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How Do Mutual Fund Pension Plans Work To Build Your Retirement Corpus?

Dec 02, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Mutual Fund Pension Plans are a smart and systematic way to build your retirement nest egg.

Pension plans are means of generating funds for the golden years of a person’s life. New age mutual fund pension plans offer a systematic way of saving up a sizeable retirement corpus. These plans now come with a hybrid option that you can choose during retirement planning. Meaning, these pension plans cover both debt and equity investments.

How do Mutual Fund Pension Plans work?

These mutual funds work in quite a simple manner. They pool the funds of several investors and use it to invest in equity and debt markets. Equity exposure on pension plans vary close to 40%, which is comparatively lower when you compare it to balanced funds (65% to 70%).

It is important to remember that withdrawing from your pension plan before you retire is not a good idea, given that inflation by then can make the decision a costly one. Most plans consider the standard retirement age to be 58-60 for this purpose.

You may choose to either withdraw a lump sum or opt for regular income (annuity payments) once the plan has matured. No matter your choice you can rest assured that the balance units, post withdrawals, shall continue to remain invested and continue to grow. Pension plans are a smart step towards retirement planning, and investing in one, ensures that your nest egg post-retirement, benefits from compounding of returns that you make from it. The 40% exposure in equities ensures that your investment benefits from the highs of the stock market.

A word of caution before investing, you should be aware of all aspects related to the investment. For example, mutual fund pension plans charge a heavy exit load if you withdraw your investment returns prematurely. Moreover, returns from mutual funds are taxed and could make you reconsider an investment in pension schemes.

However, the compounding effects of mutual fund pension plans, on the value of your returns at the time of maturity, and in the long run, far outweigh the cons by a huge margin.

Mutual fund pension plans details

The lock-in period of the mutual fund pension plan is longer than that of equity-linked savings scheme (ELSS). While an ELSS has a lock-in period of 3 years, these plans have a lock-in period of 5 years.

The higher lock-in period of these plans has a logical reason to it, one that your retirement planning must consider considering for any other financial instrument. One, the long-term aspect of pension plan investments like these, give investors the benefit of compounding returns over time. Market volatility is a concern that you can override over the short-term if you are consistent with mutual funds.

Just as saving is a discipline of habit, investing is no different and must be done so. Pension plans such as these, ensure that you benefit from the market, while steadily building towards a comfortable nest egg during your golden years.

It is important to remember that mutual fund pension plans aren’t very liquid. There are high pre-withdrawal charges in the form of an exit load of 1% on early withdrawal. However, you have the option to opt for a systematic withdrawal plan to meet your regular cash flow needs.

To conclude

Retirement products, offered by mutual fund houses, are a good option to have on your portfolio, when planning your retirement. They have a lock-in of 5 years and a 1% exit charge on premature fund withdrawal. When you compare it to the lock-in of 15 years in an NPS, mutual fund pension plans aren’t that long.

While they offer decent returns from the market, mutual fund instruments aren’t risk averse to market volatility. There are other secure options available such as insurance annuity plans available at Aegon Life. You may want to include Insta Pension Plan in your retirement portfolio to secure an income post retirement. You may want to consider annuity plans as part of your retirement planning process.

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