It is imperative that one accounts for inflation while building a retirement corpus. And, there are various instruments - slightly riskier than debt - that need to be accomodated in it, to earn good returns.
There are various mutual fund schemes to choose from, such as equity-diversified funds, mid- or small-cap funds, debt funds and so on. Alternatively, you can pick retirement-specific funds that some fund houses offer. At the moment, only UTI Mutual Fund, Franklin Templeton and Tata Mutual Fund offer retirement schemes.
However, as far as returns go, the retirement-specific schemes have offered lower returns than pure-equity schemes. According to data by Value Research, over a 10-year period, the Templeton India pension scheme has given returns of 13.62 per cent annually. The category average returns of equity-diversified funds, on the other hand, have been 20.84 per cent. Multi-cap equity funds have returned 28.19 per cent.
Returns from debt-fund categories such as income and hybrid debt-oriented funds have gone up between six and nine per cent. One should, however, have a judicious mix of both equity and debt in a portfolio and keep rebalancing it with advancing age.
Suresh Sadagopan, principal financial planner at Ladder7 FA, says retirement funds have given lesser returns, as they predominantly invest in debt right from the start. "It is important to have a good mix of both equity and debt in your portfolio. With the right combination, one can beat inflation, which is necessary when building a retirement corpus." With mutual fund schemes, one has the flexibility to alter the ratio of debt and equity according to need, unlike in a retirement fund where it is done by the fund house. Financial advisors say an exposure of between 10 and 20 per cent in equity is a necessity, even when planning for retirement.
On the cost front, too, retirement funds are more expensive. While mutual funds charge an annual management fee, retirement schemes charge an exit load, which at UTI is three per cent (withdrawal before the age of 58). Franklin Templeton charges five per cent on withdrawal before one year, three per cent after one year and one per cent after three years. Tata Mutual Fund's Retirement Savings Fund wants to discourage a mid-way exit and has imposed an exit load of five per cent in the first year. Thereafter, it climbs down and becomes one per cent in the fifth.
On the tax front, if one invests in a mutual fund scheme, the accumulated amount is tax-free because of zero long-term capital gains tax on equities. Experts advise investing in an equity-diversified fund via a systematic investment plan. They ask investors to shift money to a monthly income plan or a debt fund as they approach retirement.
On the other hand, retirement funds get taxed like debt funds (10 per cent with indexation benefits and 20 per cent without). By the time one starts to withdraw after retiring, the investment would be mainly in debt instruments.
Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says a good mix of equity and debt is enough to build the mutual fund part of one's retirement corpus than going for a retirement fund. He says the latter is nothing but a marketing gimmick.