Personal Finance

The latest option for retirement savings

K Venkatasubramanian | Updated on March 12, 2018

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Simplicity of the scheme and tax benefits make Reliance’s Retirement Fund attractive



Mutual fund houses are set to launch exclusive retirement schemes after a long gap. UTI and Franklin India started their dedicated pension plans 17-20 years ago. Now, Reliance Mutual has come out with the Reliance Retirement Fund.

Here’s a look at the features of the new product and how it compares with the National Pension System (NPS), the other equity-linked pension product.

What it offers

The scheme basically offers a simple investment strategy to lock-in money for the long-term without taking high risks.

The Reliance Retirement Plan comes with two options — a wealth creation plan and an income generation plan. The wealth creation plan is expected to invest 65-100 per cent of its corpus in equity and the remaining in safe debt instruments. This makes it work more or less like an equity-oriented balanced fund. It will be benchmarked against the BSE 100, which means that the equity bets are likely to be in large-cap or bluechip names.

The income generation plan seeks to invest 5-30 per cent of its corpus in equities and 60-95 per cent in debt. This plan is suitable for conservative investors as it is designed more on the lines of a monthly income plan (MIP).

Switching between either of the two plans is allowed, without any charges.

Investments are locked in till you turn 60. If you wish to redeem units before this period, you would have to contend with a 1 per cent exit load.

The investments made in the Reliance Retirement Fund are eligible for tax deductions under Section 80C.

How it compares

The simplicity of the product makes it inviting. Existing pension plans from UTI and Franklin India function more as conservative debt-oriented balanced schemes and have generated returns of 11-14 per cent over the past 17-20 years. Quality equity-oriented balanced schemes such as HDFC Balanced and Tata Balanced, on the other hand, have generated 18-20 per cent annually over the past 10-15 years. Clearly, equity does provide a kicker to returns. This applies even so for long-term goals such as retirement, where there is enough time to play out the risks associated with equity investments and, at the same time, generate inflation beating returns.

The NPS has an option for automatic allocation between instruments such as equity, corporate bonds and government debt. Else, there is also another option where you will have to choose the proportion to be allocated to these instruments. Of course, making decisions may not be very easy. Also, there is a limit of 50 per cent for equity investments in the NPS. Charges though, are quite low. Returns are reasonable.

Charges and tax treatment

The Reliance Retirement Fund will charge 2.5 per cent. But if investors choose the ‘direct option’ available for mutual fund investments, charges could come down dramatically. For example, in equity-oriented balanced funds, the direct plans charge 1.5-1.8 per cent annually, while the normal plans charge 2-2.5 per cent. NPS though, is still the cheapest at around 1 per cent.

In terms of tax treatment, the wealth creation plan would be tax-free at the time of retirement as it would have at least 65 per cent of its corpus in equities. Of course, if the income generation plan is chosen, you would have to pay long-term capital gains. But with indexation benefits, even the 20 per cent taxes payable may not create a significant dent in your corpus. In comparison, the proceeds from the NPS are taxable in the current scenario. Also, this offer allows you to withdraw the entire sum and invest it as you like once you turn 60.

The NPS, on the other hand, requires you to buy an annuity for 40 per cent of the accumulated corpus. If annuity rates are unattractive, then you would stand to lose. In addition, Section 80C tax deduction adds to the attractiveness of the product. So, for investors who have started working or are in their 30s or early 40s, the wealth creation plan would be suitable.

Later on, in your mid 50s, you can opt for a switch to the income generation plan, or continue with the same plan if you have adequate risk appetite.

Two other houses — SBI and Axis — are reportedly looking at launching retirement funds. So, the space is expected to get competitive soon. The Reliance Retirement Fund NFO is open till February 5, 2015.

Published on February 01, 2015

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