personal finance

Should I invest in mutual funds or pension plans to save for retirement?

I am a 42-year-old professional planning to invest Rs 10,000 per month to build a retirement corpus. Should I invest in mutual funds or pension plans?

Rahul Parikh CEO, Bajaj Capital replies:

You could start an SIP of Rs 10,000 per month in diversified mutual funds and upon retirement, say at 58, shift the corpus to an accrual debt fund and then start an SWP for regular cash flows.

Or, you may opt for a pension plan and invest Rs 10,000 per month in a diversified equity fund in the plan. The plan will convert your accumulated corpus into a limited period annuity when you turn 58. The accumulated corpus in both the cases is likely to be similar.

However, in the case of mutual funds, withdrawals through SWPs are considered redemptions. The gains are treated as short-term capital gains and taxed at the applicable slab rates for the first three years and as long-term capital gains thereafter and taxed at 10% without indexation and at 20% with indexation. Your pension, however, will be treated as income and taxed at the applicable slab rate. The effective tax payable on capital gains (short and long term) tends to be lower than the tax payable on annuity or salary income.

Based on current income tax laws, income slabs and tax rates, an SWP in accrual debt mutual funds is likely to give you better after-tax cash flows, compared to a pension plan. So, the mutual fund route seems better than a pension plan.

I am a 22-year-old software engineer. I save Rs 15,000 per month from my salary. Please suggest some schemes to invest in for the long as well as the short-term.

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C.R. Chandrasekar CEO and Co-Founder, replies: You can consider investing Rs 6,000 in HDFC Hybrid Equity and Rs 3,000 each in Parag Parikh Long Term Equity, HDFC Midcap Opportunities and HDFC Short Term Debt. Please do not worry about the near-term volatility in the market. Continuing your SIPs unaffected by short-term volatility will help you earn better returns.


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