Should you invest in Retirement savings fund?

Recently one HSBC Survey revealed that nearly 61% of the working population in India aged 45 plus wants to retire in the next 5 years, with the major reason of Work Related pressure affecting mental and Physical health.

Also financial constraints are the biggest reason for those unable to retire, as per that survey.

Surveys like this though takes a small sample size, but still presents an interesting and thought provoking picture. It’s quite heartening that what was considered as an alien term for private sector people 5-10 years ago, they at least have started talking about it. Earlier when talked about Retirement, most of the people used to reply that it’s quite far away, we’ll discuss later.

Now even youngsters have started connecting to this term that Retirement is a Reality, though many are still only wishing for good retirement years and have not started planning and acting towards it.

The other important thing that survey results shows is that of those 45+ pre-retirees            (worldwide) who would like to retire but are unable, 64% say this is due to not having saved enough, 32% say it is because they have dependents who rely on their income and 24% cannot retire due to having a lot of debt.

On the other side most of those who wants to plan towards retirement, still don’t take structured advisory route and feels that retirement oriented products like Insurance pension plan will answer their requirements. They don’t follow a structured investment plan, don’t work on the behavior gap, and are impatient enough to run after high returns and thus keeps on juggling between products. (This is my observation and not the survey result)

One may retire from work due to many reasons. It may be voluntary, or on superannuation. In case of professionals or business persons, it may be voluntary or forced (due to health conditions). With whatever reason, Retirement demands a planned approach towards saving and distribution (withdrawing) the money. And for those who are not planned enough to work like this, product manufacturers come out with retirement oriented products.

Retirement savings fund is a category in Mutual funds. It works like a simple mutual fund only, just that these funds comes with minimum 5 years lock in and are notified as approved pension fund by CBDT and thus qualifies for tax benefit u/s 80C.

If you invest in these funds from retirement perspective, then you keep investing in these till 60 years of age and then start SWP or redeem the units as and when required.

To refrain you from withdrawing units before 60 years of age, these Retirement savings fund would charge 1% exit load on every withdrawal before that age.

Last year Reliance came up with Reliance retirement fund and this year HDFC Retirement savings fund has been launched. NFO will be closing on 19^th feb’2016.

HDFC Retirement savings fund like Reliance has 3 variants – Equity, Hybrid (Equity Oriented), Hybrid (Debt Oriented). One may invest any one as per the risk profile.

Since these products are not that old, so can’t be commented much on performance and Investment strategy levels, but just have to be thought over if one should invest in these kinds of funds or not.

All retirement savings fund works in the same pattern, you save till retirement, and afterwards starts withdrawing as per need. In case of Insurance pension products, you buy immediate annuity products and in case of mutual funds you may start with SWP or redeeming the units. ( Read: Retirement plan or Pension Plan, what to chose?)

Now the main thing which you have to understand is that Retirement goal mostly comes at last of your earning life cycle, and most of other goals like you children education, marriage, business etc. comes in the early years of life. When you save for that goal which is far, your other goals may get hit, or may demand more money which you may not have planned for. In such situation, you tend to withdraw from your Retirement savings, presuming that you will save more lately in life.

This is the result of lack of planning. When you are investing into open ended products like mutual funds, you have to tame your behavior too, which lets you withdraw your savings every now and then for many reasons.

Insurance pension plans does not provide you that much liquidity which itself is dangerous as you never know which side and when life will take turn, and you would be In need of money.

( Read: How pension Plan in India works?)

So when it is a question of your hard earned money and your life goals, you need to have a process and plan, so you should be ready for all “what ifs”. Even if you don’t have all the answers, planning and regular reviews still keeps you aware about what is right. Buying products with no plan will not help in such cases.

I am sure after 5 years of lock in period is over; you would be tempted to move the money to some other “well performing fund” of that time. Else your Relationship manager or your insurance/mutual fund agent will push you to switch the corpus to some other fund/product with whatever reason. You might also withdraw it to fund your foreign vacation or to pay your child’s college fee, where at the beginning you thought of keeping it till retirement.

If you have a plan at place then all your needs and wants would have a separate arrangement to be taken care of. There may be a separate product or a corpus to look after your other goals, so only in extreme situations you may need to withdraw your important savings towards important goals.

Conclusion:

No Retirement savings fund or Insurance pension plans or any product for that matter, would get your retirement goal achieved unless you are financially planned. You have to make arrangements for other important goals separately, keep your risk management at place, should have to keep your debts in check, keep your expenses in line and above all should not let your emotions take over the process.

What are your views? Do you think that these retirement savings fund can help you in retirement planning? Especially when savings are not backed by proper planning.