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Planning for your retirement effectively can make your golden years comfortable and stress-free. You can build a corpus for your retirement in various ways, such as investing in government pension schemes, life insurance policies, etc. 

Another way to boost your savings for retirement is to invest in retirement funds.

What are Retirement Funds?

Retirement funds, which are also called pension funds, are investment options through which you can save a certain portion of your income for your retirement. These funds are invested on your behalf. 


The benefits of these funds are that your gains are not dependent on asset return and market fluctuations. Therefore, you get a fixed income. 


These funds provide a regular source of income after you retire. This investment avenue thus helps you systematically plan your retirement so that you can conveniently finance your expenses.

Types of Retirement Funds

Now that you know what a retirement mutual fund is, here are the different types of schemes you can choose within the category. 

  • Debt Funds

In debt funds, the entire amount is invested in low-risk bonds and debt instruments like government and other securities. It is a popular option since it offers adequate safety, making it an ideal option for investors looking to dilute risk. 

  • Unit Linked Plans

Unit linked plans invest in equity as well as debt profiles equally. Compared to other types of retirement funds, they come with slightly higher risk. However, due to a higher risk profile, they offer higher returns.

  • Hybrid Funds

As the name suggests, hybrid funds invest in debt and equity funds according to your preference and risk appetite. 


You can also invest in government hybrid funds like the National Pension Scheme. With these funds, you can withdraw 60% of your investment at retirement, and the remaining 40% is used for annuity.

How Do Retirement Funds Work?

To invest in retirement funds, you need to pay a premium towards a chosen retirement plan. Then, these funds are invested on your behalf in a fund or asset for a predetermined period. The allocation is based on your investment preference and risk preference. 


After maturity, you start receiving pension benefits. You can choose to get the benefits or withdraw the investment to purchase an annuity plan from the same institution.

Pros of Investing in Retirement Funds

Check out the various benefits of investing in retirement funds.

  • Long-Term Investment

Since the main objective of retirement funds is to help you save for your retirement, these funds are long-term investments. With a longer investment horizon, you enjoy adequate security and stability.

  • Higher Flexibility

You can opt for a lump sum at maturity or a monthly annuity, depending on your financial requirements and investment plans.

  • Tax Benefits

Under Section 80CCC of the Income Tax Act, you can get a deduction of up to ₹1.5 Lakhs. However, it is essential to note that you need to pay tax on the withdrawals. 

Cons of Investing in Retirement Funds

Here are some drawbacks associated with investing in retirement funds.

  • Lower Returns

A drawback of retirement funds is that you may get lower returns compared to other types of investments. This is because these types of funds invest a significant portion of funds in debt securities. Therefore, the expected returns are on the lower side. 

  • Underfunding

This investment option can be risky if the fund is underfunded. Underfunding refers to a situation in which the fund’s assets may be insufficient to cover future obligations. In such situations, the stability and the fund’s ability to provide returns suffer.

Things to Consider Before Investing in Retirement Funds

However, learning retirement fund's meaning is not enough while planning an investment. Here are some points that you must consider when investing.

  • Tax Implications

If you withdraw from retirement funds, the withdrawals are subject to taxation. In the case of annuity, you need to pay tax on the withdrawals according to the income tax slab you fall under. 


However, the tax implications may change if you choose to get the total investment amount after retirement. 

  • Risk and Returns

These funds offer lower returns, and they are not guaranteed. However, if you choose to invest for a longer period, you have the chance to get higher returns. 


Since mutual funds invest in debt and equity instruments, you can understand the fund’s volatility by checking the allocation. Also, analyse the past performance of the fund before investing.

Who Should Invest in Retirement Funds?

Investing in retirement funds is suitable if your priority is building a corpus for your retirement. These are low-risk investment options, which are best for conservative investors. Investing in these funds can also be a smart decision if you lack experience in constructing an equity portfolio. 


You can start investing in these funds as early as you like. Investing early gives you ample time to plan an investment strategy that helps you meet your savings goals. 


As you can see, investing in a retirement mutual fund can be advantageous for your future. If you’re looking for more investment tools for retirement planning, visit Bajaj Markets. Here, you can enjoy minimal documentation and begin investing right away. 

FAQs on Retirement Funds

Are there any charges associated with investing in retirement funds?

Yes, since retirement funds are a type of mutual fund, you need to pay a small percentage of your investment amount towards the expense ratio.

What is the ideal investment amount for a retirement fund?

The ideal investment amount for retirement funds depends upon your goals, income, and other factors. Therefore, you must calculate the appropriate investment amount based on your spending habits and necessities during retirement.

Are retirement funds risky?

The risk factor for retirement funds depends upon the fund allocation. They carry some risk since they invest a portion in equities. However, you can balance this risk by investing a higher proportion in debt.

What interest rates are offered on pension funds?

Historically speaking, the National Pension Scheme (NPS) has offered interest rates ranging between 9% and 12%. Compare different retirement funds and the returns they offer to understand which is most beneficial for you. 

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