Mutual Fund Category Analysis - Retirement Benefit Pension Funds

Transcription

1 September 17, 2014 Mutual Fund Category Analysis - Retirement Benefit Pension Funds Retirement Benefit Pension Funds offered by Indian Mutual Funds: Key Facts: Indian Mutual Funds also offer, like life insurance companies, Retirement Benefit Pension Funds with an objective to help investors build retirement corpus. Currently, there are four fund houses such as Franklin Templeton, UTI, Tata and ING provide retirement benefit plans for the investors with the defined investment strategies. Among these, Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan are the pure pension plans with the investment made in these schemes are eligible for the tax benefit under the Sec 80C of IT Act, The plans provided by the Tata mutual fund such as Tata Retirement Savings Conservative, Moderate and Progressive are merely asset allocation funds (no tax benefit u/s 80C) designed to provide income during the old age. The plan provided by the ING mutual fund - ING Retireinvest Fund - Series I is a close ended fund as the fresh investment into the fund was closed. Retirement planning means saving some money or assets for the purpose of deriving some income during the old age. There are many products such as PPF, EPF, NPS, Life Insurance, FD, Mutual Funds, etc are preferred by the investors to generate safe and regular income post retirement. Life Insurance pension and annuity plans, NPS and MF schemes such as Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan are structured especially to suit the retirement solution for the investors. The Retirement Benefit Pension Funds provided by the Mutual funds are hybrid in nature having investment in both debt and equity assets. Investors can either invest lump sum amounts or can choose the route of systematic investment plan (SIP). Mutual fund pension plans operate like a regular mutual fund scheme in which investors invest throughout their working life. Pooled money is invested into debt and equity which generates income post retirement. Withdrawal of funds is discouraged before you retire and standard retirement age is taken as 58 years. Post-retirement, based on one s discretion, investor can make a lump sum withdrawal or opt for regular income (annuity payments). The balance units post withdrawals in either case remain invested and continue to grow. In this note, we have explained the features and performance of the schemes such as Franklin India Pension Plan, UTI-Retirement Benefit Pension Plan, Tata Retirement Savings Conservative, Tata Retirement Savings Moderate and Tata Retirement Savings Progressive plans. They are suited for any type of risk profile investors as far as the retirement solutions is concerned of which units are held for long time and allowed to grow considerably. Lock in: The investments made in Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan are eligible for the tax benefit under the Sec 80C of IT Act, 1961 upto Rs. 1.5 lakhs as they are locked in for 3 years period. The investment into Tata Retirement Savings Conservative, Moderate and Progressive plans have no lock in period and hence not eligible for the tax benefit under the Sec 80C of IT Act. Equity Asset Allocation: The schemes -Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan allocate upto 40% into equity while the rest in the debt instruments. Tata Retirement Savings Conservative allocates into equity upto 30%, Tata Retirement Savings Moderate allocates into equity to 65% to 85% and Tata Retirement Savings Progressive allocates into equity to 85% to 100%. Performance: The performance of the pure pension plans such as Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan has been decent and showed outperforming returns against the respective benchmarks across almost all the time frames such as one, three, five, seven and ten years. The performance of the schemes can be placed between in the mutual fund categories of Hybrid Equity oriented and Hybrid Debt oriented. Limited allocation

2 into equity assets have kept the schemes to grow moderately during market rallies and contained loss well during market corrections. The lock in assets in these schemes has helped the fund managers to take long bets on the assets without any redemption pressures. Despite the short tracking record, the Tata retirement schemes saw posted commendable returns during in the last six months and one year periods outperforming their respective benchmarks with huge margin. On a rolling returns basis, the schemes have underperformed the NPS funds especially in the short term such as six month and one year periods. However, these schemes have matched the returns with that of the NPS funds over 3 year period. Hence for investors who are looking to invest for retirement on a SIP basis over 3+ years, the retirement schemes are slightly better placed compared to NPS schemes. Portfolio: Given their basic mandate of generating higher returns with minimal risk over the long run, the schemes maintain conservative portfolio with buy and hold strategy (mostly). The last one year portfolio data show, the schemes -Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan have maintained between 35% and 40% of its assets in equities. Tata Retirement Savings Progressive have maintained between 88% and 98% of its assets in equities. Tata Retirement Savings Moderate have maintained between 77% and 86% of its assets in equities. Tata Retirement Savings Conservative have maintained between 19% and 32% of its assets in equities. Some schemes take somewhat higher returns by allocating more into mid and small cap stocks. Debt portion is preferred to hold higher rated debt instruments. The schemes are seen invested in debt instruments such as Gilt, Corporate debts, PTC & Securitized Debt and so on. Relative performance of the Retirement Benefit Pension Funds Vs. Benchmarks and NPS Funds: Scheme Name Structure Launch Date Latest Corpus (Rs Crs) Expense Ratio (%) 6 Month Absolute 1 Year Trailing Return (%) Rolling Return (%) Franklin India Pension Plan - (G) Open Mar ING Retireinvest Fund - Series I (G) Close Dec UTI-Retirement Benefit Pension Plan Open Dec Tata Retirement Savings - Conservative (G) Open Oct Tata Retirement Savings - Moderate (G) Open Oct Tata Retirement Savings - Progressive (G) Open Oct Benchmark Sensex Nifty S&P CNX Crisil Balanced Fund Index Crisil Composite Bond Fund Index Crisil Debt Hybrid (60:40) Crisil MIP Blended Index Average of NPS Fund - E Average of NPS Fund - G Average of NPS Fund - C Feasible allocation of NPS Portfolio (E-50%, C- 25% & G-25%) Note: NAV value as of Sep 10, Rolling returns calculated from the last 10 years NAV data. Standard Deviation calculated from last 3 years data. Source: ACEMF and NAVIndia. 3 Year 5 Year 7 Year 10 Year 6 Month Absolute 1 Year 3 Year 5 Year Standard Deviation

3 Yearly Returns posted by the Retirement Benefit Pension Funds: Risk as measured by Standard Deviation (daily): Comparison of Schemes features: Name of the Scheme Franklin India Pension Plan UTI-Retirement Benefit Pension Fund Tata Retirement Savings - Progressive Tata Retirement Savings - Moderate Tata Retirement Savings - Conservative Nature of the Scheme An Open-end Tax Saving Fund open ended notified tax savings Open ended fund Open ended fund Open ended fund Nature of the Portfolio Hybrid - Debt Oriented Hybrid - Debt Oriented Pure Equity Oriented Hybrid - Equity Oriented Hybrid - Debt Oriented Lock-in Period Three (3) full financial years Yes. There is a lock in period of 3 years applicable to this plan. However, investors may withdraw anytime even during the lock in period (subject to the exit load) and lose out the tax benefir under sec 80C. No No No Yes. subject to a maximum of Rs. Yes. Subject to a maximum of Rs. 1,50,000/- under Section 80 C of Income Tax Benefit under Section 80 C 1,50,000/- under Section 80 C of Tax Act,1961. In case if the investor No tax benefit under Income Tax Act, redeems his units before three years from 80c No tax benefit under 80c No tax benefit under 80c 1961 the date of allotment, the tax benefit under sec 80c will be reversed. Exit Load (subject to completion of the lockin period and minimum target investment) 3% if redeemed before the age of 58 years; Nil if redeemed after the age of 58 5% if redeemed less than one year from the date of allotment, 3% if redeemed between 1 to 3 years, 1% if redeemed after 3 years. Nil if redeemed at maturity (i.e. 58 years of age) or after 5 years from Nil - If redeemed after attainment of retirement age i.e. 60 years of age. In case of Auto switch-out of units on occurrence of Auto-switch trigger event Nil. For Redemption of units before the attainment of retirement age i.e 60 years: 3% - If redeemed / Switched out on or before expiry of 3 Years from the date of allotment. 1% - If redeemed / Switched out after 3 Years from the date of allotment.

4 Liquidity Benchmark years. Subject to completion of the lockin period and minimum target investment, the Scheme is open for repurchase/redemption on all Business Days 40% of CNX % of Crisil Composite Bond Fund Index the date of investment whichever is later. No exit load, in the case of the death of an unitholder. Yes. Any business day (subject to the exit load) CRISIL Debt Hybrid (60:40) Yes. Any business day (subject to the exit load) S& P BSE SENSEX Yes. Any business day (subject to the exit load) CRISIL Balanced Fund Index Yes. Any business day (subject to the exit load) CRSIL MIP Blended Index Asset Allocation into Equity (As per the SID) Up to 40% Up to 40% 85% to 100% 65% to 85% 0 to 30% Asset Allocation into Equity (As per latest portfolio) 39% 39% 95% 84% 30% Largecap & Midcap allocation Ratio in equity portion ( as per 85:15 78:22 80:20 70:30 74:24 latest portfolio) Eligible Entry Age up to 60 years in the age group of 18 to 65 years Rs.10,000 / (Rs. 500 Subject to attaining a Minimum investing Amount Rs.10,000 / SIP Rs. 500 minimum investment of Rs. 10,000/- by the Rs. 5,000/- and in multiples of Re. 1/- thereafter age of 52 years) Redemption options On attaining 58 years of age (subject to completion of lock-in period of 3 FY) and The total investment made is at least Rs.10000/-, the investor (i.e. you) can avail any of the following options: Pension Option, Lump sum Option, Combination Option, Flexible Option, Unitholders who have made investments upto the age of 52 years may get the regular periodical payments after they complete 58 years. Unitholders who make investments between the age of 53 and 65 years can redeem it after 5 years from the date of each such investment. Unique Auto-Systematic Withdrawal Plan (SWP) facility: Once an investor retires he/she needs a regular flow of money to fund his/her expenses. While salary stops post retirement, annuities and pension form a major part of his/her regular cash flow Minimum amount for Rs.1,000/- and any amount in redemption multiple of Re.1/- thereafter Rs. 1,000/- and multiples of Rs.100/- minimum of Rs. 500/- / 50 units or in multiples of Re.1/- thereafter or for all the Units Periodicity to receive the redemption proceeds Options Redemption benefits can be availed any of the following options: Pension Option, Lump sum Option, Combination Option, Flexible Option, Growth, Dividend, Div - Reinvestment and Div - Payout Option. Upon reaching the eligibility age, the unit holders will get at any intervals such as monthly, quarterly, half-yearly or yearly Tax implications Treated as Debt Oriented Funds Treated as Debt Oriented Funds monthly, quarterly, half-yearly or yearly Only Growth Only Growth Only Growth Only Growth Treated as Equity Oriented Funds Treated as Equity Oriented Funds Treated as Debt Oriented Funds

5 Retirement Benefit Pension Funds offered by Indian Mutual Funds Vs. NPS: On trailing returns basis the retirement benefit pension funds offered by Indian Mutual Funds posted similar or slightly higher returns for six months and one year periods than the NPS funds with their respective asset classes such as E, C and G funds. For instance, the pure pensions funds -Franklin India Pension Plan and UTI-Retirement Benefit Pension Plan posted average returns of 18%, 28% and 13% for the time frames such as six months, one year and three years periods while the Feasible allocation of NPS Portfolio (asset allocation in the ratio of E-50%+C-25%+G-25%) posted 16%, 25% and 14% returns for the same periods. On the other hand, on the rolling returns basis, the schemes have underperformed the NPS funds especially in the short term such as six month and one year periods. However, these schemes have matched the returns with that of the NPS funds over 3 year period. The government launched NPS for government employees in In 2009, it was opened for all citizens in the age group of years. There are two types of NPS accounts. Tier-I is a retirement account while Tier-II works like a savings account. Investors cannot withdraw from the former till the age of 60. In Tier-II, there is no such restriction. As far as the investment approach is concerned, subscribers can choose between active and auto options (Asset Class Choice). At turning 60, the investor can withdraw 60% of the fund, either at once or in a phased manner, from the retirement account. The rest is to be used to buy annuity. In NPS, as far as the investment approach is concerned, investors can choose between active and auto options. NPS categories assets classes as following -Asset Class E -- equity instruments. -Asset Class C -- Fixed income instruments other than government securities. -Asset Class G --Government securities. In active choice, investors decide the asset allocation between the three assets. They are allowed to take 100% exposure to Class C or Class G instruments but only 50% to Class E assets. In auto choice, the assets are shifted according to the age of the investor. At present, Investors can claim deduction for the NPS investment upto the total limit of Rs1.5 lakh under Section 80CCD (1) (own contribution) that is included in the 80C limit. If the employer is contributing on one s behalf, he can avail of an additional tax benefit for the employer s contribution under Section 80CCD (2). This is over and above the Rs1.5 lakh limit (raised from Rs1 lakh earlier) of Section 80C. Franklin India Pension Plan Key Points: Franklin India Pension Plan (FIPEP) was launched on Mar The investments in Franklin India Pension Plan (formerly known as Kothari Pioneer Pension Plan/ Templeton India Pension Plan) qualified for tax rebate u/s 88 of the Income Tax Act, In terms of Section 80C(7) of the Act, a pension plan referred to u/s 88 shall be eligible for deduction u/s 80C w.e.f. April 1, 2005.

6 The deduction u/s 80C of the Act shall be on investments up to Rs. 1.5 Lac. Other approved avenues for investment under Section 80C include ELSS, LIC, PPF and NSC etc., apart from Franklin India Pension Plan. 3 year lock in is compulsory. Any eligible investor up to 60 years of age can invest a minimum of Rs.10,000 cumulatively (either in lump sum or in instalments of a minimum of Rs.500) anytime up to the age of 60 years. There is no maximum limit on investment. On attaining 58 years of age (subject to completion of lock-in period of 3 financial years and the total investment made is at least Rs.10,000/-), the investor can avail any of the following options: Pension Option: Under this option, you may continue to remain invested in the scheme with the entire accumulated investment (units outstanding to your credit in your account) and receive income in the form of dividends to be declared out of the distributable surplus. Lump sum Option: Under the Lump sum Option, you can withdraw the entire accumulation (units outstanding to your credit in your account) after you reach 58 at the applicable NAV (without any discount). Combination Option: Under the Combination option, you can withdraw/redeem part of your accumulated units at the applicable NAV as a lump sum and continue to receive income in the form of dividends to be declared out of distributable surplus with reference to the remaining units in your FIPEP account. Flexible Option: Under the Flexible option, you can withdraw a fixed amount from your account every month for a specified period of time. Units to the extent of amount withdrawn will be redeemed at the applicable NAV (without any discount) and your unit balance will stand reduced to the extent of redemption. Investors may note that dividends may be declared subject to the availability of adequate distributable surplus and at the discretion of the Trustee. Further, the payment of dividend will be net of taxes, as may be applicable. Performance: Franklin India Pension Plan managed to deliver outperforming returns against its benchmark - 40% of CNX % of Crisil Composite Bond Fund Index especially in the last five years period (see below the yearly chart). The fund saw outperformed its peer scheme - UTI-Retirement Benefit Pension Plan in the one, three and five year time frames. The performance is always better than the returns provided by the Hybrid Debt Oriented category. During market downturn and higher volatile periods, the scheme managed to contain well the losses in comparison to the other hybrid oriented funds. Portfolio: The scheme has managed with high quality Portfolio in both equity and debt sides. The last one year portfolio show that the allocation to equity aseets has been between 35% and 39%. Close to 85% of the equity assets (or 34% of overall assets) have been invested in large-cap assets, latest portfolio as of July 2014 shows. However, the minimal allocation to mid and small cap stocks helps the schemes to generate higher returns during market rallies. The scheme follows buy and hold strategy. The turnover ratio stood at 30%. On debt side, most of the assets are kept in high rated long term bonds, debentures and then G secs. The recent portfolio shows that the maximum exposure into G secs and cash equivalents. The Average Maturity of the portfolio maintained as years. The latest corpus as of July 2014 stood at Rs. 281 crore. Expense ratio kept at 2.43%. Exit load: (subject to completion of the lock-in period and minimum target investment) 3% if redeemed before the age of 58 years; Nil if redeemed after the age of 58 years. Tax implications: the scheme is treated as non equity schemes as far as tax implications are concerned, since the scheme allocates close to 40% into equity.

7 Yearly returns of the scheme Vs. Peer and Benchmark: Allocation into equity and Debt Assets: During various time frames: Market Cap breakup of the category portfolio:

8 UTI-Retirement Benefit Pension Plan Allocation into equity and Debt Assets by UTI-Retirement Benefit Pension Plan: Key Points: UTI-Retirement Benefit Pension Plan was launched on Dec The investments in UTI-Retirement Benefit Pension Plan shall be eligible for deduction u/s 80C w.e.f. April 1, The deduction u/s 80C of the Act shall be on investments up to Rs. 1.5 Lac. 3 year lock in is compulsory to avail the tax benefit u/s 80C. However, investors are allowed to exit at anytime subject to exit load. In such case wherein the investor sells units within three years from the date of allotment, he will lose out the tax benefit availed u/s 80C. The objective of the scheme is to provide pension to investors particularly selfemployed persons after they attain the age of 58 years, in the form of periodical cash flow upto the extent of redemption value of their holding through a systematic withdrawal plan. UTI-Retirement Benefit Pension Fund is open in the age group of 18 to 60 years. Systematic Investment Plan, Systematic Transfer Investment Plan and Systematic Withdrawal Plan are available. So investors can redeem the units through SWP after 58 years / 5 years from the date of investment, whichever is later by choosing monthly, quarterly, half-yearly or yearly intervals. Minimum amount of redemption is Rs.1000/- and in multiples of Rs.100 thereafter. Performance: UTI-Retirement Benefit Pension Fund has showed mixed performance in comparison to the performance of its benchmark - Crisil Debt Hybrid (60:40). The scheme saw underperformed in the time frames such as one, three and five years periods against its peer - Franklin India Pension Plan. However, the scheme saw outperformed its peer in seven and ten years time frames. Market Cap breakup of the category portfolio:

9 Portfolio: The scheme has managed with high quality Portfolio. The last one year portfolio show that the allocation to equity assets has been between 38% and 40%. Close to 78% of the equity assets (or 30% of overall assets) have been invested in large-cap assets, latest portfolio as of July 2014 shows. However, the considerable allocation to mid and small cap stocks helps the schemes to generate higher returns during market rallies. The scheme follows buy and hold strategy. The turnover ratio stood at 30%. On debt side, most of the assets are kept in high rated long term bonds, debentures and then G secs. The recent portfolio shows that the increased exposure into G secs. The Average Maturity of the portfolio maintained as years. The latest corpus as of July 2014 stood at Rs. 1,265 crore. Expense ratio kept at 2.17%. Exit load: 5% if redeemed less than one year from the date of allotment, 3% if redeemed between 1 to 3 years, 1% if redeemed after 3 years. Nil if redeemed at maturity (i.e. 58 years of age) or after 5 years from the date of investment whichever is later. No exit load, in the case of the death of an unitholder. Tax implications: the scheme is treated as non equity schemes as far as tax implications are concerned, since the scheme allocates close to 40% into equity. Yearly returns of the scheme Vs. Peer and Benchmark: During various time frames: Tata Retirement Savings Conservative, Moderate and Progressive: Key Points: Tata Retirement Savings Conservative, Tata Retirement Savings Moderate and Tata Retirement Savings Progressive were launched on Dec They are regular mutual funds, no lock in applicable and hence not eligible for the tax benefit u/s 80C. They are merely asset allocation funds designed to provide income during the old age.

10 They are structured suite of plans designed to meet investment needs for retirement planning. Not only do unitholders have a choice of three plans within the Fund, but also it is easier for unitholders to move between Plans as their needs change. Each plan under the Fund shall follow a different investment pattern / style to cater the need different investor classes at different stages of their lifecycle. Progressive Plan focuses on the need & risk appetite of young age people and aims to provide long term growth by investing at-least 85% of its net assets in equity and equity related instruments. This plan also invests upto 15% of its net assets into debt securities. Moderate Plan focuses on the need and risk appetite of middle age people aims to provide growth along with the increased exposure towards debt securities as compare to the Progressive Plan. This plan, at-lest 15% of its net assets, compulsory invest into debt securities and restricts its exposure to equity to a maximum of 85% of the net assets. Conservative Plan focuses on the need & risk appetite of elder age people and shall aim on the preservation of capital along with the steady income stream by investing at least 70% of its net assets into debt and money market instruments. However, in order to get a long term investment advantage, this plan may also invest in to equities to a maximum extent of 30% of its net assets depending upon the investment opportunities as may arise from time to time; plans under the fund may also invest in overseas securities. Unique Auto-Switch facility: The Tata Retirement Savings Fund offers a unique "Auto-Switch" feature which takes away the hassles of adjusting the equity-debt proportion with increasing age. So if you start an SIP or make a lump sum investment in the "progressive" option and opt for the "Auto- Switch" feature, then the fund will do the needful asset allocation automatically as you cross different age brackets as explained below: 1) Progressive to Moderate switch happens once you attain the age of 45 years. 2) Moderate to Conservative switch happens once you attain the age of 60 years. However the fund also provides the option of staying perpetually invested in a single plan of choice. Unique Auto-Systematic Withdrawal Plan (SWP) facility: Once an investor retires he/she needs a regular flow of money to fund his/her expenses. While salary stops post retirement, annuities and pension form a major part of his/her regular cash flow. The unique "Auto-SWP" is designed with an objective to provide the investor with regular cash flow after he/she turns 60. There are 2 options of "Auto-SWP" facilities: 1) Monthly 0.5% of market value of investment as on date of completion of 60 years of age. 2) Quarterly 1.5% of market value of investment as on date of completion of 60 years of age. Investors will also be given an option to withdraw a flat amount with a minimum amount being Rs.500 and in multiples of Rs.500 on monthly basis.

11 Exit load: Nil - If redeemed after attainment of retirement age i.e. 60 years of age. In case of Auto switch-out of units on occurrence of Auto-switch trigger event Nil. For Redemption of units before the attainment of retirement age i.e 60 years: 3% - If redeemed / Switched out on or before expiry of 3 Years from the date of allotment. 1% - If redeemed / Switched out after 3 Years from the date of allotment. Tata Retirement Savings Conservative has posted outperforming returns for the last two years compared to its benchmark. As of Aug 2014, the allocation into equity was close to 30% of the total assets. The scheme kept maximum equity assets in large-cap stocks. However, the recent portfolio shows the gradual increase in mid and small cap stocks. Since it is a hybrid debt oriented, it is considered as non equity fund for tax purpose. The latest corpus as of Aug 2014 stood at Rs. 2 crore. Expense ratio kept at 2.37%. Tata Retirement Savings Moderate and has posted underperforming returns so far compared to its benchmark. As of Aug 2014, the allocation into equity was close to 84% of the total assets. The scheme kept maximum equity assets in large-cap stocks. However, the recent portfolio shows the gradual increase in mid and small cap stocks. Since it is a hybrid Equity oriented, it is considered as equity fund for tax purpose. The latest corpus as of Aug 2014 stood at Rs. 16 crore. Expense ratio kept at 3.28%. Tata Retirement Savings Progressive has posted outperforming returns for the last two years compared to its benchmark. As of Aug 2014, the allocation into equity was close to 95% of the total assets. The scheme kept maximum equity assets in large-cap stocks. However, the recent portfolio shows the gradual increase in mid and small cap stocks. Since it is an equity oriented, it is considered as equity fund for tax purpose. The latest corpus as of Aug 2014 stood at Rs. 65 crore. Expense ratio kept at 3.16%. Performance (Trailing Returns): Tata Retirement Savings - Conservative Tata Retirement Savings Moderate: Tata Retirement Savings - Progressive:

12 Analyst: Dhuraivel Gunasekaran Source: NAVIndia & ACEMF. Fax: (022) Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building B, Alpha, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai Fax: (022) Website: Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-institutional Clients.