What are retirement schemes?
Retirement schemes are solution-oriented mutual funds designed for long-term retirement planning. They come with a mandatory lock-in of five years or until retirement, whichever is earlier. “These funds typically combine equity and debt to balance growth and capital preservation over time,” says Gaurav Kulshrestha, chief investment officer (CIO), Nexedge Capital.
Most retirement funds in India currently operate like hybrid funds, with asset allocation moving within pre-set bands for equity and debt. Fund managers adjust allocations within these bands according to market conditions. In some schemes, the portfolio becomes less risky and more debt-oriented as retirement approaches.
Different from diversified equity schemes
One major difference between retirement schemes and diversified equity schemes is that the former work with sticky capital. The lock-in reduces redemption pressure on the fund manager.
“Unlike diversified equity funds that primarily focus on generating higher returns, retirement schemes seek to build a more stable corpus while balancing risk,” says Vinayak Magotra, product head and founding team, Centricity WealthTech.
Impose behavioural discipline
A key advantage of these funds is the behavioural discipline they impose. “The statutory lock-in prevents retail investors from panic-selling during market downturns,” says Archit Doshi, senior vice president, PL (Prabhudas Lilladher) AMC. It allows compounding to work without disruption from short-term reactions.
Sticky capital also helps fund managers reduce cash drag and take illiquid, high-conviction, long-term bets without worrying about sudden redemptions during market corrections. “Fund managers are able to capture the illiquidity premium by making long-term value bets that can enhance alpha generation,” says Doshi.
Some of these funds also offer multi-asset diversification by including gold in the portfolio, which helps insulate the corpus against severe macroeconomic shocks.
“Specific notified retirement funds offer tax efficiency by allowing investors to claim deductions of up to ₹1.5 lakh under Section 80C,” says Doshi.
Their equity exposure also gives them the ability to beat inflation over the long term. “Structured asset allocation reduces the need for investors to actively manage shifts between equity and debt,” says Magotra.
Investors do not need to rebalance the portfolio or manage asset allocation themselves. More of these funds are also expected to resemble life-cycle funds that follow a glide path and automatically shift from equity to debt as retirement approaches.
“Sebi’s push towards life-cycle-based structures is a meaningful evolution,” says Kulshrestha.
Limit access to liquidity
The biggest drawback of these funds is the lock-in of five years, or until retirement, whichever is earlier. This limits flexibility and reduces access to liquidity.
“Investors cannot access their money even in emergencies,” says Feroze Azeez, joint CEO, Anand Rathi Wealth. He points out that many of these funds also have higher expense ratios than diversified equity funds. The fund manager, not the investor, decides the asset allocation.
“An investor may want a higher equity allocation even near retirement, given their risk profile, but the fund manager will turn conservative because of the category’s characteristics,” says Azeez.
These funds suit investors who recognise their own behavioural weaknesses. “They are especially suited for those prone to frequent churning or panic-selling during volatility,” says Doshi.
People in their 30s and 40s who want a fill-it, shut-it, and forget-it approach and prefer to outsource asset allocation and risk mitigation may consider them.
Investors nearing the end of their careers may benefit from conservative variants that prioritise capital preservation over aggressive growth.
People who need high liquidity should avoid these locked-in structures.
“For sophisticated investors who already manage diversified portfolios with defined asset allocation strategies, retirement funds are not critical,” says Kulshrestha.
Retirement funds versus NPS
Retirement mutual funds offer greater flexibility in access to funds and are easier to understand.
“The National Pension System (NPS) is a lower-cost product and offers investors an earmarked tax deduction of ₹50,000,” says Harsh Vira, chief financial planner and founder, FinPro Wealth.
It is suitable for salaried individuals and long-term investors who are comfortable locking in money for retirement and do not need regular liquidity.
Money in NPS stays locked in till the age of 60, and a portion must go into an annuity. “NPS is more restrictive in terms of withdrawals and exit rules, which may not suit all investors,” says Jyoti Prakash Gadia, managing director, Resurgent India.
Retirement funds versus deferred annuity schemes
A retirement mutual fund is a market-linked accumulation product. “It is suitable for investors who are still in the corpus-building stage and want their money to possibly grow over time through equity and debt market exposure,” says Gadia. These funds are better suited to younger or middle-aged investors who still have time before retirement. “Investors should be able to absorb some market ups and downs,” says Vira. The main advantages of retirement funds are growth potential, transparency, and flexibility. “They can help investors build a larger retirement corpus over time and can beat inflation, but returns are not guaranteed,” says Vira.
Deferred annuity schemes offered by insurers serve a different purpose. “Their objective is income certainty rather than wealth accumulation,” says Gadia. They offer a fixed, regular income after retirement with no market risk, but lower returns.
“These products are generally better suited for conservative investors who prioritise guaranteed income over return maximisation,” says Gadia.
The writer is a Mumbai-based independent journalist
