To all readers ..sorry was out for quite some time..didn’t post articles…Now Finance_Doc is back..
Most of us are confused to choose between pension plans or mutual funds for better retirement planning..Hopefully this article will help a bit in making your decision.
“Should I go for Pension Plan or Mutual Funds? I think Pension Plan will be better and safer than Mutual Funds” – Ramesh asked me.
I asked in reply, “Why do you want to go for a Pension Plan & not the mutual Funds?”
He said, “Well, because they are safe & provides Life Insurance Cover”.
People simply Love Pension Plans because of this clause:
“On the death of the Life Assured during the deferment period of the policy, i.e. before the annuity vests,
an amount equal to the Sum Assured under the Basic plan along with the accrued Guaranteed Additions,simple Bonuses and Terminal Bonus, if any, will be paid in a lump sum to the appointed nominee, provided the policy is in force for full Sum Assured. Nominee will also have the option to purchase an annuity with this amount.”
But My argument is that, if you want a Life Cover than why not go for a Simple, Conventional Life Insurance Plan? Pension Plans are not for Life Insurance benefits, For Life Insurance, we have Life Insurance Plans.
My another logic behind going for Mutual Funds rather than Pension Plans is that, Because We have to invest in pension plans for 15, 20 or 30 years which is an ultra-long time horizon. If you are going for this much of long time horizon investment than why not go for Equity which is the Best Asset class in comparison to any other Asset class.
Historical Data shows that, Indian Equity has given 15-20% per Annum compounded annual return in the long run while your Pension Plan will give you just 6-8% per Annum return, may be less but not more. This additional 5-10% of Compounded Interest rate in the long run can make a huge difference in your wealth.
Than why not go for Mutual Funds?….!!!
So in my opinion, rather than going for Pension Plans only for Life Insurance benefits, you should buy a separate Conventional Life Insurance Plan separately and invest rest of the money in good equity mutual funds systemically over 15, 20 or 30 years.
15% return with 5000/- SIP can fetch you 3.5 Crore in 30years.. Check Calculators section. In the Long-run, Equity is the Best Asset Class to beat the Tax & Inflation Both….!!!!