What Are Retirement Mutual Funds And What Are The Benefits Of Investing In Them?

Mutual funds

During our working lives, one of our top financial priorities should be retirement planning. Retirement mutual funds are open-ended retirement savings plan that can help you save when you retire. Before you decide, know how retirement mutual funds work, the benefits, tax working and if you should invest in them. You can learn all about the availability of mutual funds designed specifically to meet your needs for planning on retirement in this blog. 

Read on!

What are Retirement Mutual Funds?

Retirement mutual funds are open-ended retirement schemes with a lock-in period of 5 years or till retirement age. These are ideal for investors looking for a comprehensive solution that ensures steady returns after retirement. 

What are the Types of Retirement Mutual Funds?

Here are types of retirement mutual funds in which individuals can pool their money:

1. Debt mutual funds

These funds are an ideal option for retirement planning for conservative or risk-averse individuals. One can be sure about stable returns at low risk. These can help in leading a stress-free life after retirement.

2. Equity mutual funds

 These invest in equity and equity-related instruments of companies. As equities are highly volatile, these funds carry high risk. However, their return potential is higher than debt funds.

3. Hybrid funds

Hybrid funds invest in both debt and equity instruments. Depending upon the asset allocation, these funds can provide high returns as well as stability. Individuals should choose a hybrid fund that can fulfil their investment objective.  

4. Pension funds

Many fund houses provide the option of investing in pension funds which are designed to cater to the needs of post-retirement life.   

Best Retirement Mutual Funds to Invest in 2022

The following are the annualised returns of some of the best retirement mutual funds in India: 

*Returns data as of June 21 2022

How Do Retirement Mutual Funds Work?

Retirement mutual funds invest primarily in safe investment options such as government securities that protect the capital from market fluctuations. These schemes also invest in equity and various debt instruments so that the investment grows over time. Income from capital gains and interests adds to the investment resulting in a sizeable corpus. 

Many mutual fund houses offer dedicated retirement schemes. These are beneficial for inexperienced investors and those without much knowledge about investments. The mandatory lock-in period ensures a disciplined investment as you cannot exit the scheme in case of a slight market correction.

Benefits of Investing in Retirement Mutual Funds 

• Higher Liquidity: Compared to traditional retirement schemes, retirement mutual funds are more liquid. Depending on the fund house and investment option, investors can partially or completely withdraw their funds. 
• Long-Term Savings: As investors remain invested for a long time, these funds help to accumulate a considerable sum over time. Interest income and capital gains of such funds add to the investment, resulting in more returns. 
• Low-Risk Investments: Retirement mutual funds are among the safest investment options due to their allocation towards low-risk securities. Risk-averse investors can choose to invest in only government securities to minimise their risk further.

Risks of Investing in Retirement Mutual Funds?

Here are some risks of investing in retirement mutual funds:

1. Market risk

One of the most prominent risks associated with investing in retirement funds is market related risk. These funds invest in the debt and equity instruments of companies. All these come with some degree of risk. Any fluctuation in the stock market will influence the performance of these funds. 

2. Inflation risk

Inflation has a direct effect on purchasing power. The inflation rate in the country will reduce the returns received from these funds. The net return is also called the real rate of return. There will always be inflation risk in any investment avenue. 

3. Interest rate risk

This type of risk mainly affects the debt mutual funds. Debt funds invest in financial secured instruments like bonds. The bond prices and interest received have an inverse relationship. An increase in interest rate will reduce the bond price and vice versa, thereby affecting capital gains. 

4. Credit risk

Again, this risk is mainly associated with debt instruments. Credit risk implies the risk that the bond issuer may not be able to repay the principal amount along with interest. It is higher in case the debt instruments have a low credit rating. 

Who Should Invest in Retirement Mutual Funds in India?

• Young investors can invest in such schemes to start accumulating funds for their retirement early.
• Conservative investors can also invest in retirement mutual funds focusing solely on debt securities. 
• Investors lacking the time and knowledge to build their retirement portfolios will benefit from these funds. 

However, investors with a basic knowledge of mutual funds will want to directly choose the right combination of investments for their portfolio. So, if you are a young investor with a high risk-appetite, pure equity funds, such as the Navi Large Cap Equity Fund will help you accumulate wealth over time. It invests primarily in top companies of India and can offer more stable returns compared to other equity funds. Visit Navi Mutual Fund and start investing to fulfil your financial objectives. 

Also Read: 14 Best-Performing Retirement Mutual Funds

Mode of Investment in Retirement Funds 

Lump-sum method of investment involves making one-time payment or paying a large sum upfront. It is suitable for individuals having a substantial investment corpus and those having high-risk tolerance. 

On the other hand, SIP or systematic investment planning involves investing a fixed amount in a mutual fund scheme at regular intervals. It is suitable for individuals who have a small investment corpus. It is suitable for new investors as it inculcates a sense of financial discipline and offers wealth accumulation over the long term.

Both these methods have some shortcomings and advantages. It is advisable that individuals consider their risk appetite, and disposable funds before choosing an investment method. 

Taxability of Retirement Mutual Funds in India

Investors need to be aware that returns from these investments are taxable. Capital gains upon redemption of retirement funds are subject to taxes depending on the holding period and equity/debt portion of the investment. If the fund’s portfolio has over 65% equity exposure, it is taxed as an equity fund. Otherwise, it is taxed in a similar manner to debt funds.

For equity-oriented funds and a holding period of fewer than 12 months, Short-Term Capital Gains (STCG) taxes are applicable at 15%. For a holding period of over 12 months, Long-Term Capital Gains (LTCG) are taxed at a 10% rate. 

STCG tax for debt funds is applicable for a holding period of fewer than 3 years. The short-term capital gains are added to the investor’s income and taxed as per their income tax slab rates. For a holding period of over 3 years, LTCG is taxed at a flat 20% rate with the benefit of indexation.

How Much Money Should One Have Before Retirement?

This is a subjective issue and it is different for each individual. The ideal corpus before one enters his/her retirement age depends on the expenses and standard of living. The rate of prevailing inflation also plays a role.  Hence, what was considered to be ideal in 2000 may not be so in 2022. 

Also, one must consider his/her financial goals and risk appetite before allocating their money to any retirement fund. 

Things to Consider before Investing in Retirement Mutual Funds

• Financial Goals: Investors looking to build a retirement corpus need to invest in a disciplined manner. It is important for them to check if the fund’s investment objectives align with their financial goals. 
• Investment Horizon: Since retirement funds come with a lock-in period of five years, investors need to have a long-term investment horizon to invest in these funds. A longer investment period gives the fund potential to earn considerable returns.
• Risk Appetite: Retirement funds usually invest in low-risk securities though some of them can invest more in equity. Investors should carefully check their investment portfolio to know the potential risks. 
• Returns: Unlike traditional retirement schemes, mutual funds do not offer guaranteed returns. However, a longer investment horizon typically generates high returns. You can also check the fund’s past performance over a long time to get an idea about what returns it may generate. 
• Expense Ratio: The fund houses charge a percentage of a fund’s assets as an expense ratio to manage the funds of investors. Investors may want to pick funds charging lower expense ratios to save more on their returns. 
• Investment Modes: Investors can invest via lump sum to allocate a large sum of money at once. The other option is to invest through a Systematic Investment Plan (SIP) to take advantage of rupee cost averaging.

Also Read: How To Invest In Systematic Investment Plans (SIPs) Online?

Final Word

Retirement mutual funds invest in a mix of equity and debt securities to accumulate enough funds for retirement. Before selecting the best retirement funds, you may want to calculate your ideal retirement corpus and check the above-mentioned factors. 

FAQs on Retirement Mutual Funds

Before you go…

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.