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What is a retirement mutual fund? Are they a good option for retirement planning?

Updated on: Jan 11th, 2022


6 min read

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Retirement funds are also known as ‘Pension Funds’. These are the funds that invest a specific portion of the investment towards the investor’s retirement planning. 

Investors have many options to save for their retirement, including pension schemes of the government, life insurance policies etc. Apart from the conventional methods, mutual funds have also started catering to the need for retirement savings. 

A pension or a retirement fund enables investors to plan their retirement systematically so that their needs are met during their retirement days when they stop earning. 

Different types of plan for retirement

There are primarily four different plans one can choose from:

  1. Debt funds- The most popular plan that invests fully in debt profiles makes them extremely safe and ideal for a conservative borrower. 
  2. Unit linked plans– These plans invest both in equity and debt profiles equally. These carry slightly higher risk, therefore, offer higher returns.
  3. Hybrid funds- 
    • Investors can also opt for hybrid funds offered by the government like National Pension Schemes. These schemes allow investment in both debt and equity markets according to preference. Usually, these funds allow you to withdraw 60% of the investment at retirement, and the balance of 40% is used for annuity payment. The maturity amount in NPS or any government-backed retirement funds is tax-free.
    • Hybrid Pension fund/retirement fund offered by fund houses. 

Purpose of a retirement fund

Most pension funds offer returns either as a monthly annuity or in a lump-sum amount. A monthly annuity is a fixed amount paid, including inflation protection in most cases. Lump-sum payments allow the investors to withdraw a total amount of accumulated wealth at the time of retirement.

Features of retirement/pension funds are as below

  1. Less risky -Pension plans/mutual fund retirement plans carry less risk than others, making them an ideal investment source for retirement. These mutual fund plans usually invest in low-risk securities like government bonds and securities to ensure steady returns. 
  2. Hybrid in nature-Mutual funds have started offering hybrid pension plans. These hybrid plans have their investments in both debt and equity markets. The equity exposure is usually kept low at a range of 40-50% in these plans.
  3. Withdrawal condition- Withdrawal of investments from the retirement funds is discouraged before the retirement age of 58 years to 60. Investors can either withdraw a lump-sum amount or can choose to avail of annuity income every month.
  4. Liquidity- Liquidity in these pension funds is usually low as there is a levy of charges and heavy exit load in early withdrawal. The investor should obtain all the knowledge before purchasing the plan. Moreover, the returns attract tax which could invest in the pension mutual funds unattractive.
  5. Lock-in period- Retirement mutual funds usually have a lock-in period of five years higher than a lock-in period of three years for ELSS funds. However, a higher lock-in period may prove to be beneficial due to the power of compounding. When the investment is held for an extended period, it usually does not get affected by the market fluctuations of the short term.

Advantage of buying a retirement fund

  1. Flexible – Main advantage of a mutual fund’s retirement products is that one doesn’t have to compulsorily buy an annuity, unlike the case with the NPS or any other retirement insurance policies. An investor can choose to withdraw either a lump-sum amount or opt for a monthly annuity depending on their financial requirements and plans. 
  2. Tax benefit – Contribution towards the retirement mutual fund is allowed as a deduction up to Rs.1.5 lakh under section 80CCC. However, please note that the withdrawals from these funds are usually subject to tax. If the investor chooses to withdraw as an annuity, it will attract tax applicable to the individual slab rate similar to salary income. 
  3. Long-term investing – These funds are long-term savings schemes, as their main aim is to provide stability of income after investors’ retirement. The scheme objective is to invest in less risky securities in the market, offering security. 
  4. Insurance cover– Most pension policies serve as a life insurance cover, protecting their dependents from any financial loss in case of fundholders demise before retirement. Also, some policies allow the withdrawal of a lump-sum amount in case of any medical emergency. This can prove a beneficial feature of pension funds.
  5. Protection against inflation – Most retirement funds offer some compensation against inflation. It protects the investors against inflation by allowing them to withdraw one-third of accumulated corpus post-retirement. The balance investment is utilised for a monthly annuity for the investor. A monthly annuity enables the investor to keep their funds invested and return by withdrawing a part of the balanced funds.
  6. Risk-free investment – Pension fund retirement plans are among the safest investment modes as they carry extremely low-risk profiles. Risk-averse investors have an option to put their money in government-backed securities for a fixed return or invest in debt and equity (hybrid fund) to earn better returns. 

Mode of investing in a retirement fund

There are mainly two ways to invest in these types of the fund; one can either choose to make a one-time lump-sum investment or opt to invest via a Systematic Investment Plan (SIP). SIP will enable the investor to deposit a fixed amount of money in specified intervals, such as monthly, quarterly, and yearly. 


Retirement plans offered by mutual funds are an excellent option to plan one’s retirement. These funds have a lock-in of five years, which is less than a lock-in period of 15 years in the government’s National Pension Scheme. These funds will offer decent returns, as well as secure you for your retirement days.

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