Retirement Fund - Definition, Features & Benefits

Retirement funds, also termed pension funds, offer individuals a means to save part of their earnings for retirement. They provide steady income post-retirement via annuity payments, with managed investments generating returns that contribute to the fund pool.

These funds offer fixed benefits immune to market fluctuations and typically invest in low-risk options like government securities, making them an attractive choice for retirement planning.

Features of Retirement Funds

The features of Retirement Funds are discussed in detail:

1. Long-term Investment: Retirement funds are designed for long-term investment, aiming to accumulate wealth over an individual's working years to support them during retirement.
2. Diversified Portfolio: These funds typically invest in a diversified portfolio of assets, including stocks, bonds, mutual funds, and other securities, to spread risk and enhance returns.
3. Tax Advantages: Many retirement funds offer tax benefits, such as tax-deferred growth on contributions or tax-free withdrawals during retirement, incentivizing individuals to save for retirement.
4. Contribution Limits: Retirement funds often have contribution limits set by regulatory authorities to ensure fair access and prevent over-reliance on tax benefits.
5. Withdrawal Restrictions: To encourage long-term savings, retirement funds may impose restrictions on withdrawals before a certain age or impose penalties for early withdrawals.
6. Professional Management: Retirement funds are typically managed by professional fund managers or investment firms, who make strategic investment decisions to maximize returns while managing risk.
7. Flexibility: Some retirement funds offer flexibility in terms of contribution amounts, investment options, and withdrawal strategies, allowing individuals to tailor their retirement savings to their specific needs and preferences.
8. Regular Monitoring and Reporting: Retirement funds provide regular updates on fund performance, investment allocations, and account balances, allowing investors to track their progress towards their retirement goals.

Benefits of Retirement Funds

The advantages of Retirement Mutual Funds are as follows:

1. Retirement funds offer tax advantages on contributions and withdrawals.
2. They provide a reliable income during retirement, reducing dependency.
3. Funds benefit from compounding returns, especially with early investments.
4. Retirement funds spread risk and improve returns through diverse investments.
5. They help achieve retirement goals with structured planning.
6. Investing ensures proactive financial planning for retirement comfort.
7. Most retirement funds require relatively low inputs, typically around Rs.1,000 per month, with limited fees and charges.

1. Growth mutual funds provide potential returns that can outpace inflation rates, preserving the value of savings.

Retirement Funds in India ranked by their last 5-year returns

This table below provides key details about each retirement fund, including its name, fund type, minimum investment required, annual return, expense ratio, and age of the fund.

How to Calculate for Retirement Fund?

The following factors should be considered for calculating your Retirement Fund:

1. Estimate Retirement Expenses: Determine your estimated annual expenses during retirement, considering factors such as housing, healthcare, daily living expenses, and leisure activities.
2. Determine Retirement Age: Decide at what age you plan to retire and the number of years you expect to spend in retirement.
3. Calculate Inflation: Consider the inflation rate to adjust your future expenses accordingly. Inflation erodes the purchasing power of money over time, so it's essential to account for it when calculating your retirement fund needs.
4. Assess Existing Retirement Savings: Evaluate your existing retirement savings, including any pension plans, employer-sponsored retirement accounts, or other investments earmarked for retirement.
5. Calculate Required Retirement Corpus: Use a retirement calculator or consult with a financial advisor to determine the corpus needed to sustain your desired lifestyle during retirement. This calculation considers factors such as estimated expenses, inflation, investment returns, and retirement age.
6. Select Suitable Mutual Funds: Choose mutual funds that align with your risk tolerance, investment goals, and retirement timeline. Consider factors such as fund performance, expense ratios, investment strategies, and track record of the fund manager.
7. Invest Regularly: Set up a systematic investment plan (SIP) to invest regularly in the selected mutual funds. Consistent investing over time can help you benefit from rupee-cost averaging and compound growth, enhancing your retirement savings.
8. Monitor and Adjust: Regularly review your retirement plan and adjust as needed based on changes in your financial situation, investment performance, and retirement goals. Stay informed about market trends and economic developments that may impact your retirement fund.

Example

Estimating the required retirement corpus involves considering post-retirement expenses, typically advised to be 70-80% of pre-retirement expenses to maintain a comfortable lifestyle. For instance, with current monthly expenses at Rs.50,000 and an inflation rate of 6%, projected expenses a decade from now could amount to approximately Rs.96,889 per month.

Factoring in a 30 year retirement span and retaining 75% of pre-retirement expenses, the estimated monthly expense becomes about Rs.72,667. To secure a retirement corpus of Rs.2.6 crores, individuals aiming for an 8% return on investment and with 10 years left for retirement may need to save around Rs.1,50,000 monthly.

This disciplined approach, coupled with early initiation and investment in mutual funds through SIPs, offers a viable path to achieve the retirement goal while ensuring financial security in the golden years. 

Purpose of Retirement Fund

Retirement planning often gets neglected amid immediate financial priorities but overlooking it can lead to financial insecurity in later years. Understanding its significance is crucial as retirement represents the culmination of years of hard work and should ideally be a time of financial freedom.

Several factors underscore the importance of retirement planning:

1. Lack of Pension: Unlike some countries, India lacks a comprehensive pension system, making it imperative for individuals to save and invest for retirement.
2. Inflation: The value of money diminishes over time due to inflation, necessitating investments that can outpace inflation.
3. Falling Interest Rates: Traditional avenues like bank deposits offer lower returns, requiring individuals to build a larger retirement corpus to maintain their desired lifestyle.
4. Rising Medical Costs: Healthcare expenses tend to escalate with age, highlighting the need for adequate retirement savings to cover medical emergencies.

Who Should Consider Investing in Mutual Funds for a Retirement Fund?

Mutual funds for a retirement fund are suitable for individuals who:

1. Seek Long-Term Growth: Those looking to build a substantial corpus over the long term for their retirement years can benefit from investing in mutual funds. These funds offer the potential for higher returns compared to traditional savings avenues like fixed deposits or savings accounts.
2. Desire Diversification: Mutual funds invest in a diversified portfolio of assets, including stocks, bonds, and other securities. Investors who want to spread their risk across different asset classes can benefit from the diversification offered by mutual funds.
3. Want Professional Management: Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors. Individuals who prefer to delegate investment management responsibilities to experts can opt for mutual funds.
4. Have a Moderate to High Risk Tolerance: Depending on the type of mutual fund, the risk level varies. Equity mutual funds carry higher risk but also offer the potential for higher returns, making them suitable for investors with a moderate to high-risk tolerance and a long investment horizon.
5. Value Convenience and Flexibility: Mutual funds offer convenience and flexibility in terms of investment amounts, redemption options, and automatic investment plans. Investors who value ease of investment and redemption may find mutual funds appealing for their retirement savings.
6. Seek Tax Efficiency: Certain mutual fund schemes offer tax benefits such as tax deductions on investments or tax-efficient withdrawal options. Individuals looking to optimize their tax liabilities while saving for retirement may find mutual funds advantageous.

1. Prefer Regular Income Post-Retirement: Mutual funds offer options such as systematic withdrawal plans (SWPs) or dividend payout options, which can provide investors with a regular income stream during retirement.

Why is Mutual Fund Retirement Planning Important?

Here are some of the reasons to consider mutual funds for retirement planning:

1. Low cost: Mutual funds do not require high inputs. Most retirement funds need an input of just around Rs. 1,000 per month. However, choose a fund that has limited fees and charges such as entry and exit load, fund management charges, etc.
2. Beat the inflation: As you grow older, inflation could also rise, making the cost of living higher by the time you are 60 years old. This means that you need to invest in an instrument that also grows at par with the inflation rates, or better. Growth mutual funds are ideal under such a situation.
3. Liquidity: If your fund does not have a lock-on period, you can liquidate your fund and withdraw money whenever you want. It takes less than 2 days for the amount to be credited to your account once you sell of the units. Lock-in periods are usually as short as 3-5 years, unlike pension schemes such as PPF that has 15-year lock-in period.
4. Tax efficient: Short-term gains (less than 3 years) on equity funds attract a tax of 15%, while short-term debt fund gains are added to your regular income and taxed as per the income tax slab you fall under. On equity funds, there is no tax on long-term capital gains, but long-term debt fund gains are taxed at 10% without indexation and 20% with indexation.

How to Choose the Best Retirement Plan?

Before you buy a mutual fund, you need to do some research to find the fund that is the most suitable for you. The things you need to keep in mind while doing the research are:

1. Years left for retirement: If you are in the early years of employment - that is, between 22 to 35 years, then you may want to choose a moderate risk fund with steady investment growth and appreciating returns. The older you grow, the more aggressive your investment might need to be, to ensure that at the end of the day you will have enough money to beat inflation during retirement. You may want to plan your savings in such a way that you can live comfortably after your employment years.
2. Risk tolerance: As an investor, you may have a risk level that you are at ease with. Some people are overcautious, some are prudent, and many more are aggressive risk takers. Choose a fund that has a risk level of your standard.
3. Fund goal: Depending on whether you are looking for investment growth or stable savings, you could go for equity funds, debt funds, hybrid funds, growth funds, value funds, etc. There are several options in the mutual fund market. You could mix and match portfolios and fund types to achieve the right level of diversity, capital increase and steady income.
4. Fees and charges: Compare the exit and entry loads, management fees, redemption fees, etc. between different funds before buying one. If the fund size is small with limited Assets under Management (AUM), then the charges are likely to be higher.

Top Five Funds for Retirement Planning for Investors Between 25 and 40 Years of Age

Top Five Funds for Retirement Planning for Investors Between 41 and 50 Years of Age

Top Five Funds for Retirement Planning for Investors Between 51 and 55 Years Age

Top Five Funds for Retirement Planning for Investors Above 56 Years of Age

Different Types of Mutual Funds for Building a Retirement Fund

Choosing the right type of mutual fund for building a retirement fund depends on factors such as risk tolerance, investment goals, and time horizon. It's essential to diversify your investments and regularly review your portfolio to ensure it remains aligned with your retirement objectives. There are various types of mutual funds suitable for building a retirement fund, each offering different risk levels and potential returns. Some common types include:

1. Equity Mutual Funds: These funds primarily invest in stocks, offering the potential for higher returns over the long term. They are suitable for investors with a higher risk tolerance and a long investment horizon.
2. Debt Mutual Funds: These funds primarily invest in fixed-income securities like bonds and government securities, offering relatively lower returns but with lower risk compared to equity funds. They are suitable for investors seeking stability and regular income.
3. Hybrid Mutual Funds: Also known as balanced funds, these invest in a mix of both equity and debt instruments, offering a balanced approach to risk and return. They are suitable for investors looking for a combination of growth and stability in their retirement portfolio.

1. Index Funds: These funds aim to replicate the performance of a specific stock market index, such as the Nifty 50 or Sensex. They offer diversification at a low cost and are suitable for investors seeking market returns with minimal active management.
2. Retirement or Pension Plans: Some mutual funds are specifically designed for retirement planning, offering features like systematic investment plans (SIPs), target-date funds, and tax benefits. These funds are tailored to meet the long-term financial needs of retirees and are suitable for individuals planning for retirement.

Mode of Investing in Retirement Funds

Investing in retirement funds can be approached through two primary methods: a one-time lump sum investment or a Systematic Investment Plan (SIP).

1. Lump sum: A lump sum investment involves depositing a single, substantial amount into the fund in one go. This approach offers the potential for higher returns, especially if the market appreciates over time. However, it also exposes the investment to higher risk, particularly if the market experiences volatility. Typically, seasoned investors who are comfortable with market fluctuations prefer this method.
2. SIP: On the other hand, a Systematic Investment Plan (SIP) allows investors to contribute smaller, regular amounts at fixed intervals, such as monthly or quarterly. This method helps inculcate a disciplined savings habit and spreads out the investment over time, reducing the impact of market volatility.
   1. SIPs are ideal for beginners or those with a limited initial investment, as they offer a more gradual approach to wealth accumulation.
   2. Additionally, SIPs are well-suited for long-term retirement planning, as they enable investors to benefit from the power of compounding and dollar-cost averaging.
   3. Overall, both approaches have their merits and suitability depending on the investor's risk appetite, investment goals, and financial situation. 

Taxability of Retirement Funds

The taxability of retirement funds depends on various factors, including the type of fund, contributions made, and withdrawals.

1. Contributions: Contributions made towards retirement funds may qualify for tax deductions under certain sections of the Income Tax Act. For example, contributions to the National Pension Scheme (NPS) are eligible for tax deductions under Section 80CCD(1) up to specified limits.
2. Accumulation Phase: During the accumulation phase, where the funds remain invested and grow over time, any interest, dividends, or capital gains earned within the fund are typically tax-deferred. This means investors do not pay taxes on these earnings until they withdraw funds from the retirement account.
3. Withdrawals: Withdrawals from retirement funds are subject to taxation based on the type of fund and the nature of the withdrawal. For instance, withdrawals from NPS are subject to tax under the EET (Exempt-Exempt-Taxable) regime, where contributions and accumulation are tax-exempt, but withdrawals are taxable.
4. Annuity Payments: If an individual opts for annuity payments from their retirement fund, the annuity income received is generally taxable as per the individual's income tax slab.
5. Tax-Free Withdrawals: Some retirement funds may offer tax-free withdrawals under certain conditions, such as withdrawals from the Public Provident Fund (PPF) or Employee Provident Fund (EPF) after the completion of the specified lock-in period.