Should you invest in retirement mutual funds?

Retirement funds, as the name suggests, are mutual funds designed to secure your golden years. There is roughly Rs 21,600 crore worth of investors' money in this category collectively managed by 10 asset management companies (AMCs) across 26 different plans, most of which have emerged after the recategorisation initiative by SEBI. More recently, Bandhan Mutual Fund also launched a scheme in the same category.

But should you consider them for your retirement? Our readers are avidly inquisitive about the intricacies of these funds and whether they're the golden ticket for their retirement nest egg. Before we dive-in, let's understand some important points about these funds.

Points to note

• Lock-in period: Usually, retirement funds come with a lock-in period of five years, from the date of investment or until the investor's retirement age (usually around 60 to 65), whichever arrives earlier. There's an exception in the case of Tata Mutual Fund schemes, allowing early withdrawals subject to an exit load.
  
• Exit load: While there's no exit load upon redemption after the lock-in period, exceptions exist. Tata Mutual Fund imposes a 1 per cent exit load if the investment is redeemed before five years, although this fee is waived if the investor has reached retirement age. Franklin also levies a 3 per cent exit load for investors under the age of 58, even if the mandatory five-year lock-in period has passed.
  
• Tax advantages: Some retirement funds qualify as Notified Pension Funds, recognised by the Central Government. Investing in these funds allows you to claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. It's important to note that this deduction does not apply if you opt for the new tax regime.
  
  Retirement mutual fund schemes by HDFC , Nippon , UTI and Franklin offer tax benefit under Section 80C of the Income Tax Act.

Furthermore, fund houses offer multiple retirement plans catering to investors with diverse risk profiles and financial phases. For instance, HDFC provides three types of retirement schemes: Hybrid Debt Plan, Hybrid Equity Plan, and Equity Plan. An investor in the accumulation phase who is relatively young might favour the Equity Plan, while those nearing retirement may opt for more conservative options.

So does investing in retirement funds make sense?

To give you an answer, we have drawn a comparison table illustrating the three-year SIP returns and expense ratios of the top 10 retirement schemes, alongside their alternative schemes of the same fund house, with similar asset allocation.

The retirement schemes are chosen on the basis of highest AUM and having at least a three-year history. Retirement schemes which do not have a similar alternative scheme (falling in the same Value Research category) have also been excluded.

As the table shows, the returns from retirement schemes often underperform or merely match those of the alternative funds. However, it's essential to bear in mind that this comparison spans a relatively short three-year period, as most retirement funds have only recently been introduced.

What about expense ratios?

As can be seen in the table above, expense ratios are higher in case of retirement schemes as compared to their alternative counterparts.

What should you do

Consider investing your money in standard mutual fund schemes and working toward building a substantial retirement corpus. These well-established alternatives may be the better bet in your journey toward financial security in your golden years.

Retirement fund schemes offer no significant advantages over their alternative options/regular mutual fund schemes. Thus, tying up your liquidity for a five-year period may not be the wisest choice when there are established mutual fund schemes with a proven track record over a more extended horizon.

Also read: Know the dangers of investing in small-cap funds