With mutual funds getting increasingly emphatic about long-term investing, investors need to see what's on offer before they consider these long-term options.
We have discussed tax-saving funds as one long-term investment option for investors. Now it is time to consider another equally imperative investment: pension.
Pension plans help investors accumulate wealth over the long-term to meet a specific eventuality -- retirement.
Two important options at the investor's disposal to help him with his pension plans are life insurance and mutual funds. While it is common knowledge that life insurance companies have an array of pension plans to enable individuals to plan for retirement, a relatively lesser-known fact is that mutual funds also manage pension products.
Only one private sector mutual fund has a pension plan catering to the investor and there is more than one reason for you to look at this plan seriously.
First for a little background. Templeton Pension Plan (TPP) is the country's first and only central government approved private sector pension scheme under Section 88.
To put it simply, investments in TPP are eligible for Section 88 tax benefits (rebate). TPP is in the same tax-saving space as infrastructure bonds, National Saving Certificate (NSC), Public Provident Fund (PPF) and tax-saving funds (ELSS).
Low on equity, high on performance
| Balanced funds | NAV (Rs) | 1-Mth | 6-Mth | 1-Yr | 3-Yr | 5-Yr |
| HDFC PRUDENCE G | 56.29 | 7.75% | 35.39% | 25.21% | 43.45% | 21.31% |
| UNIT SCHEME 95 G | 35.54 | 4.62% | 30.81% | 15.43% | 28.11% | 19.17% |
| PRINCIPAL CHILD (CAREER) | 29.19 | 6.11% | 24.27% | 17.32% | 25.42% | 19.01% |
| JM BALANCED G | 12.62 | 6.59% | 24.21% | 11.58% | 21.30% | 16.07% |
| TEMPLETON PENSION G | 31.01 | 2.95% | 15.15% | 13.09% | 21.38% | 15.82% |
| ALLIANCE 1995 G | 102.16 | 10.41% | 38.30% | 27.72% | 34.07% | 13.49% |
| KOTAK BALANCE | 16.13 | 7.77% | 36.44% | 24.30% | 30.75% | 13.37% |
| TATA BALANCED APP | 27.02 | 5.95% | 37.37% | 17.45% | 34.35% | 12.14% |
| DSP ML BAL G | 21.79 | 7.34% | 28.48% | 23.25% | 34.29% | 11.33% |
| LIC MF UNIT LINK INSURANCE | 13.08 | 6.44% | 22.73% | 13.54% | 16.57% | 10.78% |
Tax-saving funds operate in the mutual fund space just like TPP, but both have varying tax benefits. The investment amount on which tax benefits can be claimed by investing in tax-saving funds is restricted to a maximum permissible limit of Rs 10,000.
However, the maximum permissible investment limit under TPP is Rs 70,000. So while TPP and tax-saving funds are in the same 'investment genre' (mutual funds), effectively TPP, NSC, PPF and life insurance operate in the same "tax genre" (Rs 70,000 investment limit).
So why should TPP be a part of your portfolio?
1. Primarily because it's a must-have if you are looking at saving for your retirement nest egg. TPP allows for withdrawals at 58 years of age or 3 years whichever is later. This acts as a deterrent for early withdrawals, which is the trait of a good pension plan. Even if you want to withdraw money on emergency you can do so after 3 years by paying a 3% exit load.
2. The power of equities. Time and again we have said this on Personalfn, and have no qualms about reiterating it. Getting equities even a small component can do wonders to your investment portfolio over a 10-15-year time frame.
Rs 10,000 in TPP over 15 years will get you. . .
| TPP | 10% | 12% | 14% |
| Rs 10,000 | 41,772 | 54,736 | 71,379 |
3. Smarter tax-savings. TPP offers tax benefits at par with NSC and PPF i.e. permissible limit of Rs 70,000. So you are 'tax-neutral' by investing across the 3 tax-saving options.
However, the returns are another story. NSC and PPF operate in the debt space under an administered interest rate regime. TPP on the other hand is a balanced fund with a maximum permissible 40 per cent equity investment limit.
NSC/PPF will be hard put to match the returns generated by TPP if one is willing to consider a comparison given that PPF and TPP are retirement-oriented investments.
Read more about small savings schemes
While admittedly, PPF and NSC offer assured returns against TPP's market determined returns, if you have even a 15-year investment time frame, which is what PPF investors need to have; TPP is likely to generate appreciation far in excess of the former.
And this is not an assumption, TPP with a smaller equity component, has done decidedly better than other aggressive balanced funds over a 5-Yr period.
If you are looking at investing over the long-term, go for an option that has a little bit of equity and offers you a competitive tax advantage. TPP does both, which is why you need to give it a look-in before you consider its peers.