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Mutual Funds vs. Pension Plans: Which is Good for Retirement? Research Team | Posted On Friday, November 22,2019, 03:03 PM

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Mutual Funds vs. Pension Plans: Which is Good for Retirement?



Are you confused between a mutual fund investment and a retirement plan? If yes, then we are here to help you.

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A wide range of retirement products many leads to a dilemma over your investment choices. However, when it comes to retirement plans you need to invest smartly. you need to evaluate certain important factors when you take investment decisions for your retirement,

  • How to incorporate your savings plan with your budget
  • Which investment plan will help you get inflation-beating returns
  • Calculate your lifestyle and healthcare cost post-retirement
  • How much debt you are likely to carry post-retirement

If your investment choices are among mutual fund schemes and pension plans, then here are certain aspects you must consider while planning for retirement.

See Also: Retirement Planning In India

What are Mutual Funds?

A mutual fund is a scheme that pools money from investors who are then invested in company shares and bonds. These funds are managed by professionals known as fund managers, who aim to get the best returns on investments. Some mutual funds have started offering pension plans which invest in both debt and equity instruments. You can take the SIP route to invest in pension plans at regular intervals.

What is a Pension Plan?                                                                           

Pension plans or retirement plans are provided with dual benefits of saving retirement corpus along with providing insurance cover. With a pension plan, you can invest a specific amount at regular intervals to accumulate a huge corpus to help you lead a financially independent life post-retirement. PPF and NPS are the most popular retirement schemes, offering an array of benefits.

If you start contributing early, you will be able to secure the golden years of your life. To choose the correct plan and remain financially independent you need a plan that helps you gain promising returns as well as compound your corpus to give added returns.

See Also: Pension Calculator: Retirement Planning Calculator

Mutual Funds vs. Pension Plans: Which is Good for Retirement?

An appropriate retirement plan must be chosen based on your age and budget. It must also align with your financial goals, meet your investment appetite and must align with your investment plan.

You may choose to invest in mutual funds through the SIP route. An investment of Rs. 10,000 in diversified mutual funds will help you build your retirement kitty. After its maturity, you can shift the corpus to accrual debt fund and then start an SWP for a regular flow of income.

Or you may also choose a pension plan over a mutual fund. You investment capital of Rs. 10,000 can be put in a diversified equity fund based on your risk exposure. The plan will convert your invested corpus into a limited period annuity by the time you retire.

Usually, most of the Indian investors opt for pension plans to save for their retirement. Retirement plans are a good option, but when compared to mutual funds it can be considered the second-best. Mutual fund investments enable you to have the required equity exposure while reducing the risk through diversification of your portfolio.

See Also: Is Rs 1 Crore Enough for Your Retirement?

Role of Mutual Funds for Your Retirement Planning:

People working in the private sector and self-employed individuals face difficulty when it comes to planning the financial aspects of their retirement. Retirement planning is essential for all groups of people and mutual funds offer one of the best avenues to plan for such.

If you have plans to remain invested for an investment horizon of 20 to 30 years then the mutual fund is one of the best options you can opt for. You can start a SIP with a monthly investment as per your budget. It will accumulate and help to compound wealth in an affordable way.

It is one of the few investment options that have the potential to give inflation-beating returns which is why it makes mutual funds an attractive retirement planning tool.

See Also: Financial Plans For Retirement Benefits

Role of Pension Plans for Your Retirement Planning:

Pension plans work to secure your golden years and help you lead a financially stable life by savings funds in it. Pension plans like NPS and PPF are backed by the government and these offer tax deduction under section 80C where you can claim for deduction up to Rs. 1.5 lakh.

Keep in mind to choose a pension plan that aligns with your long term savings goal. For instance, your retirement plan should be adequate and must support your post-retirement life. If you decide to retire early, you must invest so that the maturity corpus is enough to support the additional years. Invest smartly and make use of tax benefits to build a retirement corpus.

Both pension plans and mutual funds can work as your retirement tool. But you need to choose a plan that serves your savings goal as per your budget.

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