People do not get loan to fund retirement like they do for other financial goals like buying a house or funding children’s education. This makes it imperative to be adequately prepared for retired life.
Considering the increasing life expectancy and medical inflation, investors should consider a product that gives them exposure to equities to secure their retirement.
Currently, investors can invest NPS, PPF and Mutual Fund to achieve their retirement goals. In this article, we will look at some key benefits and drawbacks of retirement focused products.
National Pension System - NPS
The central government launched NPS as a social security tool, which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is open to all individuals irrespective of their employment or occupation.
Advantages
- Investors get flexibility to alter asset allocation
- NPS offers host of tax benefits and enjoys the status of an EEE (Exempt-Exempt-Exempt) product i.e. investors get tax benefits during accumulation, growth and disbursal phase
- Cost effective
- Offers partial withdrawal facility
- Allows portability i.e. investors can change asset managers
Disadvantages
- Atleast 60% of total corpus to be invested in annuities
- Requires annual contribution to keep the NPS account active
- Have to pay transaction fee every time investors invest in NPS
- Can’t exit until investors reach retirement age or 60 years
- If investor requests change in allocation, the entire corpus gets rebalanced
Public Provident Fund - PPF
PPF is a fixed income long-term savings scheme. Investors can open a PPF with an authorized bank or post office. At the time of maturity, investors can either withdraw proceeds or request for extension for a block period of five years.
Advantages
- Completely tax-free
- No risk of default as it is backed by the government of India
- Offers partial withdrawal
- Potential of relatively higher returns than bank FDs
Disadvantages
- Comes with lock in period of 15 years (16 years practically)
- Annual contribution required to keep the account active
- Cap of Rs.1.50 lakh per year on contribution
Retirement Benefit Mutual Funds
Retirement benefit funds are open-ended mutual funds that invest across different asset classes.
For example here is the asset allocation structure of a retirement fund based on plans:
|
Plan Type |
Equity Allocation (Equity and equity related instruments) |
Debt Allocation (Debt, debt-related and money market instruments) |
||
|
Min |
Max |
Min |
Max |
|
|
Aggressive |
80% |
100% |
0% |
20% |
|
Aggressive Hybrid |
65% |
80% |
0% |
35% |
|
Conservative Hybrid |
10% |
40% |
60% |
90% |
|
Conservative |
0% |
20% |
80% |
100% |
Retirement Mutual Funds typically offer better diversification as each plan can invest in debt, gold ETFs, REITs/InVITs, foreign securities including overseas ETFs.
Going by the thumb rule of asset allocation by age, the risk appetite normally declines with age. Young investors can start with higher equity exposure and eventually switch to plan, which offers exposure to higher debt securities.
Advantages
- Professionally managed
- Offers better risk adjusted returns
- Lowest lock in period of retirement age or 5 years whichever is earlier
- Investors need not invest annually to keep their account active
- No cap on maximum contribution
Disadvantages
- Tax impact can be offset because of better returns
- Relatively riskier compared to NPS and PPF
NPS vs PPF vs MF
|
Particulars |
NPS |
PPF |
MF |
|
Age Eligibility |
18 years to 65 years |
No age capping |
Up to 65 years |
|
Minimum Contribution |
Tier I - Rs 500 at the time of account opening and Rs. 1000 annually. |
Rs. 500 annually |
Rs 5000 at the time of initial investment and Rs. 1000 in case of additional purchase |
|
Tier II - Rs 1000 at the time of account opening |
|||
|
Lock-in/ Withdrawal |
Where withdrawal is after 60 years of age, 40% of the corpus must be used to purchase an annuity. In other cases, withdrawal up to 25% is permitted subject to certain conditions |
There exist a lock-in of 15 years. However, technically the lock-in could be of 16 years as the maturity is calculated from the end of the financial year in which the deposit is made. Partial withdrawal is permitted from the 7th year subject to certain conditions |
It has a lock-in for five years or until retirement, whichever is earlier. The retirement age for this purpose is considered at 65 years |
|
Cap on maximum contribution |
No |
Rs.1.50 lakh annually |
No |
|
Annuitization on exit |
Yes |
No |
No |
|
Fund management |
Passively managed |
Passively managed |
Actively managed |
To conclude, retirement oriented products offered by mutual funds offer better risk adjusted returns than other retirement focused offerings. For a long term goals like retirement, investors should invest in mutual funds to secure their retirement and overcome post retirement risks like longevity and inflation.
