Retirement Funds Vs. Equity Funds: Which is Better for Your Golden Years?
As individuals plan for their golden years, two popular options for building a retirement corpus emerge – retirement funds and equity funds. Both types of mutual funds offer potential for growth, but they serve different purposes and come with their own set of advantages. The data from the Association of Mutual Funds in India (AMFI) shows a significant rise in retirement fund assets, which makes them an appealing choice for long-term planning.
According to AMFI, the assets under management (AUM) for retirement funds increased from Rs.8,408.96 crore on August 31, 2019, to Rs.30,394 crore on August 31, 2024. This represents a remarkable growth of 261%. Analysts attribute this rise to a range of factors, including increasing healthcare costs, shrinking family sizes, and longer life expectancies. These elements make retirement funds a critical part of planning for a financially secure future.
Retirement Funds: A Stable Source of Income
Retirement funds, often referred to as pension funds, are designed to facilitate the savings process for the post-working years. The retirement funds ensure a regular flow of income through the annuity settlements in old age. As retirement funds invest in low-risk assets, such as government securities, they are contemplated to generate stable return streams. Retirement funds provide a variety of well-structured platforms that help to avoid market volatilities of equity markets.
The interest from the pension funds is spread among the investors. Because the interest rates are quite attractive, even as high as 11%, depending upon the policy and investment strategy, retirement funds attract so much support in planning the retirement of many people.
Equity Funds: A Powerful Vehicle for Higher Returns
On the other hand, equity funds are essentially invested in equities of those publicly listed companies. According to SEBI regulations, they have to invest more than 65% in equities, and the rest 35% can be invested in debt instruments or money market securities. There are also categories of equity funds like large-cap, mid-cap, and flexi-cap which is for a more significant level of investment strategy flexibility.
While retirement goals can also be achieved through equity funds, this will involve discipline. A long-term and consistent investment in high-quality equity funds can really create a strong retirement corpus. It is often recommended to investors not to switch too frequently between the funds to ensure optimum growth.
Returns and Flexibility
While retirement funds and equity funds look similar when compared at the surface level, they share the same general strategies, such as investment in diversified equity or hybrid styles. However, a characteristic of retirement funds is that there is a lock-in for five years or until the investor reaches 60 years of age. Flexibility might be more limited here as compared to equity funds, where changes and adjustments can actually happen fairly frequently.
In fact, Flexi-cap funds provide the portfolio with an opportunity to change on the basis of market conditions, making it a favourite investment for long-term growth. With the ability to even change the allocation between large-cap, mid-cap, and small-cap stocks, these funds generate higher returns. Retirement funds also have a lock-in period that may not help the investor respond quickly to underperformance or changes in fund management.
Best Retirement Strategy: Flexi-Cap Funds Vs Retirement Funds
Starting retirement mutual funds early, especially when a person is in their 20s or 30s, seriously generates tremendous returns due to compounding of interest. An example: For instance, Rs.5,000 SIP in the same mutual fund for 30 years with an average return of 12%. It yields a tremendous sum of over Rs.1.75 crore.
Flexi-cap funds provide more returns and flexibility, so this could be a great option for someone who wants to maximize growth potential right before retirement. A strategy might involve holding larger portions of flexi-cap or index funds through the first few years and then moving progressively toward more conservative investments such as debt funds during retirement.
Best Retirement and Flexi-Cap Funds
1. HDFC Retirement Savings Fund – Equity Plan
AUM: Rs.6,016 crore
Return (since inception): +22.48% p.a.
Risk: Very High
2. Nippon India Retirement Fund – Wealth Creation Scheme EQUITY
AUM: Rs.3,467 crore
Return (since inception): +13.11% p.a.
3. Tata Retirement Savings Progressive Plan-
AUM: Rs.2,132 crore
Return (since inception): 17.3% p.a.
4. Quant Flexi Cap Fund-
AUM: Rs.7,710 crore
Returns (p.a): +36.55 per cent
5. JM Flexicap Fund
AUM: Rs.4,228 crore
Returns (p.a): +34.19 per cent
6. HDFC Flexi Cap Fund
AUM: Rs 63,436 crore
Returns (p.a): +30.83 per cent
Conclusion
Both retirement funds and equity funds have their place in a well-rounded financial plan. Retirement funds offer stability and a reliable source of income, while equity funds—particularly flexi-cap funds—provide the opportunity for higher returns. Investors are encouraged to consult financial advisors to determine the best mix of these investments based on individual financial goals and retirement plans.
