Illustration: Binay Sinha
Deciding between retirement funds and equity funds is crucial for long-term financial planning. Both options cater to different investment needs and risk appetites, making it essential for investors to understand their unique characteristics.
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Shrinivas Khanolkar, Head– Products, Marketing & Corporate Communication at Mirae Asset Investment Managers said, “Choosing between retirement mutual funds and equity mutual funds depends on an investor’s financial goals, risk tolerance, and time horizon.”
Understanding retirement mutual funds
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Retirement mutual funds are designed specifically for long-term goals, offering a mix of equity and debt, with an emphasis on risk management as the retirement age approaches. These funds focus on capital preservation and income generation in later years, gradually shifting to safer assets like bonds.
Advantages:
Risk management: The portfolio becomes more conservative over time, reducing risk as retirement nears.
Steady returns: Offers a balance of stability and growth, ideal for risk-averse investors.
Understanding equity mutual funds
Equity mutual funds primarily invest in stocks, offering higher growth potential but with increased volatility. Over a long horizon, equity funds can significantly outperform retirement funds, making them suitable for younger investors aiming for wealth creation.
Advantages:
Higher returns: Historically, equity funds have delivered better long-term returns.
Flexibility: Investors can choose different equity fund types based on sectors, market capitalisation, or themes.
Differences between retirement fund and equity fund
Returns on investment
Retirement funds generally offer fixed or predictable returns. Equity funds, on the other hand, tend to provide higher returns over the long term when compared to debt funds.
Risk
Retirement funds carry a low level of risk. Equity funds, however, involve moderate to high levels of risk.
Suitability
Retirement funds are ideal for investors seeking safe, low-risk investment options. Equity funds, being long-term investments, are more suited for investors with moderate to high-risk tolerance, and can help achieve long-term financial goals.
Tax
In the retirement fund, any contribution up to ~150,000 is allowed as a deduction under Section 80CCC of the Income Tax Act. A tax of 20 per cent is applicable on capital gains from equity funds held for less than 12 months. Long-term capital gains (more than 12 months) of up to ~1.25 lakh are tax-exempt and taxed at 12.5 per cent thereafter.
Choosing the right investment
“Diversified equity funds are the best bet as they don’t have a lock-in period, so you have liquidity and control over your investments. On the other hand, retirement funds will fall under the category of solution-oriented funds, which carry a lock-in for five years, so you will not have liquidity in the portfolio for the next five years and additionally, their portfolio is a mix of equity and debt, so you don’t get control over the asset allocation. That’s why diversified equity funds stand out as best, as they give you control over asset allocation, flexibility, and liquidity,” said Chirag Muni, Executive Director at Anand Rathi Wealth Limited.
First Published: Oct 14 2024 | 7:25 PM IST