital also helps fund managers reduce cash drag and take illiquid, high-conviction, long-term bets without worrying about sudden redemptions during market corrections. \u201cFund managers are able to capture the illiquidity premium by making long-term value bets that can enhance alpha generation,\u201d says Doshi.<\/p>\n
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\n\tSome of these funds also offer multi-asset diversification by including gold in the portfolio, which helps insulate the corpus against severe macroeconomic shocks.<\/p>\n
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\n\t\u201cSpecific notified retirement funds offer tax efficiency by allowing investors to claim deductions of up to \u20b91.5 lakh under Section 80C,\u201d says Doshi.<\/p>\n
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\n\tTheir equity exposure also gives them the ability to beat inflation over the long term. \u201cStructured asset allocation reduces the need for investors to actively manage shifts between equity and debt,\u201d says Magotra.<\/p>\n
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\n\tInvestors do not need to rebalance the portfolio or manage asset allocation themselves. More of these funds are also expected to resemble life-cycle funds that follow a glide path and automatically shift from equity to debt as retirement approaches.<\/p>\n
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\n\t\u201cSebi\u2019s push towards life-cycle-based structures is a meaningful evolution,\u201d says Kulshrestha.<\/p>\n
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\n\tLimit access to liquidity<\/p>\n
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\n\tThe biggest drawback of these funds is the lock-in of five years, or until retirement, whichever is earlier. This limits flexibility and reduces access to liquidity.<\/p>\n
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\n\t\u201cInvestors cannot access their money even in emergencies,\u201d says Feroze Azeez, joint CEO, Anand Rathi Wealth. He points out that many of these funds also have higher expense ratios than diversified equity funds. The fund manager, not the investor, decides the asset allocation.<\/p>\n
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\n\t\u201cAn investor may want a higher equity allocation even near retirement, given their risk profile, but the fund manager will turn conservative because of the category\u2019s characteristics,\u201d says Azeez.<\/p>\n
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\n\tThese funds suit investors who recognise their own behavioural weaknesses. \u201cThey are especially suited for those prone to frequent churning or panic-selling during volatility,\u201d says Doshi.<\/p>\n
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\n\tPeople in their 30s and 40s who want a fill-it, shut-it, and forget-it approach and prefer to outsource asset allocation and risk mitigation may consider them.<\/p>\n
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\n\tInvestors nearing the end of their careers may benefit from conservative variants that prioritise capital preservation over aggressive growth.<\/p>\n
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\n\tPeople who need high liquidity should avoid these locked-in structures.<\/p>\n
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\n\t\u201cFor sophisticated investors who already manage diversified portfolios with defined asset allocation strategies, retirement funds are not critical,\u201d says Kulshrestha.<\/p>\n
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\n\tRetirement funds versus NPS<\/p>\n
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\n\tRetirement mutual funds offer greater flexibility in access to funds and are easier to understand.<\/p>\n
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\n\t\u201cThe National Pension System (NPS) is a lower-cost product and offers investors an earmarked tax deduction of \u20b950,000,\u201d says Harsh Vira, chief financial planner and founder, FinPro Wealth.<\/p>\n
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\n\tIt is suitable for salaried individuals and long-term investors who are comfortable locking in money for retirement and do not need regular liquidity.<\/p>\n
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\n\tMoney in NPS stays locked in till the age of 60, and a portion must go into an annuity. \u201cNPS is more restrictive in terms of withdrawals and exit rules, which may not suit all investors,\u201d says Jyoti Prakash Gadia, managing director, Resurgent India.<\/p>\n
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\n\tRetirement funds versus deferred annuity schemes<\/p>\n
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\n\tA retirement mutual fund is a market-linked accumulation product. \u201cIt is suitable for investors who are still in the corpus-building stage and want their money to possibly grow over time through equity and debt market exposure,\u201d says Gadia. These funds are better suited to younger or middle-aged investors who still have time before retirement. \u201cInvestors should be able to absorb some market ups and downs,\u201d says Vira. The main advantages of retirement funds are growth potential, transparency, and flexibility. \u201cThey can help investors build a larger retirement corpus over time and can beat inflation, but returns are not guaranteed,\u201d says Vira.<\/p>\n
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\n\tDeferred annuity schemes offered by insurers serve a different purpose. \u201cTheir objective is income certainty rather than wealth accumulation,\u201d says Gadia. They offer a fixed, regular income after retirement with no market risk, but lower returns.<\/p>\n
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\t\u201cThese products are generally better suited for conservative investors who prioritise guaranteed income over return maximisation,\u201d says Gadia.\u00a0<\/p>\n
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\n <\/p>\n
\n\tThe writer is a Mumbai-based independent journalist<\/p>\n","protected":false},"excerpt":{"rendered":"\u00a0
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