Should you opt for MF pension plans?

This is the last week for you to invest in tax-saving instruments, so buckle up and get to it before the 31 March deadline. You could choose from the popular options, such as tax-saving fixed deposits, the Public Provident Fund, National Savings Certificate, insurance schemes and equity-linked savings schemes.However, there is another avenue that you could consider— pension plans of mutual funds. These are not widely used, but provide dual benefit of tax rebate (up to Rs 1 lakh under Section 80C ) as well as disciplined saving for your retirement years.

What do these plans offer?

Currently, there are only three dedicated pension schemes available in the mutual fund domain. Two of these, UTI Retirement Benefit Pension Fund and Templeton India Pension Plan, have existed since the 1990s and offer the advantage of tax savings under Section 80C.The third one, Tata Retirement Savings Fund, was launched a couple of years ago, but is not a tax-saving instrument as its features are different from the above two.

Funds allow you to invest systematically-

All three funds allow you to invest systematically until you retire. The funds from UTI and Templeton invest around 40% of their assets in equity, while the balance is in debt instruments. The investment in both the schemes is concentrated in large-cap stocks in the equity portion, whereas the fixed income has more of corporate bonds and government securities.The Tata scheme, however, is available in three options—a progressive plan, which offers a minimum equity investment of 85%, while its moderate and conservative plans offer equity exposure ranging from 0-65%. The scheme automatically switches from one plan to another depending on the investor's age.

Withdrawal comes at a cost-

After you turn 45 years old, investments under the progressive plan automatically switch to the moderate plan, while at the age of 60 years, investments in the moderate plan are shifted to the conservative plan.Since these are pension plans, any withdrawal from them comes at a cost. Under the UTI scheme, if you opt to invest without the benefit of tax rebate, you can redeem units at any time, subject to a hefty exit load (5% within one year, 3% between 1-3 years and 1% after three years).

All schemes offer a systematic withdrawal plan-

There is no exit load if you redeem after you are 58 years old. So, a redemption of Rs 10,000 within a year will fetch you only Rs 9,500. You also have to maintain a minimum balance of Rs 10,000 after withdrawal.If you opt for the tax rebate, you will have to abide by a 3-year lock-in period. The Templeton scheme also has a 3-year lock-in period, and there's a flat 3% exit load if you redeem units at any time before the age of 58. The Tata scheme charges a 3% exit load for redemption within three years and 1% thereafter, except if it's done after retirement age.All schemes offer a systematic withdrawal plan, where you can redeem at chosen intervals—monthly, quarterly, half-yearly or annually—for regular income during retirement.


Should you invest in such pension plans?

What does a mutual fund pension scheme offer that makes it better than other similar offerings? Most of the other options used for building a retirement kitty, such as the PPF, NSC and tax-saving FDs, are pure debt instruments. They offer a return of around 8% in the long term, which may not be sufficient for building a sizeable corpus, given that inflation erodes a chunk of this wealth. Hemant Rustagi, CEO, Wiseinvest Advisors, says, "Traditional retirement products yield a low return and offer no flexibility in asset allocation."

Mutual fund pension schemes, on the other hand, offer a dash of equity, which gives them the potential to offer much higher returns. While pension plans by insurance companies also offer flexible asset allocation, these charge hefty costs in the early stages for this privilege.

A healthy retirement corpus-

However, some experts believe that mutual fund pension schemes are nothing more than balanced funds, which provide an exposure to both debt and equity, and can be easily replicated by investors on their own. "These are not pension schemes in the real sense as there is no compulsory annuitisation of the investor's money," says Jayant Pai, CFP, Parag Parikh Financial Advisory Services. He adds that a combination of the PPF and ELSS investments can, instead, be used to create a healthy retirement corpus.Incidentally, these schemes have been performing well and the 5-year returns for the two existing schemes is healthy. However, the schemes from UTI and Templeton limit equity exposure to 40%, which makes them a tad under-exposed to the asset class for someone who is starting out early and should be taking higher risk (the National Pension System provides an equity exposure up to 50%). The scheme from the Tata stable, on the other hand, offers a more aggressive approach for building wealth over the long term. However, to get the maximum benefit from any of these plans, you should stay invested for the entire tenure of the scheme.