Life cycle funds can be game changers for retirement savings

Saving for retirement is an important financial goal for many, especially in India, where the social security support is inadequate. Most of us do not have access to adequate pensions in old age and have to fund our golden years while working. Many used solution-oriented mutual fund schemes – retirement funds to save for their retirement. Some used child plans, another type of solution-oriented schemes, to fund their child’s higher education and other financial goals.

However, a recent circular issued by the Securities & Exchange Board of India (SEBI), the financial market regulator, has replaced these with life cycle funds (LCF). Also, the regulator has instructed to pause inflows into the existing retirement and child plans.

These developments have led to many questions. There are news reports that some fund houses approached the regulator seeking clarity on whether they can continue accepting money through ongoing systematic investment plans and not allow the fresh registrations. Investors also want to know what will happen to their investments in the existing plans. While the picture will be clear soon, investors need not panic. A clear understanding of these revisions should help investors make informed choices.

Soon, we will see fund houses filing and launching LCF after getting approval from SEBI. Fund houses can launch LCF with a minimum tenure of five years and a maximum tenure of 30 years, with tenures in multiples of five years. This allows a maximum six scheme LCF from a fund house at a time. Each of these LCF will have high allocation to stocks to begin with and as the scheme nears maturity the allocation to debt is hiked, depending on the scheme’s tenure.

For example, an LCF maturing 30 years from now will invest 65-95 percent in stocks in the first year and over a period of time will shift to bonds, in such a manner that in the last one year only 5-20 percent of the money will be kept in stocks and rest in bonds. LCF are allowed to invest in commodities and units of InVIT up to 10 percent of the assets under management.

This approach solves many problems investors faced earlier. For example, retirement schemes and child schemes had a static asset allocation, say 75:25. An investor holding a 75:25 portfolio in equity and debt, respectively, while he nears the retirement age, usually stares at a situation wherein he is exposed to a higher risk than he should have. Hence many were forced to sell their retirement schemes’ holdings and move to debt funds as they near retirement. This asset rebalancing would not only cause some extra effort for the investor, but also made them incur tax liability.

LCF now takes care of this asset rebalancing over the tenure of the scheme. The regulator has also instructed the fund houses that when an LCF has only 1 year left to maturity, it may be merged with nearest maturity LCF with positive consent from the unitholders. This also addresses the need to continue compounding accumulated corpus.

After the new LCF are launched, we will get clarity on how the existing schemes are merged with them, and also other aspects such as liquidity, lock-in, tax benefits and withdrawals.

For the time being, investors need to keep calm and continue with their investments. They can invest in aggressive hybrid funds and flexi-cap schemes through systematic investment plans

(SIP) to continue deploying their savings as per their asset allocation. Aggressive investors keen to make the most of ongoing volatility in the financial markets should also consider supplementing their ongoing SIPs with lump sum.

Investors keen to deploy a lump sum but worried about volatility may find systematic transfer plans attractive. Flexi-cap funds from HDFC, Kotak, Mahindra Manulife, ICICI and White Oak Capital should be considered to invest for the long term.

Investors should understand that the asset allocation should guide their investments and not the market sentiment. The schemes selected to achieve the desired asset allocation should have a record of performance. Instead of relying more on nomenclature – child plan or retirement plan, investors should give more importance to the investment strategy of a mutual fund scheme. Till the time LCFs step in, investors should not stop investing. Be it a child’s education or retirement, our eye on our financial goals should not be distracted. Keep investing!

Disclaimer: This article is prepared in his personal capacity, and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.