Pension Plan V/s Equity Mutual Funds | Which Is Better for Retirement Planning?

Dec 11, 2021

Listen to Pension Plan V/s Equity Mutual Funds | Which Is Better for Retirement Planning?

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After years of hard work, people certainly become entitled to a happy retirement, when they can free themselves from the work-related responsibilities and finally follow their passion or enjoy their golden time with their closed ones. However, to live a happy post-retirement life, it is crucial to do retirement planning well in advance. Therefore, to safeguard you future financially you must invest wisely.

Retirement planning ensures that you have an additional source of income to meet your day-to-day expenses, medical emergencies or any other financial emergencies. Many banks and Non-Banking Financial Companies (NBFCs) introduce several retirement plans. But, how will you know which is a better investment option for your retirement planning? In this article, we will compare one of the popular insurance-cum-investment retirement plans, Pension Plan with carefully selected Equity Mutual Funds, which will help you to make an informed decision.

What are Pension Plans?

Pension plans are insurance-cum-investment retirement plans offered by life insurance companies. It offers the dual benefit of investment and insurance cover. It ensures you accumulate a substantial amount over the years and you receive a steady flow of income after retirement. A typical pension plan has two phases - an accumulation phase, where the retirement corpus is accumulated. And, a distribution phase, where you start receiving a regular pension. Planning for retirement is a crucial aspect so, start planning your retirement early and choose the retirement plan smartly.

Pension Plan V/s Equity Mutual Funds | Which Is Better for Retirement Planning?
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Here are some of the features and benefits of the Pension Plans:

  • The biggest advantage of investing in a pension plan is that you receive considerable returns on your accumulated amount along with a life insurance cover. Hence, ensures you a financially independent life after retirement.

  • Pension plans offer fixed and steady income, which ensure financial freedom even after your retirement.

  • Depending on the type of plan you choose, you can opt for an immediate income option that offers returns on your investment immediately after investing in the plan.

  • You get a tax exemption up to Rs 1,50,000, under Section 80C of the Income Tax Act, 1961.

  • Pension plans are long-term investment plans that generally do not allow any withdrawals until the accumulation period is completed and unless you have invested in an immediate annuity plan.

  • The vesting age (This is the age when you start receiving regular income from the Pension Plan) is flexible with most insurers. So, you can choose the age from where you want to receive the payouts. However, there is a minimum vesting age criteria of 45 years to 50 years, depending on the insurer.

  • Based on your requirements, you can choose to receive the pension in a lump sum or on a monthly, half-yearly, or yearly basis.

What is an Equity Mutual Fund?

An Equity Mutual Fund is a mutual fund that invests more than 65% of its total assets in equity shares of different companies of different sectors. The asset allocation of a mutual fund is done by the fund manager who is an expert with long-term experience. An Equity Mutual Fund is a moderate to high risk but high-return generating investment avenue. However, if you do a long-term investment in carefully selected Equity Mutual Funds, you can achieve your long-term financial goals, depending upon the amount you invest.

Here are some of the Features and Benefits of investing in Equity Mutual Funds for your retirement:

  • Equity mutual funds offer vast choices in terms of diversification of investment and investment styles.

  • Investments in thoroughly researched and carefully selected mutual funds can generate adequate funds for a happy retirement while also beating inflation.

  • You can start investing in your retirement fund at as low as Rs 5,00 per month through an SIP ( Systematic Investment Plan).

  • In case of an emergency, you can liquidate your mutual funds completely or partially.

  • Mutual funds offer flexibility and variety in investing which helps you to design your own retirement plan as per your requirements.

  • The risk part of the equity mutual funds can be easily reduced by diversifying the portfolio.

  • Although you do not get any tax benefit from investments in mutual funds unless you have invested in Equity Linked Saving Schemes (ELSS), they can generate much higher returns as compared to the tax-saving insurance-cum-investment plans.

  • Since it is not a life insurance plan, it does not provide any death benefit.

What is the difference between making retirement planning through Pension Plan and Equity Mutual Funds?

  • The Type of Investment:

    A Pension Plan is an Insurance-cum-investment plan that offers guaranteed returns as well as insurance coverage. Whereas, Equity Mutual Funds is a high-return investment option that does not provide any insurance cover.

  • Risk:

    The pension plans are considered low-risk investment avenues as they invest the collected corpus into debt and related financial instruments. The Equity Mutual Funds are moderate to high-risk investment avenues that primarily invest the collected corpus into equity shares.

  • Flexibility And Liquidity:

    You cannot make any modifications or customisations in pension plans as they are designed by the Insurance Companies. Most pension plans do not let you withdraw your money during the accumulation period. Whereas, you can diversify your equity mutual fund portfolio, by making changes in it, or even withdraw funds completely or partially, as per your needs.

  • Amount of Investment:

    The pension plans usually have a minimum premium requirement that you must pay every year or every month as per your policy terms and conditions. However, there is no minimum amount required for investment in equity mutual funds. You can start with a minimum of Rs 500 through SIP.

  • Investment Tenure:

    The pension plans have a long tenure depending upon when you start investing. It generally has an investment tenure of 5 years to 10 years, which may differ from insurer to insurer. Although there is no minimum investment tenure requirement for equity mutual funds, in order to generate high returns it is advisable to invest for a long term. You might not receive the expected returns with mutual funds if invested for the short term.

  • Tax Benefit:

    As discussed above, you get tax benefits up to Rs 1,50,000 on the premiums paid for a pension plan. But, there is no such benefit on mutual funds investments, unless invested in ELSS.

  • Suitability:

    The investment in equity mutual funds might not be suitable for conservative investors who are not ready to take a moderate risk with their retirement funds.

To Conclude:

Although pension plans provide guaranteed regular income, it might not be adequate considering the rate of inflation. It is advisable to make your retirement planning with carefully selected equity mutual funds that can generate high returns while reducing the risk with a diversified portfolio. Moreover, it is crucial to estimate your future financial requirements, decide the pension amount you will require and choose the right investment amount by considering your present earnings and expenses. However, before investing, make sure that you do the research thoroughly and choose the mutual fund schemes wisely, which will help you to make an informed decision.


Warm Regards,
Ketki Jadhav
Content Writer


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