Retirement Mutual Funds: Meaning, Types, Benefits and Why Invest

Explore Retirement Mutual Funds in depth. Learn about the types of plans, their purpose, and the advantages they offer in securing your post-retirement financial future.
4 mins
13 october 2023

Retirement planning is a vital financial goal for individuals to ensure a financially secure and comfortable post-retirement life. One of the tools that have gained popularity in recent years for retirement planning is the Retirement Mutual Fund. These funds, are designed to help investors accumulate a corpus over their working years and provide a steady income stream during retirement to the extent of the redemption value of their holding. In this article, we will explore what Retirement Mutual Funds are, and whether they are a good option for retirement planning.

What is a Retirement Fund?

A Retirement Mutual Fund is a specialised investment vehicle created to meet the long-term financial goals of retirement planning. These funds are managed by Asset Management Companies (AMCs). The primary objective of a retirement fund is to accumulate wealth over time and provide a regular income stream when an individual retires to the extent of the redemption value of their holding. The solution-oriented retirement fund has a lock in period of 5 years or till retirement age.

Different Types of Plans for Retirement

Retirement Mutual Funds come in different types to cater to the diverse needs and risk profiles of investors:

  • Equity Funds:
    •  Equity-based retirement funds primarily invest in stocks and equities. They offer the potential for higher returns but also come with higher volatility.
    • These funds are suitable for investors with a higher risk tolerance and a longer investment horizon.
  • Debt Funds:
    • These funds primarily invest in fixed-income securities like government and corporate bonds.
    • Suitable for investors with a low-risk appetite looking for stable returns.
  • Hybrid Funds:
    • Hybrid retirement funds invest in a mix of equity and debt instruments.
    • They aim to strike a balance between capital appreciation and income generation.

Purpose of a Retirement Fund

The main purpose of a Retirement Mutual Fund is to provide long term capital appreciation to meet retirement goals. These funds enable investors to:

  • Accumulate a corpus over their working years through systematic investments.
  • Enjoy the power of compounding by staying invested for the long term.
  • Create an income source to maintain their lifestyle post-retirement.

Advantages of Retirement/Pension Funds

Retirement Mutual Funds offer several advantages that make them a viable option for retirement planning:

  • Flexibility: Investors can choose from different asset allocation strategies based on their risk tolerance.
  • Tax Benefits: Certain retirement funds offer tax deductions under Section 80C of the Income Tax Act, reducing the taxable income.
  • Less Risky: Debt-based retirement funds provide stability and lower risk compared to pure equity funds.
  • Long-Term Investing: Retirement funds encourage disciplined, long-term investing, which can lead to significant wealth accumulation.

What Should be the Mode of Investing?

Investors can choose between two modes of investing in Retirement Mutual Funds:

1. One-time Investment:

  • A one-time investment, also known as a lump-sum investment, involves investing a significant amount of money at once into a Retirement Mutual Fund.
  • This mode of investment is suitable for individuals who have a substantial corpus of savings or a windfall amount, such as an inheritance or a bonus, that they want to invest for their retirement.
  • It provides the advantage of potentially benefiting from market conditions at the time of investment. If the market is favourable, the entire lump-sum amount can be invested, potentially leading to immediate capital appreciation.
  • However, it comes with higher risk because the entire investment is exposed to market fluctuations at once. If the market experiences a downturn shortly after the investment, it could impact the overall returns.

2. Systematic Investment Plan (SIP):

  • A Systematic Investment Plan (SIP) is a mode of investing where investors contribute regular, smaller amounts of money at predefined intervals (typically monthly).
  • SIPs are designed to promote disciplined and consistent investing over time. Investors commit to contributing a fixed sum regularly, regardless of market conditions.
  • This mode of investment is convenient for most investors because it allows them to start investing with a smaller initial amount and gradually increase their investments over time.
  • SIPs reduce the impact of market volatility as investments are spread out over time. When the market is down, investors buy more units with the same amount, and when the market is up, they buy fewer units.
  • SIPs are an effective way to harness the power of rupee cost averaging, which means buying more units when prices are low and fewer units when prices are high, potentially reducing the overall average cost of investment.

Taxability of Retirement Funds

Retirement funds stand out as tax-efficient investment choices, offering a potential tax deduction of up to Rs. 1.5 lakh annually under Section 80CCC of the Income Tax Act. However, once the annuity starts, the accrued income is subject to taxation based on your prevailing tax slab. While premature withdrawals from retirement funds can be challenging, they come with specific tax implications:

1. Equity Retirement Fund:

  • Withdrawal within 1 year: Short-Term Capital Gains (STCG) tax of 15% + cess + surcharge.
  • Withdrawal after 1 year: Long-Term Capital Gains (LTCG) taxed at 10%.

2. Debt Retirement Fund:

  • Withdrawal within 3 years: Taxed as per your income tax slab.
  • Withdrawal after 3 years: Taxed at 20% post indexation.

These tax considerations add to the overall appeal of retirement funds for tax-conscious investors.

Factors You Should Know Before Investing In Mutual Funds for Retirement in 2024

  • Enhanced Flexibility: Retirement mutual funds surpass traditional pension plans in flexibility. You have the liberty to make partial or complete withdrawals at any time without constraints. Additionally, you can opt to withdraw your investment and seamlessly switch to another mutual fund as per your preferences.
  • Transparency Advantage: Retirement mutual funds offer superior transparency compared to pension plans. Accessing comprehensive information about a mutual fund is swift and uncomplicated. To sustain a post-retirement lifestyle, a stable income source is crucial. Mutual funds facilitate efficient future planning while mitigating associated risks.
  • Tax Efficiency: Mutual Funds for Retirement outshine pension plans in terms of tax benefits. Unlike pension income subjected to regular taxation, long-term capital gains from equity mutual funds enjoy tax exemption up to Rs 1 lakh. Debt funds, on the other hand, incur taxes post-indexation, often resulting in negligible tax liability. This tax efficiency enhances the attractiveness of retirement mutual funds.


Retirement Mutual Funds can be a valuable addition to one's retirement planning strategy. They offer the benefits of diversification, professional management, and tax advantages. However, the suitability of a retirement fund depends on individual financial goals, risk tolerance, and investment horizon. It is advisable carefully assess various options before making an informed decision on including Retirement Mutual Funds in your retirement planning portfolio.

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Frequently asked questions

What is the purpose of Retirement Funds?

The purpose of retirement funds is to provide financial security and income after you retire, ensuring you can maintain your lifestyle without regular employment.

What are risks involved with retirement funds?

Risks involved with retirement funds include market fluctuations, inflation, longevity risk, and potential changes in government policies that may affect your savings.

How much do you need for retirement?

The amount you need for retirement depends on your lifestyle, expenses, and financial goals, making it crucial to assess your specific circumstances.

How much to save and invest?

The amount to save and invest for retirement varies but generally involves setting aside a portion of your income and strategically investing it to meet your retirement goals.

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