Investment in designated pension plans from mutual funds allows accumulating a corpus for retirement

Mutual funds are ideal for long-term financial planning. But unfortunately only two asset management companies, UTI and Franklin Templeton, have till date been allowed to launch funds whose purpose is to help people plan for retirement. These invest up to 40% money in equities and the rest in debt. Plus, investments in both are eligible for tax exemption up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Both levy an exit load to discourage people from quitting early.

Pension schemes work just like other mutual fund schemes. Funds contributed by different investors are pooled together and invested in a portfolio of securities. The investor’s share of the pool is determined by the number of units held. The fund will define the minimum investment. The investment objective of the fund would be to build a retirement corpus for the investor over a long period of time, by using a combination of equity and debt securities. These funds differ in the exit options available to investors. Since the corpus is being accumulated for retirement, mutual funds penalize withdrawals from the fund before the assumed retirement age of 58 years. After the specified age, the funds accumulated can be freely withdrawn. Investors can choose to remain invested and receive a periodic payment in the form of dividend or redemption while the rest of the funds continue to remain invested and grow. Or the corpus can be withdrawn to buy an annuity. The returns from mutual fund schemes, including pension plans, cannot be assured according to SEBI’s guidelines. Investments made into these funds are eligible for deduction from total income under section 80C of the Income Tax Act. At the time of redemption they will be subject to capital gains tax applicable to debt-oriented funds. The products described above are designed primarily for accumulation of the retirement corpus.


You can invest in these plans, if you are keen on a significant equity component.