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Retirement planning is not just about the earning member but also equally about their dependents as well. The earning member’s reliance is not limited to retirement planning, but also to monthly costs, savings, and investments for various financial goals. That said, selecting the correct financial instrument that can augment your wealth is of prime importance.

Returns can be much greater with a diversified portfolio that includes long-term equity investments, equity-oriented mutual funds, national pension schemes, public provident funds, and other instruments. There is also one mutual fund for more specifically retirement knows as retirement funds.

Retirement funds (also referred to as pension funds) invest in two-three variants of asset allocation with the mix of debt, equity, gold ETFs, etc. For example, a retirement fund with an aggressive hybrid variant invests at least 65% in equity and the remaining in debt, gold ETFs, and real estate investment trusts. These are designed for investors with aggressive or moderate risk tolerance. There are also variants with a lower equity allocation and a higher debt allocation for those who are conservative or have limited tolerance for risk.

Currently, many fund houses are offering retirement funds with a variety of variants. For instance, HDFC Mutual Fund offers retirement funds that invest in three variants of asset allocation. ICICI Prudential Mutual Fund offers four distinct variants. Additionally, Aditya Birla Sun Life Mutual Fund, Axis Mutual Fund, Franklin Templeton Mutual Fund, Nippon India Mutual Fund, Tata Mutual Fund, and UTI Mutual Fund all provide retirement funds.

Features of retirement funds

Typically, schemes with variants have a lock-in period, which varies by the fund house. That said, different retirement funds offer different allocations towards equity and debt.

The investor can choose to get paid either a lump sum amount or monthly annuity depending on their financial requirements and plans. One also has the option to opt for a deferred annuity plan to secure a higher corpus for post-retirement requirements. Withdrawals from retirement accounts prior to the age of 58 to 60 are discouraged.

“There is no age limit for the creation of retirement funds, and even those who are in their 40s or even those who are in their 30s can plan for investment in such funds and especially those investors who are risk-averse and want to plan for a long term, can look for investment in such funds,” explained Suresh Surana, founder, RSM India.

Retirement mutual funds typically have a five-year lock-in period, compared to three years for equity-linked saving scheme funds. However, due to the power of compounding, a longer lock-in time may prove beneficial. When an investment is held for an extended period of time, it is typically unaffected by short-term market swings.

Should one invest?

The investor should do research before investing in retirement funds as the returns are taxed, which makes investing in pension mutual funds less appealing. Retirement funds may be a good fit for investors who lack discipline and frequently withdraw money. The lock-in period of 5 years ensures that an investor does not touch his retirement assets.

“Consistent and disciplined investment starting from an early age would over the period provide them with a substantial corpus to provide them with funds required for their retirement,” pointed out Surana.

Lastly, contributions to a retirement mutual fund are deductible up to a maximum of Rs 1.5 lakh under section 80CCC. However, please keep in mind that withdrawals from these funds are typically taxed. If the investor prefers to withdraw as an annuity, it will be taxed at the individual slab rate.