Mutual funds: Retirement funds or equity funds: Which are better for your golden years?

Retirement funds, also referred to as pension funds, are investment vehicles that allow individuals to set aside a portion of their earnings for their retirement years. These funds play a crucial role in providing a reliable source of income post-retirement, as retirees receive regular annuity payments based on their investments until the end of their life. In recent times, the popularity of retirement funds has been on the rise.

According to data shared by the Association of Mutual Funds in India (Amfi), the assets under management (AUM) of these funds saw a significant increase, rising from Rs 8,408.96 crore on August 31, 2019, to Rs 30,394 crore on August 31, 2024, marking a substantial growth of 261 percent. ICRA Analytics has attributed this surge to factors such as escalating healthcare expenses, the trend towards smaller family units, and the increase in life expectancy among individuals.

Pension funds are financial vehicles that invest funds on behalf of investors. They generate revenue through these investments, which are then distributed as interest among the pool of funds. This interest provides a stable benefit that is not influenced by fluctuations in asset returns or market trends. R

Retirement mutual fund plans typically opt for low-risk investment choices, such as government securities, to maintain consistent returns over time. Pension funds can offer attractive interest rates of up to 11%, subject to the specific policy and investment strategies employed. Due to these factors, pension funds are considered a superior option for retirement planning compared to other alternatives.

In contrast, equity mutual funds primarily focus on investing in stocks of publicly traded companies. According to regulations set by the Securities and Exchange Board of India (SEBI), these funds must allocate a minimum of 65% of their assets towards equities and equity-related securities. The remaining 35% of their assets are permitted to be invested in debt instruments or money market securities.

Which can give you better returns?

"Retirement funds and equity funds share similar investment strategies, with retirement funds often employing diversified equity and hybrid styles. However, they come with a lock-in period of 5 years or until the investor reaches age 60, which limits flexibility. Equity funds, on the other hand, offer various options—such as large-cap, mid-cap, and flexi cap funds. While retirement goals can be achieved through equity funds, investors must maintain discipline and avoid frequent switching. A long-term, consistent approach in high-quality equity funds can help build a solid retirement corpus. Consulting a financial advisor ensures an appropriate balance based on the individual’s profile," said Rajani Tandale, Senior Vice President, TPP, 1 Finance. 

"Retirement funds typically offer higher potential returns and flexibility compared to PPF, NPS, or pension plans,” said Chintan Haria, principal, investment strategy, ICICI Prudential AMC. 

Retirement funds vs Flexi Cap funds

“One should begin investing in retirement mutual funds in the 20s or 30s to benefit from compounding. A systematic investment plan (SIP) of Rs 5,000 per month for 30 years at a 12 per cent return can grow to Rs 1.75 crore,” Haria said.

"Flexicap funds can be an excellent choice over retirement funds for a long-term investment strategy, especially for disciplined investors. They allow fund managers to actively adjust the portfolio across large-cap, mid-cap, and small-cap stocks based on market conditions, aiming to generate higher returns (alpha). In contrast, retirement funds come with a 5-year lock-in period (or until the investor reaches 60), which may limit your ability to make changes if there is underperformance or a shift in fund management strategies. A strategy that involves a higher allocation in flexicap or index funds initially, with a gradual increase in more conservative investments like debt funds as you near retirement, can provide both growth and stability. However, it’s crucial to consult a qualified financial advisor to tailor the allocation ratio to your specific financial profile and retirement goals," Tandale said.

Retirement funds

1. HDFC Retirement Savings Fund - Equity Plan

AUM: Rs 6,016 crore
Return (since inception): +22.48% p.a.
Risk: Very High

2. Nippon India Retirement Fund - Wealth Creation Scheme EQUITY
AUM: Rs 3,467 Crs
Return (since inception):: + 13.11% p.a.

3. Tata Retirement Savings Progressive Plan
AUM: Rs 2,132 crore
Returns since inception: 17.3% p.a.

Flexicap funds

1. Quant Flexi Cap Fund
Fund Size: Rs 7,710 Crs
Return (p.a): + 36.55%

2.JM Flexicap Fund
Fund Size: Rs 4,228 Crs
Return (p.a): + 34.19%

3. HDFC Flexi Cap Fund
Fund Size: Rs 63,436 Crs
Return (p.a): + 30.83%