Retirement planning is now one of the most important components of personal financial planning since the retirement population of India is expected to increase by 41% by 2031. If one has a retirement plan during their working years, they will potentially gain from investments made in the retiring years.
It entails saving money and making calculated investments in plans that provide steady increases over time, enabling people to keep their level of living after retirement.
This article will delve into the advantages and disadvantages of investing in retirement funds, helping individuals understand the best retirement funds suited for them.
Must read: Ready for retirement? Learn how to decide on your retirement corpus
What are retirement funds?
Among the best retirement plans for individuals, are the mutual funds designated for retirement. They are meant to give consistent income once an investor reaches the age of retirement. They are also referred to as pension funds since these money give investors pensions.
Usually open-ended and falling under the “Solution-Oriented” category of mutual fund designs, retirement mutual funds Although pension funds usually invest in debt instruments, including government securities, corporate bonds, money market instruments, and the like, some funds also invest in equity stocks and related instruments. Compared to equity stocks, debt instruments have rather less volatility.
Furthermore, retirement money sometimes comes with a lock-in term, like five years or until the intended retirement, in which case you cannot take out your investment before.
Two ways of investing in retirement funds are SIP and lump sum, depending on the investor. Since you can invest a little monthly to build a sizable retirement corpus, SIP, or systematic investment plan, is often the most favoured choice for investors.
Also read: What are mutual funds?
Who should invest in retirement funds?
- Long-term investment horizon: Retirement mutual funds can help you profit from market increase over time if you have a long time before retiring—ideally ten years or more. These funds let you target good returns while weathering temporary changes in the market.
- Focus on steady growth: Usually featuring a balanced mix of stocks and bonds, retirement mutual funds provide stability mixed with growth possibilities. This kind of diversification is great for reaching long-term goals for retirement.
- Limited time or expertise for active management: You don’t have to actively investigate or change your portfolio since experts handle these funds. Retirement mutual funds can give comfort whether you’re busy or not confident in your own investment choices.
- Looking for discipline and convenience: Systematic Investment Plans (SIPs) let you make regular contributions, so you can save consistently and use rupee-cost averaging. Your retirement fund will steadily increase more easily with this disciplined approach.
Advantages and disadvantages of investing in retirement funds
| Advantages | Disadvantages |
| Long-term growth potential: Retirement funds—especially those with equity exposure—offer the prospect of higher returns over time. | Market volatility: Returns are not guaranteed; market conditions can cause variations in the value of investments. |
| Professional management: Experts oversee these funds, so less personal research and active management are needed. | Management fees: The high fees in particularly actively managed funds can lower overall performance. |
| Diversification: Using stocks, bonds, and other assets, the funds seek to spread risk. | Lock-in periods: A few retirement funds may have long lock-in terms, thus restricting your access to and liquidity for your money. |
| Tax benefits: Under Section 80C or 80CBC of the Income Tax Act, retirement funds sometimes provide tax deductions. | Taxation on withdrawals: Especially following annuity payouts, withdrawals are taxed according to your income slab. |
| Convenience: Systematic Investment Plans (SIPs) guarantee disciplined savings by making regular contributions simple. | Low flexibility: Once committed, particularly in plans tailored to retirement, the flexibility to modify investment choices may be limited. |
| Rupee cost averaging: By purchasing units consistently, SIPs help to average the cost of investment independent of market swings. | Limited access to funds: Usually accompanied by penalties or restrictions, premature withdrawals can be difficult. |
Taxability of retirement funds
Under Section 80CCC of the Income Tax Act, retirement funds—known for their tax efficiency—offer deductions of up to ₹1.5 lakh yearly. Once you begin receiving the annuity, though, your current tax bracket controls the income tax rate. Should you withdraw from these funds prior to the maturity date, specific tax laws apply:
If you sell units in Equity-Oriented Funds (EOFs) before 23 July 2024, you pay a 15% tax on short-term gains. After that date, the tax rate is 20%.
For long-term gains over ₹1.25 lakh, the tax is 10% if you sell before 23 July 2024. After that date, the tax rate is 12.5%.
These taxes include the Securities Transaction Tax (STT) and do not offer benefits like adjusting for inflation or flexibility with foreign exchange.
Debt retirement funds:
Gains from debt mutual funds purchased prior to April 1, 2023, are short-term if held for up to 24 months and taxed based on your income tax rate. Long-term gains are taxed at 12.5% without the previous benefit of indexation if held for more than 24 months.
All gains from debt mutual funds purchased after April 1, 2023, are taxed depending on your income tax slab and are regarded as short-term regardless of their length of ownership. For long-term investors, this new rule streamlines taxes but could lessen the attraction of debt mutual funds.
Must read: Tax-efficient withdrawal strategies for retirement in India
Bottomline
Retirement mutual funds are a great way for long-term financial planning since they let people guarantee a consistent income source after retiring. Particularly for people with limited time or knowledge in active portfolio management, they offer a good approach to building a retirement corpus by combining professional management with development potential.
Retirement mutual funds can be a great tool for financial security in later years if one chooses suitable funds and matches investment goals with risk tolerance.
FAQs
Are retirement mutual funds tax-free?
Retirement mutual funds are not totally free from taxes. Under Section 80CC of the Income Tax Act, contributions to these funds can be deducted up to ₹1.5 lakh. Usually, though, withdrawals are liable for taxes. Should the investor choose an annuity, it will be taxed using the applicable income tax slab rate, much as salary income.
Why invest in retirement funds?
Making retirement fund investments guarantees financial stability for your later years. This facility provides disciplined savings, tax advantages, and the possibility for long-term increases. They enable a sizable corpus to meet post-retirement living expenses, healthcare, and other needs. Professional fund management and diversified portfolios also lower risk, which qualifies them as a consistent choice for a comfortable and steady retirement.
Is NPS good for retirement?
Yes, for retirement the National Pension System (NPS) is a decent choice. Along with low management fees and tax advantages, it presents the possibility of market-linked returns. NPS also lets partial withdrawals for particular needs and gives flexibility in investment options. Using annuities guarantees a consistent income at retirement, which makes building a retirement corpus dependable and quick.
What are the risks involved with retirement funds?
Retirement funds carry risks including market volatility that could compromise returns. Over time, inflation risk could undermine buying power. Fixed-income investments suffer also from interest rate risk. Moreover, bad investment choices made by fund managers create fund management risk. Finally, liquidity risk can restrict available funds as needed. Regular portfolio review and diversification of investments help to reduce these hazards.
Is SIP good for retirement?
Yes, for retirement a systematic investment plan (SIP) is a great tool. It advances disciplined savings, rupee cost averaging, and compounding over time. Higher returns made possible by SIPs in equity mutual funds help to create a sizable retirement corpus. They also give freedom in frequency and investment amounts, which helps you more easily fit your risk tolerance and financial objectives.
