Best Retirement Funds
About Retirement Mutual Funds
Retirement funds are investment instruments that allow individuals to save a portion of their monthly or yearly income for their retirement. This means the investor keeps investing in the pension fund until retirement. Upon retirement, the investor receives either a lump-sum amount of money or they receive monthly payments. These funds are typically offered by employers or financial institutions, and they may offer a variety of tax advantages.
Retirement funds invest in a variety of assets, such as stocks and bonds. Therefore, it is important to check out the constituents of the fund before investing in it.
Retirement funds can be a very effective, low-risk way to save for retirement.
How Do Retirement Funds Work?
A retirement fund basically requires you to keep investing in the fund periodically right up until your retirement. During this entire time, your investment’s value increases based on the returns that the fund obtains from stock or bond investments. These returns are further reinvested, and they compound over the years.
Once you retire, you receive the entire final value of your investment, either in the form of a lump-sum payment or as a monthly annuity in the following years.
Features of Retirement Funds
- Less risky: Pension plans and mutual fund retirement plans are typically less risky than other investment options, making them a good choice for retirement savings. These plans often invest in low-risk securities, such as government bonds and securities, to provide steady returns.
- Hybrid plans: Mutual fund companies have also started offering hybrid pension plans. These plans invest in both debt and equity markets, but the equity exposure is typically kept low, at around 40-50%.
- Withdrawal conditions: Early withdrawal of funds from retirement plans is discouraged, typically before the retirement age of 58-60. Investors can choose to withdraw a lump sum amount or receive an annuity income every month.
- Liquidity: Liquidity in these pension funds is typically low, as there are early withdrawal charges and penalties. Investors should carefully consider their requirements and aspirations before investing in a pension plan. Additionally, the returns on pension plans are taxable, which may make them less attractive to some investors.
- Lock-in period: Retirement mutual funds typically have a lock-in period of 5 years, which is longer than the 3-year lock-in period for ELSS funds. However, a longer lock-in period can be beneficial due to the power of compounding. When investments are held for a longer period of time, they are less affected by short-term market fluctuations.
Advantages of Investing in Retirement Funds
Here are some of the benefits of saving for retirement in a retirement fund:
- Provides income in old age: The best thing about retirement funds is that they provide you with financial strength in old age. They may provide you with a steady stream of income, which, taken together, may be much higher than the investment made.
- Flexibility – You, as an investor, can choose either a debt fund or a sort of hybrid fund. You can also choose whether you want the post-retirement amount as a lump sum or in an annuity.
- Life insurance – Most retirement funds come with a life insurance cover. This helps people most susceptible to diseases to withdraw a large amount at the time of disease-related financial needs.
- Tax advantages: As mentioned above, contributions to retirement funds are tax-deductible, e.g. as under Section 80CCC under the IT Act. This means that individuals can lower their taxable income by contributing to a retirement fund.
- Compounding of returns: Compounding your returns over a really long period, like 30 years or more, allows your investments to grow by many multiples.
- Professional management: Retirement funds are typically managed by professional investment managers. This can be a good option for individuals who do not have the time or expertise to manage their own investments.
Risks Involved in Retirement Funds
Retirement funds are largely low-risk investments, but they are not completely risk-free. The following are some of the risks associated with retirement funds:
- Insufficiency of funds – Multiple risks increase after you reach a certain age, especially risks related to your health and security. Therefore, at the time of emergency, it may happen that a very large lump sum amount is needed that your retirement fund may not be able to cover.
- Outliving your money – It may happen that your retirement fund can pay you only up to a certain number of years and not necessarily until your demise. Therefore, there may come a time when you are alive, but your payments have stopped.
- Market risk – This is the risk of the value of the assets held by your pension fund dropping too low, such that your returns from the pension fund fall far short of other investment opportunities.
- Inflation – If your amount of payment, either lump sum or monthly, is fixed, but inflation is increasing at a high rate, then the real value of your retirement fund may fall too much.
Factors To Consider Before Investing in Retirement Funds
Before you contemplate investment in a retirement fund, you may want to consider the historical performance of the funds you are opting to invest in. Having said this, there are other factors to consider before you invest:
- Risk tolerance – You need to check the type of assets which the retirement funds are investing in so that you can better understand what level of risk and volatility you will have to deal with.
- Timeline of investment – You need to understand that the returns from the retirement fund will not be realised until a very long time. Yet, you need to start investing early on in order to experience the fullest impact of compounding.
- Inflation – The rate of return from the retirement fund needs to be more than the rate at which inflation reduces the purchasing power of your money. Usually, a rate of return similar to that of a savings account is not enough to overcome inflation.
- Balanced portfolio – Although retirement funds are run by capable fund managers, you should manage your risk well by diversifying your investments and allocating capital in a way that leads to a balanced portfolio.
- Payout mode – Choose whether you want a lump sum payment or a periodic payment at the end of the investment tenure. This will depend on the kind of requirements and aspirations that you will have at that moment. For example, if you are using the money to sustain yourself for a long time, then a periodic payment may be preferable.
Who Should Invest in Retirement Funds?
The main purpose of a retirement fund is to provide a source of regular income to the investor, especially at a time when they have hardly any other major income stream. Therefore, people who foresee a future where they might face such a circumstance where their savings may not be adequate to sustain their needs should definitely consider investing in a retirement fund.
In simple terms, it is a highly long-term investment that can be started at an early age as well as in later years. You must have a long-term investment horizon in mind before committing to such a fund. It is also a useful tool for diversification for investors who are already investing in short and medium-term assets.
There are, however, different kinds of retirement funds. For example, certain retirement funds invest only in debt instruments. Investors with a risk-averse attitude may prefer this type of fund. Some invest in both debt and equity. Investors who are willing to take on more risk in order to achieve higher returns would prefer to invest in such a fund.
For example, the National Pension Scheme is a government-run retirement fund that allows investors to grow their wealth by investing in both equity and debt instruments. In fact, this scheme allows you to receive 60% of the fund right away upon retirement and the remaining 40% as a monthly annuity. The amount received on maturity is tax-free.
Taxability of Retirement Funds
Contributions made towards retirement mutual funds are tax-exempt up to a maximum of ₹1.5 lakh under Section 80CCC of the Income Tax Act, 1961. This includes both new plans and renewal of existing pension plans. However, withdrawals from retirement mutual funds are taxable. If the money is distributed as an annuity, it is taxed at the individual’s income tax slab rate.
Periodical pension payments are fully taxable, similar to salary income. However, the taxation of lump-sum withdrawals after retirement may vary depending on the individual’s employment status. Government employees, including armed forces personnel, are exempt from all taxes on lump-sum withdrawals.
Non-government employees may be eligible for partial tax exemption up to a certain amount. If gratuity is included with the pension, one-third of the total amount is tax-exempt. Otherwise, only half of the total amount is tax-exempt.
If a family member disburses the pension as a monthly annuity, it is taxed as income from other sources. However, it is exempt from tax up to a certain limit, that is, ₹15,000 or one-third of the monthly annuity, whichever is less.
Lump sum withdrawals from retirement mutual funds are tax-exempt for all individuals.
How To Invest in Retirement Funds?
Investing in retirement mutual funds is a hassle-free process when done through your Angel One account. Just follow these simple steps:
Step 1: Log in to your account on Angel One.
Note: In case you do not have an account with Angel One, you can open a Demat account with us within a few minutes by submitting the documents required.
Step 2: Determine a retirement fund that suits your needs and risk profile. You can learn more about each retirement fund on the Angel One app. Things to do at this stage are:
- Look for the fund you want to invest in.
- Analyse the fund’s performance in the preceding years, tax incidence, and the sectors and companies it invests in. Calculate the potential returns using the mutual fund returns calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the retirement fund you want to invest in, open your Angel One account, go to the mutual funds section, and look for it. Once you find it:
- Decide whether you want to invest via SIP or make a one-time investment.
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Retirement Funds to Invest in
| Name of the Fund | AUM (in ₹ crore) | Expense Ratio (%) | 3 Year CAGR | 5 Year CAGR |
| ICICI Pru Retirement Fund-Pure Equity Plan | 1,050 | 0.72% | 20.68 | 24.91 |
| HDFC Retirement Savings Fund-Equity Plan | 6,009 | 0.71% | 19.47 | 24.83 |
| HDFC Retirement Savings Fund-Hybrid-Equity Plan | 1,583 | 0.92 | 14.81 | 18.33 |
| Nippon India Retirement Fund-Wealth Creation | 3,336 | 0.98 | 16.96 | 17.62 |
| Tata Retirement Sav Fund – Mod Plan | 2,108 | 0.60 | 14.16 | 16.90 |
The listed top funds are for informational purposes only and not recommendations. Based on a 5-year CAGR as of January 7, 2025, these figures are subject to frequent changes. For real-time updates, visit Angel One.
ICICI Prudential Retirement Fund – Pure Equity Plan
The ICICI Prudential Retirement Fund – Pure Equity Plan stands out as a top-performing retirement fund with a robust five-year CAGR of 24.91% and a three-year CAGR of 20.68%. With an AUM of ₹1,050 crore and an expense ratio of 0.72%, it offers an attractive combination of growth potential and affordability. The fund invests predominantly in equity markets, making it an ideal choice for investors seeking long-term capital appreciation.
ICICI Prudential Asset Management Company, the fund’s manager, is a joint venture between ICICI Bank and Prudential Plc, a leading financial services provider in the UK. With a total AUM of ₹8,18,739.87 crore across 99 schemes.
HDFC Retirement Savings Fund – Equity Plan
The HDFC Retirement Savings Fund – Equity Plan offers an impressive five-year CAGR of 24.83% and a three-year CAGR of 19.47%. Backed by an AUM of ₹6,009 crore and a competitive expense ratio of 0.71%, this fund can be suitable for investors looking to build wealth over the long term through equity investments.
Managed by HDFC Asset Management Company, a joint venture between HDFC Ltd. and Standard Life Investments, the fund benefits from the AMC’s proven track record and expertise in managing investments. With ₹7,64,839.65 crore in AUM across 83 schemes, HDFC AMC is one of the leading mutual fund houses in India, making this fund a reliable choice for retirement savings.
HDFC Retirement Savings Fund – Hybrid-Equity Plan
For those seeking a balanced approach, the HDFC Retirement Savings Fund – Hybrid-Equity Plan offers moderate exposure to equity and debt. It delivers a five-year CAGR of 18.33% and a three-year CAGR of 14.81%, with an AUM of ₹1,583 crore and an expense ratio of 0.92%. This fund caters to investors who prefer a blend of stability and growth in their retirement portfolio.
HDFC AMC, known for its extensive experience and robust investment strategies, manages this scheme. Its hybrid nature ensures lower volatility, making it a suitable option for conservative investors.
Nippon India Retirement Fund – Wealth Creation
The Nippon India Retirement Fund – Wealth Creation Plan delivers a solid five-year CAGR of 17.62% and a three-year CAGR of 16.96%. With an AUM of ₹3,336 crore and an expense ratio of 0.98%, this fund is designed for investors who aim to accumulate wealth for retirement through equity investments.
Nippon India Mutual Fund, established as a trust under the Indian Trusts Act, 1882, is one of India’s leading fund houses. It has an average AUM of ₹4,16,723.63 crore across 80 schemes, showcasing its strong presence in the market. The fund combines the AMC’s extensive experience with robust equity strategies to provide long-term growth.
Tata Retirement Savings Fund – Moderate Plan
The Tata Retirement Savings Fund – Moderate Plan offers a balanced investment approach, with a five-year CAGR of 16.90% and a three-year CAGR of 14.16%. Its AUM of ₹2,108 crore and a low expense ratio of 0.60% make it a cost-effective option for retirement planning.
Managed by Tata Asset Management, a company with over 25 years of investment experience, this fund focuses on delivering steady returns with reduced risk. With ₹1,83,899.46 crore in AUM across 60 schemes, Tata AMC leverages its expertise to provide investors with reliable and consistent performance.
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Retirement Funds FAQs
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