Mutual Fund or Pension Plan?Best option for Retirement Planning


Mutual Fund or Pension Plan?Best option for Retirement Planning

Mutual Fund or Pension Plan?Best option for Retirement Planning
Mutual Fund or Pension Plan?Which one is a best option for retirement planning.Very often I receive this question from my blog readers.
So, today I have decided to discuss on Mutual Fund or Pension Plan?Best option for Retirement Planning.I am giving the needs of Retirement planning link below for easy reference.

Are you retiring soon?Have you planned for your retirement yet?

Worried for retirement fund creation?Mutual Fund or Pension Plan?Best option for Retirement Planning?Mutual Fund Vs Retirement Planning.
As I wrote earlier that we, the Indians are really very poor in making a sound retirement plan.Majority of salaried persons due to non planning for retirement have to compromise with post retirement life.Lack of financial planning and understanding sometimes force them to withdraw money from their one and only retirement fund i.e. Provident Fund.One must ensure to keep his PF accumulation intact for sunset years. But maximum salaried class people tend to withdraw it either for child’s marriage,education or for buying a house for them.
Retirement and pension plan are synonymous terms.Once we are thinking for a retirement plan, we tend to go for pension plans. There are numerous pension plans in India.Do they suit you best?Have you ever questioned yourself ?Have you ever checked the returns of the pension plans?I think for most of people the answer will be a big “No”.
While planning for retirement we must keep in mind that it goes through two phases viz; 1.Accumulation phase and 2.Distribution phase.

Mutual Fund or Pension Plan?Best option for Retirement Planning?

  • Accumulation phase: During this phase the investor invests regularly over a long period of time for retirement;
  • Distribution phase: During this phase the investor starts receiving regular income, which may be on monthly,quarterly,semi annually or annually basis.This income payout is based upon the accumulated value when payments begin.

Based upon risk profile,age of the investor and time horizon of the investment ,an investment can be classified as below:

Age Bracket Investment Risk Profile
Under 30 years Aggressive
30 to 40 years Moderately Aggressive
40 to 50 years Balanced
50 to 60 years Moderately Conservative
Above 60 years Conservative

One should move his investments to a lesser risk portfolio once the retirement is closer.
One must adhere to this standard principle of retirement planning strictly.

Pension Plan or Mutual Fund? Which one to choose?

Pension Plans as a tool for retirement plan
In pension plans a person pays regular premium till his retirement and then receives regular payment from the accumulated corpus as pension or annuity.Retirement plans or Pension Plans are primarily investment plans in which an individual invests till he retires and start receiving pension once he retires.Also, there is a provision to withdraw 1/3rd of the total accumulated corpus once he has retired to meet other financial goals and balance amount can be received as pension.
Mutual Funds as a tool for retirement plan
On the other hand Mutual Funds are very tax efficient.After the Budget 2018, with introduction of 10% LTCG on Mutual Funds, still they are very suitable product for retirement purpose.Also, the income accumulated upto the grandfathered date 31st January 2018 is tax free.The income generated from mutual funds over and above 1 Lakh is chargeable to LTCG @10%.Still this is a safe bet and more tax efficient as compared to pension plans.There is no hidden charges or high administrative charges unlike conventional or Unit linked pension plans.One can invest in Mutual Funds as per his own choice.The mantra is the early you start the more you grow.

Power of compounding ensures that one can build a huge corpus for his retirement.

Notably,one can choose even 100% exposure to equity for long time investments .This can even fetch more than your expected corpus.
One must keep in mind that while investing in MF for retirement purpose, the risk profile,age and investment period can play a significant role during the accumulation phase.Prudentially,one should transfer his equity investments in less risky instruments gradually once retirement age is nearer.

Once the individual attains retirement age, he can choose one of the following option to get monthly pay outs.

  1. Pension option: Receive regular income till perpetuity and leave the accumulated investment in the fund;
  2. Lump sum option:Withdrawal of full value and invest as per own choice;
  3. Combination option:Withdraw a partial option and continue to receive monthly pay outs from the remaining corpus;
  4. Flexible option: For receiving accumulated principal and dividends set a fixed amount per month for withdrawal over a certain period of time

Final Word
Mutual funds as retirement plan are a very good option for investors who seek to plan for their golden years.I personally, suggest Mutual Funds over Pension plans due to wide variety or range of products managed by professional experts, diversified portfolios,low cost products,liquidity,transparency,no hidden charges and full watch by a strong regulator SEBI.