Retirement planning is absolutely necessary so that you have a corpus at hand when you retire and need funds to meet your lifestyle expenses. As you plan for your retirement you have to factor in many questions like, how will you streamline your debt? Or how will you arrange for your medical bills? Or probably other aspects like estate planning. As individuals we want a comfortable and secure future and for that one has to start planning from a very early age in life because we all know how the adage goes, ‘make hay while the sun shines’.
Let us now understand which investment avenue better suits an investor. Say you are 40 and are planning to invest INR 12000 per month towards your retirement corpus and you plan to retire at the age of 58. Now, when it comes to planning for retirement, there are various types of retirement investment plans which might attract you. Two of the most popular ones being the pension plans and mutual funds. Are you now wondering which avenue would be the best alternative for creating a good retirement corpus?
Many argue mutual funds are better while some swear by pension plans. What do you think?Though mutual funds and pension plans both help in creating a fund for retirement, mutual funds have the upper hand. Here are a few pointers which will help you make a distinct choice instantly-
Mutual funds are flexible
Mutual fund investments give you flexibility both at the time of investment and also on redemption. While investing you can invest in monthly installments through SIPs (which are as low as INR 500 per month) or invest in one lump sum. The redemption is also flexible wherein you can choose to systematically withdraw from your funds every month (through a Systematic Withdrawal Plan) or access your funds at once. Pension plans don’t provide this flexibility. Though you can get flexibility in paying premiums (monthly premium, limited premium, single premium or regular annual premium), the maturity proceeds have a rigid redemption rule. You can withdraw only part of your accumulated corpus in cash. The remaining would have to be taken in annuity installments which are paid throughout your lifetime. This annuity pay-out might not be suitable when you require lump sum funds for meeting an emergency expense.
The returns are better in mutual funds
The growth promised by mutual funds is better than those promised by pension plans, whether traditional plans or market linked. In mutual funds, the expenses involved are also low thereby increasing the return generated. Pension plans have lower returns associated with them. If the plan is traditional, the insurer invests in Government backed investment options giving very low returns. In case of market linked, there are a lot of expenses associated with the plan (administrative expenses, fund management expenses, mortality charge, premium allocation expenses, etc.). These expenses reduce the investment and thus the returns are lower. Even the annuity pay-outs paid under annuity plans are very low and do not earn market-linked returns.
The tax implication cannot be ignored
When it comes to tax, if you choose an ELSS scheme of mutual funds, you can avail tax benefit on your investment under Section 80C. The same is true for pension plans. But in case of redemption the tax implication is different. Annuity payments received under pension plans are taxed. Only the commuted part is tax-free. In case of mutual fund investments, returns are taxed as long term and short term capital gains. Long term capital gain in case of equity mutual funds is only 10% of the gain amount and that too a gain in excess of 1lac. This means upto a gain of 1lac, no tax needs to be paid.
Given these benefits, mutual funds are the best retirement plans. You can start your retirement planning by choosing SIPs and investing an affordable amount every month. Thereafter, as your age increases, you should shift your investments to debt oriented funds to safeguard the generated returns against market fluctuations. Lastly, SWPs are a good way of redeeming your mutual funds partially to create a source of regular income in your retirement years. So, choose mutual funds and create an inflation proof and considerable corpus for your golden years.
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