There are many options available to an individual intending to plan for his retirement be it PPF, ULIP, NSC’s etc. Most retirement options fall into two categories,-those which promise a fixed assured return and those, like pension plans, which offer non-assured returns. There are very few retirement planning options available in mutual funds. Before an investor goes in for a retirement plan he needs to evaluate its various basic parameters :
In this case the comparison of returns vis a vis the fixed return instruments like PPF etc. is easy. The returns generated in the case of PPF is again, like Infrastructure Bonds, a fixed rate of 9.5 per cent unlike the returns of pension plans which can vary over a period of time. Also when it comes to comparing the returns between the two mutual fund options the investor must keep in mind, the track record of the scheme as well as his timing of entry. Both these factors will impact his return. However, in the case of infrastructure bonds, returns are fixed, irrespective of the time of entry.
Lock in period
In case of fixed return instruments like PPF etc, the lock-in period is very long, with intermediate withdrawals after a certain number of years. In case of infrastructure bonds as well as pension funds the there is a 3 year lock-in period.
In PPF, the liquidity is pretty low. A loan can be taken at the end of 3 years but even that is only to the extent of 25 per cent of the balance at the end of the preceding financial year. A withdrawal is permissible every year from the 7th financial year of the date of opening of the account. So, the loan and the withdrawal can be taken after a specified period of time and that too with certain riders.
Taxability of Interest/Dividend
Returns from PPF are tax free, Interest received on infrastructure bonds qualifies for tax exemption under Section 80L.
A minimum amount of Rs 100 has to be invested every year to keep the account alive in PPF. Also the minimum amount that can be invested in the pension plans is Rs 10,000. In the case of bonds the investor has to bring in a minimum amount of Rs 5000.
The maximum amount that can be invested under PPF in a particular financial year is Rs 60,000 whereas there is no such restriction on the maximum amount that can be invested in the pension plans.
In the case of bonds the investor has to bring in the entire minimum amount of Rs 5000 in lump sum.
A comparison on this attribute is important when choosing between any pension plan offered by a mutual fund. Normally balanced schemes are offered. However, over a period of time the portfolio may vary. For instance ULIP has essentially become a growth scheme whereas KPPP is still focussed on debt though the equity component in the scheme has gone up over a period of time.
ULIP gives an insurance cover and an accident cover along with section 88 benefit, whereas, the other instruments do not offer this.