HDFC Retirement Savings Fund – Tax Saving cum Pension Scheme – Details & Review

HDFC Fund house has launched a New Fund Offer (NFO) called HDFC Retirement Savings Fund on 5^th February, 2016. It is an open-ended, tax savings and pension oriented mutual fund scheme. The NFO is open for subscription from 5^th February to 19^th February, 2016.

Around the same time last year, Reliance Fund house launched a similar retirement / pension scheme known as ‘Reliance Retirement Fund’. The returns generated by this fund is not up to the mark (though 1 year is a very short-term to measure a fund’s performance).

Reliance Retirement fund has two options – Wealth creation option (the equity oriented hybrid plan of the fund) and Income Generation option (the debt oriented plan of the fund). Both the options have under-performed in their respective fund categories.

HDFC Retirement Savings mutual fund will be managed by well-known and talented fund managers. They are Chirag Setalvad (who manages popular schemes like HDFC Mid-cap, HDFC Balanced & Children’s Gift funds), Shobhit Mehrotra (who manages mostly debt-oriented schemes) and Rakesh Vyas.

So, is HDFC Retirement Savings fund is a good option to invest for your retirement goal? Does it offer income tax benefits? What are its features, pros & cons? Let’s discuss..

Key highlights of HDFC Retirement Savings Fund

• HDFC Retirement Savings scheme is an open ended scheme (An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period.)
• It offers three schemes / investment plans during accumulation phase with distinct investment portfolios as below;
  • HDFC Retirement Savings Fund – Equity Plan : This is an equity oriented plan. In this plan, 80% to 100 % of the funds are invested in Equity & Equity related instruments. The remaining 0 – 20% in debt and money market securities.
  • HDFC Retirement Savings Fund – Hybrid Equity plan : This is like an equity oriented balanced fund. In this option, 60% to 80 % of the funds are invested Equity & Equity related instruments. The remaining 20 to 40 % in debt and money market securities.
  • Hybrid Debt Plan : This is a Debt oriented plan. 70 to 95% of the scheme’s funds are invested in debt and money market securities and 5 to 30% in equity/equity related instruments.
• Investments in HDFC Retirement Savings Fund are eligible for tax deductions up-to Rs 1.5 Lakh in a Financial Year, as per Section 80C of the Income Tax Act 1961. This is a Notified Pension Fund approved by the Central Board of Direct Taxes, Ministry of Finance.
• In addition to tax deductions, investments in the Equity plan & Hybrid – Equity Plan will be treated as investments in equity oriented funds. The income earned (capital gains) at the time of redemption on these investments will be treated as long term capital gains which are exempt from income taxes. Any capital gains arising out of the Hybrid – Debt Plan at the time of redemption would be taxable as per the applicable tax rates and indexation benefits thereof. (Read : Mutual Funds & Tax Implications)
• The minimum initial investment (purchase/switch-in) amount during the NFO period and on an ongoing basis would be Rs.5,000 and any amount thereafter.
• Minors are not be eligible to invest in this fund.
• Lock in Period : The fund has a lock-in period of 5 years from the date of allotment of units, during which the units cannot be redeemed or switched out.
• Exit Load : Upon completion of the lock-in period of 5 years, the units can be redeemed with an exit load of 1% till the age of 60 for an investor. After completion of 60 years of age, the investor can redeem the units without any exit load. (If an investor invests say at the age of 58, the minimum lock-in period of 5 years is still applicable, but exit load will not be applicable as the redemptions are allowed after 5 years, by that time the investor’s age would be above 60 years.)
• Switch : After completion of initial lock-in period of 5 years the investor can switch between different plans (three plans) of the fund without attracting any exit loads. Though the switches are treated as normal redemptions (subject to tax implications), there will not be any fresh lock-in period.
• Withdrawal options : You have four options to redeem the accumulated fund units as below;
  • Lump sum option – you can withdraw the entire accumulated fund.
  • Switch option – You have the option to switch entire / part of units accumulated to any other Investment Plan within the scheme or else switch to any other open-ended schemes of HDFC Mutual Fund.
  • Systematic Withdrawal Advantage Plan (SWAP) Option – If you wish to receive a fixed amount monthly or at pre-specified intervals from the accumulated corpus, can opt for this option.
  • Systematic Transfer Plan (STP) – You can enroll for the STP and choose to Switch on a daily, weekly, monthly or quarterly basis from this Scheme to another Scheme of HDFC Mutual Fund, which is available for investment at that time.

My opinion on HDFC Retirement Savings Fund

My opinion and some of the important points to ponder over before investing in this retirement fund are as below;

• It is better to avoid investing in New Fund Offers. We have so many good mutual funds (equity or debt) with proven track record which are available for investments. NFO schemes do not have past performance data. Some investors may have a misconception on NFO’s Net Asset Value (NAV). It is a common misconception that an existing fund’s whose NAV is around Rs 100 is more expensive and less profitable than a NFO at Rs 10. This is just a myth.
• The fund charges 1% Exit load on redemptions before the attainment of 60 years of age.
• ‘The Debt plan option’ is not suitable for young (in terms of age) investors.
• We have three kind of pension plans – i) pension plans offered by Life insurance companies, ii) NPS (National Pension System) & iii) Pension or retirement funds offered by Mutual Funds. In terms of liquidity, transparency, flexibility and taxation point of view, equity oriented pension mutual funds like these do outscore both NPS & Life insurance pension plans. The maturity proceeds (or withdrawals) of NPS & insurance pension plans are taxable. Also, it is mandatory to re-invest the withdrawals (full or partial) in annuity products offered by life insurance companies. Even the annuity income from such plans is taxable.
• If you are an young investor and planning for your retirement, you are better off investing in Best Equity mutual funds which can invest up-to 100% in equity related instruments. You may even consider investing in top Balanced funds with proven track record as one of the investment options for your retirement planning (if you are a middle aged individual).
• In case if your investment objective is tax saving cum long-term wealth accumulation for your retirement, you can consider other investment options like Equity linked tax savings schemes and/or Provident Funds.
• When you are planning for your long term goals like ‘retirement’, you should have the flexibility and control on the way you chose various asset classes. Sometimes it is prudent to avoid ‘defined products’ like retirement fund or pension scheme etc., You should have a fair mix of conservative & aggressive investment options in your portfolio.

Most of the investors (retail investors) move out of the equity mutual funds within few years of investment. Do not withdraw the accumulated funds meant for building your retirement corpus. Staying invested and periodically reviewing your retirement plan has proven to be best ways of creating long term wealth (which can generate inflation protected retirement income).

Will you consider investing in pensions schemes like HDFC Retirement Savings Fund? Do you have your retirement plan in place? Kindly share your views and comments.

(Image courtesy of Mister GC at FreeDigitalPhotos.net) (Kindly note that ReLakhs.com is not associated with HDFC Mutual Fund and this is NOT a sponsored post.)