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Retirement and pension plans go hand-to-hand. Whenever one thinks about saving for retirement, he/she starts looking for pension plans. They have this belief that pension plans will secure their golden years. However, if one has a clear understanding of how retirement planning should be done, then I am sure they would think beyond pension plans and go with mutual funds.

Before we discuss reasons to choose mutual funds, let's have a look at stages involved in retirement planning.

Mainly, there are three stages involved in retirement planning:

  • Stage 1: Accumulation
  • Stage 2: Preservation
  • Stage 3: Distribution

At accumulation stage, you invest in different investment options as per your risk capacity and time left for retirement. When you reach the preservation stage, the main objective is to preserve the accumulated corpus. Once you reach the distribution stage, you can expect to get income out of your retirement fund.

Reasons to Choose Mutual Funds Over Pension Plans

Here are some of the reasons for opting for mutual funds over pension plans:

1. Mutual funds enjoy high flexibility

Unlike pension plans, mutual funds do not come with restrictions on premium payment and withdrawals in between. At any point in time, you can stop making the payment without paying penalties.

2. Mutual funds are tax-efficient

Though in Union Budget, 2018, the finance minister has introduced a long-term capital gain tax of 10% on capital gains, mutual funds are still more tax efficient than pension plans. Long-term capital gains under equity mutual funds will be taxable only if they are above Rs 1 lakh.

Moreover, all gains till 31st January will remain tax-free. In case of pension plans, the payout received at distribution stage is added to the income and is completely taxable.

3. Mutual funds enjoy transparent structure

In mutual funds, you can choose the funds as per your choice. The information about the fund manager, past returns, associated risks, etc.; are clearly available. However, pension plans lack that transparency.

Unlike pension plans offered by insurance companies, mutual funds are a relatively more flexible instrument that can be effectively used for retirement planning. Let's understand it in detail:

1. Use of Mutual Funds at Accumulation Stage of Retirement Planning

At this stage, investment is just like any other normal investments that you make after thoroughly understanding your time horizon, risk profile and mutual fund structure. With the availability of a wide range of mutual funds, you only need to choose the asset allocation with which you want to go and pick the right combination of equity, debt, gold and real estate.

As retirement planning is long-term in nature, you can pick from diversified equity and debt funds. In case you want to go with gold allocation, there are various gold ETFs or gold saving funds where you can invest. If you are inclined towards real estate, invest in real estate portfolios of mutual funds.

As the time is at your side, invest more in equities through systematic investment plan (SIP). When you make a SIP investment, you don't need to time your entry into the market, and you can protect your investment from market volatility.

The key to accumulating enough retirement corpus is to start saving early. The power of compounding fetches your return on the interest earned also. But it needs time to show its magic, so start early, as much as possible.

2. Use of Mutual Funds at Preservation Stage of Retirement Planning

When you reach the preservation stage, you need to develop a defensive approach. So, one can invest in safe products like fixed maturity plans, short-term debt funds, etc. Also, shift equity investments to debt funds when less than five years are remaining in your retirement. In this way, you can preserve your capital from market volatility. Systematic Transfer Plan (STP) can be used to transfer funds from equity to debt or vice versa.

3. Use of Mutual Funds at Distribution Stage

Your goal should be not only to preserve wealth, but also to get a regular income, and therefore, you can opt for systematic withdrawal or dividend payout options. If you opt for systematic withdrawal option, you can instruct mutual fund houses to start paying you a fixed income after selling your units. It is a useful way to get regular income and grow remaining corpus in the debt fund.


Investing in mutual funds for retirement planning is a good strategy as it enjoys an edge over pension plans. Saving for a rainy day is essential to enjoy a comfortable life after retirement. And, an early start in mutual funds can make it happen.


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