Weekly Musings – NFO Pick (Bandhan Retirement Fund)

18 Sep 2023 , 08:35 AM

Retirement funds are a form of solution funds available in the market today. Now, these solution funds are an extension of hybrid funds in that they combine equity and debt in a way that, the equity component maximizes returns while the debt component reduces the risk. In India, as we shall see later, the total AUM of such retirement funds in India is around Rs21,750 crore, which means the idea is yet to catch on. 

To begin with, an investor looking to a good corpus on retirement can invest in the Bandhan Retirement Fund. It is a dynamic allocation fund, which means the fund manager has the leeway to shift between equity and debt, although the basic exposure to equity will be kept at minimum 65% so as to get the benefit of an equity fund classification and greater tax efficiency. However, unlike regular dynamic allocation hybrid funds, the Bandhan Retirement Fund will come with a minimum lock-in of 5 years or the age of 60 years, whichever is earlier. This will ensure a more long-term approach to retirement planning.

How Indians have typically approached retirement planning?

According to a survey conducted on retirement planning by Max New York Life Insurance, the typical approach to retirement by Indians has been, either too ignorant or too casual. For example, as per the survey, nearly 33% of the people retiring are aware that their funds would exhaust in the next five years. Despite this awareness, nearly 40% of all Indians have not started saving for retirement or have not made any kind of provision for life after retirement. A whopping 24% of Indians have not heard of retirement planning or have not clue how to go about accumulating a corpus for retirement. However, it is also true that more than 90% of those above 50 years regret not having done more for retirement.

There are several reasons for people to put off an important decision like retirement planning. For some people, it is an innate confidence or a kind of wishful thinking that their children will reciprocate by looking after them in their old age. In other cases, the excuses for not planning retirement are more mundane like lack of awareness or the absence of a trusted advisor. However, in most cases, it is about how much priority is accorded to retirement planning. People put off the idea of retirement planning on grounds like it is too early to worry about retirement or not being aware to start or just having other priorities like a new car, home loan EMIs etc. It is hard to fathom, but that is the way it is.

Here is a quick retirement related data shocker

There are some interesting numbers that would goad you to focus on retirement planning at the earliest.

• Thanks to greater health consciousness and better medical facilities, life expectancy has gone up sharply. However, it also means that in the past, while people had to provide for 10 years after retirement, now they need to provide for around 20 years after retirement. In short your working life has to pay for a longer non-working life.

   

• You may not realize, but inflation erodes your savings much faster than you can imagine. In the last 10 years, milk prices are up 3-fold and they are likely to spike another 8-fold in the next 20 years. Prices of fruits and vegetables have doubled in last 10 years and will increase 5-fold in the next 20 years. Above all, your basic monthly budget has gone up 70% in the last 10 years and is likely to 3-fold in the next 20 years.

   

• But the biggest shocker most people are not prepared for is the inflation in the cost of healthcare. Doctor consultations have doubled in the last 10 years and could grow 4-fold in the next 20 years. Indian medical inflation is the  highest in Asia and hits the elderly people the most. The recently experience is that healthcare inflation is twice the rate of normal inflation; and this trend is likely to continue.

What these three trends mean is that people going to live longer and have to spend more on routine expenses and on healthcare. The answer lies in making your retirement funds work a lot harder.

How exactly does a retirement fund plug these gaps?

The retirement brings some basic building blocks to your retirement planning in the form of disciplined regular investment, proper asset allocation, continuous monitoring and finally managing the drawdown of the retirement corpus. A retirement fund by an existing mutual fund gives you the benefit of a product from a well-regulated industry. The fund managers handle the asset allocation between equity and debt so as to maximize returns and minimize risk, since both are critical in retirement planning. The retirement fund works on a set formula where disciplined investments are done through SIPs (systematic investment plans) and drawdowns to the corpus are done in an organized manner through SWPs (systematic withdrawal plans). So, an investor in a retirement fund gets the benefit of diversification of risk, guided allocation, and total transparency of operations.

• The operation of the Retirement Fund is broken up in to two parts. The first phase is the accumulation phase up to the age of 60 years when you invest through SIPs and even lump-sum contributions and even make enhanced contributions in sync with your rising income levels. The second phase is the distribution phase when the withdrawals are planned after the age of 60 in a regular manner through SWPs and via lump sum drawdowns. Even at the wealth distribution phase, the focus would be to ensure that the amount not withdrawn continues to earn productively.

   

• Unlike traditional retirement products that are debt heavy, the retirement fund is more dynamic. It is heavier on equity in the accumulation phase but heavier on the debt side during the distribution phase. Equities offer the best risk-adjusted returns over a longer period of more than 8 years. Hence, when the accumulation phase is around 25 to 30 years, equities work best. Over a 10-15 year period, equity can generate twice the CAGR returns compared to debt.

   

• The biggest advantage of early retirement planning is the compounding effect. For instance, if you contribute to a SIP of Rs2,000 per month on the Sensex, then it would have generated a wealth ratio of 2.2X in the last 15 years but a wealth ratio of 15.3X over the last 35 years. That is how much of difference that compounding makes to returns in the long run.

A good retirement fund relies heavy on managing flows either ways, fine tuning the asset allocation and, above all, focusing on the compounding effect.

Key benefits of the Bandhan Retirement Fund

The Bandhan Retirement Fund comes with a 5 year lock-in, but that is small price to pay for a 30-year plan and another 20 years of distribution. Here are some highlights.

1. The fund adopts a dynamic approach to allocation between equity and debt. Conceptually, timing may not matter as much as time, if you just stay invested in equities over the long run. However, when it comes to asset allocation, it is important to be in the right asset at the right asset time and to that extent timing matters. This fund is based on leveraging such timing in the case of asset allocation via dynamic allocation.

    

2. The lock-in period of 5 years or up to the age of 60, will help to adopt a long term approach to retirement planning. The fund will strive to maintain 65% allocation to equities, either via direct equities or derivatives, so that it gets classified as a tax-efficient equity fund. This will be more efficient in post-tax terms. Debt allocation is meant to limit the downside risk and offer stability to returns. 

    

3. The fund will use very time tested models for its equity and debt selection. For instance, the equity selection will be based on a mathematical model that incorporates fundamentals, technical charts, and comparative valuation parameters. On stock selection, the focus would be on sectoral leadership, high growth, and valuation moat. In other words, the focus of stock selection will be quality with temporary headwinds or cyclical companies at the point of cycle turnaround.

    

4. There is also a mathematical model for bond selection in the portfolio. The selection of debt will be based on a preference for high quality debt paper, higher duration portfolio and an eclectic mix across government bonds, SDLs, corporate bonds, money market instruments etc.

One of the advantages of such dedicated retirement products is that, even after the 5-year lock-in, investors tend to hold on to reap the full benefits since it is a long term commitment.

Key highlights of the Bandhan Retirement Fund NFO

The Bandhan Retirement Fund NFO is a dynamic allocation fund between equity and debt with a clear goal of assisting in the retirement planning.

• The Bandhan Retirement Fund NFO opened for subscription on September 28, 2023 and will close for subscription on October 12, 2023, both days inclusive. It is an open ended fund, but every investment will be subjected to a lock-in of 5 years or the investor attaining the age of 60, whichever is earlier.

   

• Bandhan Retirement Fund is a hybrid fund with a dynamic allocation model. However, it is classified as a Solution oriented retirement fund since it takes care of the two phases of wealth accumulation and wealth distribution in equal measure. 

   

• The primary objective of the Bandhan Retirement Fund is to provide long term capital appreciation  by investing in a mix of equity, debt, and other instruments to help investors meet their retirement goals. However, the fund does not offer any assurance or guarantee that such objectives would be achieved.

   

• The Bandhan Retirement Fund performance will be benchmarked to the CRISIL Hybrid 50+50 Moderate Index. However, this may not be the precise benchmark as the fund is managed dynamically.

   

• There are no entry loads in India as per SEBI regulations. However, instead of an exit load, the fund has imposed a mandatory lock-in of 5 years or the investor attaining the age of 60, whichever is earlier.

   

• NFO subscriptions in the Bandhan Retirement Fund can be made in minimum lumpsum parcels of Rs1,000 and SIP parcels of Rs100 and both investments can be multiples of Rs1 thereafter. 

On the risk scale, this is classified as a high risk fund. This is best suited for individuals looking for a solid retirement plan comprising of initial wealth accumulation and subsequent wealth distribution.

Understanding the Retirement Funds universe in India

Here are some major Retirement Funds available in India.

Scheme  Name	NAV  Direct	Return 1 Year (%) Direct	Return Since Launch Direct	Daily AUM (Cr.)
SBI Retirement Benefit Fund – Aggressive Plan	17.11	18.55	22.99	1,807.29
HDFC Retirement Savings Fund – Equity Plan	42.78	25.49	21.20	3,798.24
ICICI Prudential Retirement Fund – Pure Equity Plan	22.97	21.41	20.05	367.83
SBI Retirement Benefit Fund – Aggressive Hybrid Plan	16.03	16.34	19.94	1,147.33
HDFC Retirement Savings Fund – Hybrid Equity Plan	34.38	20.40	17.74	1,164.95
ICICI Prudential Retirement Fund – Hybrid Aggressive	19.51	18.75	15.82	214.03
Tata Retirement Savings Progressive	58.81	15.01	15.75	1,555.37
Tata Retirement Savings Moderate	57.99	14.57	15.75	1,796.57
Axis Retirement Savings Fund – Dynamic Plan	15.51	5.87	12.45	297.46
SBI Retirement Benefit Fund – Conservative Hybrid	13.45	11.60	12.10	241.96
Aditya Birla Sun Life Retirement Fund – The 30s Plan	16.36	13.98	11.52	320.59
Axis Retirement Savings Fund – Aggressive Plan	14.76	6.49	10.97	713.45
Nippon India Retirement Fund – Wealth Creation	24.04	19.66	10.74	2,687.52
Aditya Birla Sun Life Retirement Fund – The 40s Plan	15.73	11.93	10.54	102.13
Franklin India Pension Fund	194.07	10.65	10.24	475.02
UTI Retirement Benefit Pension Fund	42.72	12.92	10.23	4,051.98
Tata Retirement Savings Conservative	31.05	8.85	10.03	165.59
HDFC Retirement Savings Fund – Hybrid Debt Plan	20.43	10.51	9.92	155.72
ICICI Prudential Retirement Fund – Hybrid	15.29	11.29	9.78	55.48
Axis Retirement Savings Fund – Conservative Plan	14.10	8.41	9.63	77.65
SBI Retirement Benefit Fund – Conservative Plan	12.43	9.50	8.76	162.81
ICICI Prudential Retirement Fund – Pure Debt Plan	14.20	6.66	8.01	168.24
Nippon India Retirement Fund – Income Generation	19.25	9.38	7.92	170.86
Aditya Birla Sun Life Retirement Fund – The 50s Plan	13.28	9.24	6.49	27.95
Aditya Birla Sun Life Retirement Fund – The 50s Plus –	12.58	5.93	5.21	24.04

Data Source: AMFI

Returns on retirement funds have ranged from 5% to 23%, but this is largely a function of time and you need to evaluate after 10 years only. The total AUM is just about Rs21,750 crore, so this space is still quite small. The Bandhan Retirement Fund may be the right product at the right time.