What factors should I look at before investing in pension products of mutual funds?
When we talk about retirement planning, the pension funds offered by mutual fund houses rarely get a mention as can be seen from the low corpus that these funds have garnered in a span of more than 15 years. However, if you want to consider investing in pension products offered by mutual funds, they do offer dual benefit of tax deduction (up to R1 lakh under Section 80C) as well as disciplined saving for your retirement years. Though, currently there are not many offerings available, you must look at factors like the investment strategies (equity-debt mix) that they follow and their performance track record till date. Since these are pension plans, any withdrawal from them comes at a cost. Finally if you opt for the tax deduction, you will have to abide by a 3-year lock-in period. As these are not pension schemes in the real sense, there is no compulsory annuity scheme to be purchased on retirement.
Does a systematic withdrawal plan work like a pension plan?
The purpose of annuity purchased under a pension plan is to especially help in providing a regular income stream in your retirement years. A systematic withdrawal plan (SWP) is offered by mutual funds, where withdrawals are allowed at fixed intervals systematically. However, technically these two are different products.
The insurance industry for a long period has sold fixed and variable annuities for people to meet retirement needs, and the mutual fund industry has just started to introduce similar product — SWP to meet needs of regular income, which could be for retirement or for other purposes as well.
Before rushing to purchase any of these types of products, there are a number of factors to be considered like what frequency the pay-out would be received, steady income flows and sound investment strategies followed by the fund in its initial years.
Will the fund house give me the same day’s NAV if I put my application for redemption after 3 pm?
No, the NAV applicable for your transaction depends on the cut-off timings as per the Sebi guidelines. Again cut-off timings are different for liquid funds and non-liquid funds. For non-liquid mutual funds, applications received up to 3 pm on a business day, would have closing NAV of that business day on which application is received. In respect of applications received after 3 pm on a business day, the transaction the NAV of next business day would be applicable and not the same day’s NAV.
For liquid funds applications received up to cut-off time of 2 pm would get closing NAV of the business day immediately preceding the day of receipt of the application. And for applications received post cut-off time of 2 pm would get closing NAV of the business day immediately preceding the next business day
The writer is senior investment analyst, Morningstar India