What’s in a name, Shakespeare posed. And he was right. While selecting mutual funds (MF) to meet your post-retirement needs, don’t just go for those with the ‘retirement’ tag. These are essentially hybrid funds that can build your corpus, much like the regular MFs, if you choose those that make the cut. Here is our analysis to help you look beyond retirement funds.
Today, there are 25 different MF retirement plans from nine different AMCs with varied levels of debt and equity exposure. Nearly half of these are aggressive plans that invest 65 or 80 per cent and upwards in equity. The rest are conservative plans that invest at least 60 or 70 per cent and higher in debt instruments.
In portfolio composition and investment strategy, aggressive retirement funds that invest majorly in equity are similar to aggressive hybrid funds. They may, in fact, mirror flexi cap funds (that must invest at least 65 per cent in equity). They suit those with a higher risk appetite, and still many years away from retirement.
Conservative retirement funds, by contrast, invest mostly in debt instruments, similar to conservative hybrid funds or even pure debt funds.
Compared to other open-ended MFs, your investment in a retirement fund gets locked in for five years or till retirement age, whichever is earlier. Premature withdrawal comes with an exit load. Also, unlike other mutual funds (except ELSS), many retirement funds also offer the benefit of deduction of up to ₹1.5 lakh under section 80C of the IT Act. This may be useful only if you have not exhausted this limit through PPF, EPF and the like.
Our analysis shows that not all retirement funds are worth investing in. Of the 25 MF retirement plans only ten — five aggressive and five conservative — have been around for at least five years,. The remainder have been running for under 2.5 years, not enough time to gauge their performance.
Of these ten, Tata Retirement Savings Fund – Progressive Plan and Conservative Plan make the cut. The two funds are top performers in their respective retirement fund categories (equity and debt focused) based on a 3-and 5-year rolling returns analysis of data since 2016. The two funds have also performed at par or better than the leaders in aggressive hybrid and conservative hybrid funds, related categories during this time. The last seven years’ data too, show the Tata MF funds as strong performers compared to most hybrid funds.
Thus, retirement plans may not always be the best way to go about building a retirement corpus. While the consistent top performers in this category can no doubt be considered, regular investments in a well-performing flexi cap fund, or an aggressive hybrid fund, or even an index fund with a low tracking error may do the job just as well. For conservative investors, a well-performing conservative hybrid fund with high credit quality may serve the purpose.
Based on our analysis, here are five funds to invest in for your retirement.
Tata Retirement Savings Fund – Progressive Plan
Tata Retirement Savings Fund (10-year history) comes in three plans — Progressive, Moderate and Conservative. The first two plans invest 85-100 per cent and 65-85 per cent, respectively, in equity and the rest largely in debt. The conservative plan, on the other hand invests 70-100 per cent in debt.
The Progressive scheme is among the top performing retirement funds that invest aggressively in equity. Based on a rolling returns (CAGR) analysis, the scheme has generated 3- and 5-year average returns of 9.1 per cent and 15.3 per cent respectively compared to an average 7.2 per cent and 13.8 per cent for similar retirement funds over the last five years. The Tata MF retirement plan has also done well vis-à-vis the aggressive hybrid funds category that has returned 3- and 5-year average returns of 6.3 per cent and 11.8 per cent, respectively over the same period. The scheme has provided good downside protection too during this period with 3-year returns having been negative only 1.5 per cent of the time.
During the mid-cap rally through 2017, the scheme had 20-25 per cent of its assets in mid-cap stocks, which was subsequently brought down. In March 2020, the scheme had 66 per cent in large-caps and only a smaller proportion in mid-caps and small-caps. Banking, FMCG, Healthcare and IT have largely been among the top five sectors since the March 2020 low, helping the fund deliver well the past year.
The scheme mostly invests 90 per cent plus of its assets in equity (large-cap tilt). A comparison with flexi cap funds is therefore appropriate. The Tata fund has outperformed the flexi cap category’s 3-and 5-year average return of 7.3 per cent and 13.8 per cent.
Tata Retirement Savings Fund – Conservative Plan
The scheme is a top performer among retirement funds that invest largely in debt. Based on a rolling returns (CAGR) analysis, the scheme has offered 3- and 5-year average returns of 6.8 per cent and 9.1 per cent respectively compared to 5.9 per cent and 8.4 per cent for comparable retirement funds over the last five years.
The scheme returns are also higher than the corresponding 3- and 5-year average returns of 5.7 per cent and 7.8 per cent respectively for the conservative hybrid fund category during the same period. The Tata scheme has been investing largely in AAA-rated and sovereign debt papers all through. The scheme’s average portfolio maturity of 3.1 years as of June 2021 is among the lowest across peers. With interest rates at a bottom today, the scheme is well-placed to capitalise on a rate hike as and when it happens. In the last five years, the average maturity has varied between 2.6 and 8.9 years.
In August 2016, the average maturity was a little under 9 years. This came at a time followed by two 25-basis point rate cuts between October 2016 and August 2017. Then between April and September 2019, the average maturity was upped from 2.6 to 5.9 years coinciding with a period of rate cuts that continued until May 2020.
Its average portfolio maturity of 3.1 years as of June 2021 is among the lowest across peers. With interest rates at a bottom today, the scheme is well-placed to capitalise on a rate hike when it happens.
Average maturity of 3.1 yrs
Parag Parikh Flexi Cap Fund
While the Tata Progressive plan discussed above has done better than the flexicap funds category, its performance has lagged category leaders, Parag Parikh Flexi Cap Fund and Canara Robeco Flexi Cap Fund. That is true of other equity aggressive retirement funds too. Those with a sufficiently long investment horizon, and some appetite for risk, can park a portion of savings here.
A top performer in its category across time periods, the scheme has generated 3- and 5-year average rolling returns (CAGR) of 13.3 per cent and 19.1 per cent over the last five years. This is significantly higher than the corresponding period flexi cap category returns of 7.3 per cent and 13.8 per cent respectively. It has also consistently outperformed its benchmark, the Nifty 500 TRI.
It follows a buy and hold strategy and invests in a concentrated portfolio of Indian and global value stocks. The scheme has provided good downside protection from inception till date. A downside capture ratio of 41 per cent (under 100 per cent) implies it has captured less of the downside in periods of market fall.
Downside capture of only 41%
Holds Indian and global stocks
Mirae Asset Hybrid Equity
The scheme suits those with a moderate risk appetite. Among the toppers in the aggressive hybrid fund category, it has returned 3- and 5-year average rolling returns (CAGR) of 9.6 per cent and 14.2 per cent, higher than the category average returns of 6.3 per cent and 11.8 per cent ( last five years).
Aggressive hybrid funds must invest 65-80 per cent of their assets in equity and the rest in debt. The fund mostly allocates 70-75 per cent of its corpus to equities with a large-cap bias. It selects growth businesses at reasonable valuations. Following the market rally since April 2020, the fund gradually brought down its large cap holdings from 63 per cent in December 2020 to 53 per cent now.
It has always held a well-diversified portfolio with banking and finance among the top three holdings. While the 5-6 per cent share of healthcare stocks in 2020 would have meant a missed opportunity as the sector rallied post the March 2020 low, the fund would have benefited from the higher banking exposure in 2016 and 2017.
In debt, the scheme stands out for its high credit quality. As of June-end 2021, only 1 per cent of the scheme assets were in below AAA-rated debt papers. The core debt portfolio is managed using accrual strategy.
Good credit quality portfolio
Mix of accrual and duration
Canara Robeco Conservative Hybrid Fund
While the Tata Conservative Plan is a good fit, its returns have been a bit lower than the 3- and 5-year average return of 7.6 per cent and 9.2 per cent, respectively for the Canara Robeco Conservative Hybrid Fund, over the past five years.
The Canara Robeco fund has surpassed its category average returns of 5.7 per cent and 7.8 per cent too, over the same period. Hence low-risk investors can consider it.
Conservative hybrid funds must invest 75-90 per cent of their assets in debt papers.
Based on last five years’ data, Canara Robeco has held 45-74 per cent of its corpus in debt and 20-25 per cent in equity (large-cap bias) .
While these funds cap the extent of equity risk, watch out for the risk in the debt portfolio by way of lower credit quality papers. The scheme has had a consistently high credit quality portfolio. An actively-managed portfolio of g-secs however, does bring in some interest rate risk. The scheme’s weighted average maturity has been brought down in recent months, in line with rate hike expectations.
High credit quality portfolio