What are Mutual Fund Pension Plans?

Mutual Fund Pension Scheme

Pension scheme is a retirement plan which is bought to produce income after retirement. Due to similar functionality these annuity plans are also known as pension schemes.

Pension or retirement plans are more preferred by those investors who receive a large amount of corpus as annuity benefit after retirement. Investor chooses to invest the earnings in a pension scheme so that they can generate regular and safe income for the golden days of his/her life. Various insurance companies provide pension plans and further in this article we will emphasis on pension schemes offered by Mutual Funds.

What is Mutual Fund Pension Plan?

Keeping the requirements of customers in mind mutual funds have also started to offer pension schemes which have a hybrid nature and can be invested in both equity and debt component.

Mutual Fund pension schemes collect capital from different investors and invest the collected amount in debt and equity markets. The money invested in equity provides exposure up to 40% whereas the amount invested in balanced fund provides exposure up to 65-70% which is higher as compared to equity fund. Investors can invest according to their own choice either as lump sum amount or can choose the systematic investment plan (SIP).

How Mutual Fund Pension Plans Operate

Mutual fund pension schemes works similarly like mutual fund scheme in which the investors need to invest all over their working life. The income is generates post retirement with the collected money invested into equity and debt. Withdrawal of funds is not allowed before retirement as 58 years is the standard retirement age is taken by the mutual fund scheme. After retirement, according to one’s own choice, investor can withdraw the amount or opt for annuity payments as regular income. The investors does not need to worry about the return on investments as the balance units after withdrawals in both the case stay invested and endures to grow.

The Good and Bad

Investing in mutual fund pension schemes is very beneficial as it provides a disciplined investment option to the investor and has a potential of great capital appreciation. The investors can avail good return on investment in long term as the invested amount has an exposure of 40% in equities. If in long run the investment in equity performs well then it automatically cover the losses and provide liquidity of market funds.

Tax Implications

Besides this, the investors can save bundles of their hard earned money on mutual fund pension scheme as it provides tax benefit which most of the investors are unaware off. The investors can avail benefit of tax exemption up to Rs 1 lakh under Section 80C of Income Tax Act. In order to avail tax benefit the investors will have to accept 3 years of lock in period as applicable for other schemes.

Who Should Invest?

Mutual fund pension schemes are different from annuity plans or any other options which are used for retirement planning, like the NSC, PPF and tax-saving FDs. These retirement planning options are a pure debt instruments as compared to mutual fund pension scheme which has a kicker in the form of equity portion. Although this advantage of investing in equity funds makes it risky many times, it comes with a potential of huge capital appreciation. All the pure retirement planning instruments mentioned above provides approximately 8% return which might not be impressive enough to shape a significant corpus as price rise will erode the corpus in the long term.

Mutual fund pension schemes, on the other hand, offer capital appreciation in the form of equity investment and higher returns on investment. If the investors have higher risk appetite then opting for mutual fund pension schemes is the right choice to make.

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About Archana 38 Articles
Archana is an independent finance and investment advisor since 4 years and recently added with Investment Pedia. User are welcome to put questions on her contributions.

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