Fenil's Library

Another eight days to go and still haven’t found a perfect fit for your tax planning needs?

There is one more option that might just strike a chord with you. It’s a mutual fund that offers the ease of planning your pension and in the bargain meets all the requirements of Section 80C of the Income Tax Act under which you can enjoy a rebate of up to Rs 1 lakh.

The need for planning your pension cannot be underscored enough, but you need to be smart enough to start setting aside money today itself, step by step. Most of you would be familiar with some investment options facilitatedby Central Board of Direct Tax (CBDT), which qualifies for tax rebate, under Sec 80C up to Rs 1 lakh per annum (p.a.).For example: infrastructure bonds,national savings certificate (NSC), public provident fund (PPF) and of coursethe tax planning schemes as well as insurance plans. 

Though Indian investors are aware of the pension schemes offered by insurance schemes, the pension schemes operated by mutual funds are less known.

However, currently, there are only two schemes that were launched in the 90s. Since then, there haven’t been any pension plans launched by mutual funds.

1. UTI-Retirement Benefit Pension Fund (UTI-RBP) by UTI Mutual Fund launched in 1994 

2. Templeton India Pension Plan by Franklin Templeton Investments; launched in 1997.

The fund managed by these pension plans is not a small amount with the two schemes managing Rs 600 crore. 

Let us look into some features of these schemes:

Investors can start to invest a minimum of Rs 500 monthly. A unit holder of the scheme has to ensure that he invests an aggregate sum of at least Rs 10,000 before he completes 52 years of age for UTI-RBP, while investors have to make a minimum investment of Rs 10,000 by the time they reach the age of 58 for Templeton India Pension Plan.

While, there is no upper limit up to which any amount can be invested in the scheme in any year, it may be noted that under current tax laws only a sum up to Rs 1,00,000 along with other specified investments is entitled for tax benefit in a year under Section 80(C) of Income Tax Act, 1961. 

The redemption procedure with these funds like most other pension plans is a little tricky.

Investors under UTI-RBP can withdraw money, but they have to maintain Rs 10,000 balance in their folio after withdrawal. Redemption of units is possible at any stage after investment subject to different loads levied (as given in Table 1). 

In case of UTI Mutual Fund’s offering, one can opt to invest without the benefit of tax rebates under Section 80(C) and by doing so you can withdraw money at any time subject to exit loads. 

Those who take advantage of the tax rebate cannot withdraw money before the stipulated three-year lock-in period. Investors can also opt for systematic withdrawal plan (SWP) by which they get money in hand at regular intervals i.e. monthly/ quarterly/ half-yearly/ annual intervals. 

In case of Templeton India Pension Plan investors can redeem a minimum amount of Rs 1,000, subject to a three-year lock in period from the date of investment. An investor can withdraw his full holdings after reaching the age of 58.

Investors also redeem units prior to reaching the age of 58 and after completion of three-year lock-in; however, exit load will be levied. In this scheme also investors have the option of SWP with alternatives of monthly/ quarterly/ half-yearly/ annual intervals. 

While the exit loads may seem steep, they will enable investors to be more disciplined.

Equity linked saving schemes can invest even 100% of their net assets into equity market. However, for mutual fund pension plans investment into equity market is restricted to 40% of their net assets and the rest they can invest into debt market. 

On the whole it is the equity component that one needs to be slightly wary of because this market segment is where the risk is higher. The debt segment is comparatively less risky than equity market. 

Having said that, investors need to realise that since these schemes are positioned for the very long term, one need not be overtly concerned of the equity component, as in the long term equity is believed to outperform all other investment classes.

The two pension plans have kept an equity allocation on an average of 28.49% and 34.81% respectively over the past one year. 

Other investment avenues, which one can opt for with tax benefits such as public provident fund (PPF), national saving certificate (NSC) and five-year fixed deposit (FD) are the pure debt products, which deliver fixed returns. 

However, the pension plans offered by insurance companies have the option of flexible asset allocation from where investor can choose pure equity or a mix of equity and debt or even pure debt. 

But, one ends up paying for this flexibility with the higher costs built into these products in the first few years of the investment plan. 

For load structure for the funds, see Table 1: A 2.25% and 1.5% entry load is not very high and if you invest directly, without the help of a financial planner you can save on this load as well.

This equity market meltdown has left investors shaken. As a result they are apprehensive about investing into equity linked saving schemes and are searching for a place to hide. To this extent, mutual fund pension plans did well in capping the losses in this prolonged bearish phase and in turn emerged as an option to which a long-term investor can look for saving taxes under Section 80(C). 

Over the period of past one year, ELSS category plummeted 40.89%. On the other hand pension plans owing to their much lower equity allocation fell by only 10.55% in the same period. 

Hence, the complete risk averse investor needs to be aware that these schemes can in fact deliver negative returns in the short time frame of a year. Those who are spoilt by the ‘guaranteed return’ syndrome might be better of looking elsewhere. 

If we take longer time frames i.e. of three years and five years, ELSS category delivered compounded annualised returns of (-) 4.95% and 9.68% respectively. While, during the same period, balanced funds, which usually have equity allocation in the range of 65-75%, had generated compounded annualised returns of (-) 4.28% and 10.19% respectively. 

Whereas pension plans generated compounded annualised returns of 1.68% and 8.50%, respectively, reflecting decent performances even in the longer time frames, given the impact of equity market meltdown. 

However, this picture drastically changes when we considered the performance period as of December 31, 2008 indicating the dominance of bulls. 

ELSS category had generated compounded annualised returns of 45% and 52% respectively over the period of past three years and five years respectively as of December 31, 2008. During the same period, pension plans had generated compounded annualised returns of 19% and 20%, respectively. 

Other options available under Section 80(C) such as PPF, NSC and five years FD provide returns in the range of 8- 9%. 

Amongst the various investment avenues under Section 80(C), ELSS is the most risky and could also be the best in terms of returns when bulls drive the market. ELSS redemptions are also tax free. 

While mutual fund pension plans are less risky than ELSS owing to their mix allocation of equity and debt with bias towards debt, withdrawing before reaching the age of 58 years would mean paying an exit load in the range of 1-3%. And returns are also taxable. 

However in the case of PPF, NSC and five-year FD, minimum lock-in period is five years and returns of NSC and five-year FD are taxable. Returns of PPF are tax-free. PPF, NSC and five-year FD used to give returns in the range of 8-9% and they are the least risky amongst the various investment avenues. 

So, investors, before choosing any of the investment avenues under Sec 80(C), need to check the parameters such as asset allocation, lock-in period, expenses, tax treatment of the gains and the most important thing is to know your own risk appetite.

 

Another piece of advice is that look at these pension plans for what they are. If you intend withdrawing money before you reach the age of 58 then these funds in the first place are not meant for you.