New retirement funds are no different from tax-saving ELSS schemes
January, 12th 2015
Retirement funds are here, unfortunately. Regular readers of this column would be shocked at that 'unfortunately', since I've written about the need for retirement-focussed mutual funds. But I say unfortunately because the retirement funds that are now in the process of being approved and launched are so in name only. Practically speaking, they aren't much different than the tax-saving ELSS funds that have been available for a long time.
For the investor, they carry no additional advantage over ELSS funds, either as tax breaks, or in returns, or in any investment characteristic that makes them particularly suitable as retirement savings. These funds share the same Rs 1.5 lakh tax-saving allocation under Section 80C that is there for EPF, PPF, ELSS funds and so many other things. So, there's no additional tax break.
Why then have these funds been launched? The idea of a mutual fundbased retirement benefit scheme has been around for a while. The original idea was that this would be something like NPS tier 1. In that conception, fund companies panies would be allowed to launch 'retirement plans' of pre-existing schemes with good track records. Employer contribution to such funds would not be counted towards the tax-saving limit and the investments would be locked in till retirement.
Since a fund's performance and suitability can change over the long period of time till retirement, savers would be allowed to switch from one fund to another without it being counted as a sale of investment for tax purposes.
Given the choice of funds and the ability to switch, along with lock-in till the age of 58, this would have been a very genuine retirement saving option. When the Modi government's Budget was first presented, it appeared that some significant move had been made on retirement funds. Page 12 of the Budget Highlights document said, 'Uniform tax treatment for pension fund and mutual fund-linked retirement plan'.
From this it appeared that the government had accepted Securities and Exchange Board of India's (Sebi) recommendation for creating a new class of mutual fund retirement plans. However, there was no reference to this in the Budget speech, nor in the Budget Bill itself. That little reference to retirement plans seemed to have found its way into the Budget highlights without anything to back it up.
Later, it was explained that there was no mention in the Finance Bill because no change in the law was needed to launch the 'mutual fund-linked retirement plan'. That was a clue that whatever was being referred to in the Budget was nothing like the original idea had been. With the mention in the Budget, the Sebi was free to go ahead and approve 'mutual fund-linked retirement plans'. That process has moved forward and now a number of such funds are in the process of being approved by the Sebi and one (SBI's) has already been approved.
All have a lock-in of three years, unlike genuine retirement products that can't accessed till actual retirement. After the three years are over, they do have an exit load till the age of 58, but that's hardly a deterrent to savers casually withdrawing without giving it too much thought.
All this makes them identical to ELSS funds. In fact, they are less suitable for long-term growth and inflation-beating as they have lower equity investments than ELSS funds do. But obviously, all have the word 'retirement' in their names. Investors might think that these funds are specially suitable for retirement savings, whereas they are not.
Unless you are getting some special taxbreak or employer contribution, you are free to keep any investment intact till retirement and that's a retirement plan. Of course, there's no harm if these funds encourage non-savers to save for retirement, but that's about it.