Weekly Musings – NFO Pick (PGIM India Retirement Fund)

24 Mar 2024 , 08:47 AM

WHY RETIREMENT PLANNING

In the last few years, several trends have increased the importance of retirement planning among Indians. The first is that the average disposable income among Indians has been improving in line with rising income levels. This is a signal for people to use this productively to enhance their savings for the long term. Retirement planning is an obvious choice. The second trend is that with the rise of nuclear families, there is a trend towards independent living, at least if you can afford it. People do not want to be dependent on their children to be taken care of in their future years.

Thirdly, most of our long term goals have funding options. For instance, you can fund for a home, for a second home, for a foreign holiday and even for your child’s education. The one goal for which there is no funding available is retirement. Despite being a large requirement, the onus is entirely on you to handle retirement. Fourthly, medical and living costs are going up sharply and that calls for a faster rise in spending even post-retirement. Lastly, longevity has improved over the years with people living longer thanks to better nutrition and better medical facilities. That means; you hav a longer unproductive life to take care of.

WHY EQUITIES FIT PERFECTLY INTO RETIREMENT PLANNING

Equities are a natural fit into retirement planning for several reasons. If you look at the CAGR returns of different asset classes over a 23 year period since the start of the millennium, then equities have multiplied wealth by 27.8X; compared to 13.1X for gold, and 4.3X for FDs. All this while inflation itself has gone up by 3.8X. Today, it is estimated that for a comfortable retirement, a corpus of nearly 10X your annual income is required. Such a massive accumulation can only happen through equities. The beauty about equities for retirement planning is its natural fit for long term goals. In the long term, the biggest risk is not taking enough risk; and investing in equities perfectly bridges this gap.

WHY PGIM INDIA RETIREMENT FUND NFO

The PGIM Retirement Fund falls under the category of solution oriented funds and has several advantages. It comes with a 5-year lock-in. If you look at the BSE 500 index (the benchmark for this fund), when held for over 5 years, the probability of negative returns is just 1%, while there is a 67% probability of earning more than 10%. The PGIM Retirement Fund will adopt a multi-cap approach. In the last 18 years, large caps have outperformed 8 times, mid-caps 2 times and small caps 8 times. Multi-cap approach covers it all. The Retirement plan also has a leeway up to 25% in debt, REITs and INVITs, based on opportunities. Lastly, the 75% minimum equity orientation of the fund will classify it as an equity fund for tax purposes, making it tax efficient from a long term perspective.

PERFORMANCE OF RETIREMENT FUNDS (SOLUTION PLANS) IN INDIA

Here is a quick look at the open ended retirement funds in India as of March 22, 2024. These are CAGR returns for beyond 1 year, and pertain to regular plans.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 3-Year	Return (%) Launch	Daily AUM (₹ Crore)
Union Retirement Fund	13.31	40.25	N.A.	21.06	117.98
ICICI Prudential Retirement Fund – Pure Equity	25.86	55.32	26.70	20.63	624.80
HDFC Retirement Savings Fund – Equity	43.15	39.40	24.90	19.85	4,727.68
SBI Retirement Benefit Fund – Aggressive	17.55	30.39	21.13	19.82	2,169.72
SBI Retirement Benefit Fund – Aggressive Hybrid	16.41	25.79	18.40	17.28	1,285.05
HDFC Retirement Savings Fund – Hybrid Equity	33.71	29.58	16.46	16.24	1,335.52
ICICI Prudential Retirement Fund – Hybrid Aggressive	21.20	46.01	18.69	15.99	353.95
Tata Retirement Savings Progressive	54.09	35.08	13.65	14.59	1,712.51
Tata Retirement Savings Moderate	53.43	29.83	12.76	14.48	1,883.96
Axis Retirement Savings Fund – Dynamic	16.46	31.05	10.83	12.43	324.55
Franklin India Pension Fund	192.91	18.19	9.10	11.59	494.69
Axis Retirement Savings Fund – Aggressive	15.71	30.92	9.37	11.20	795.43
SBI Retirement Benefit Fund – Conservative Hybrid	13.89	17.25	11.59	11.14	253.89
UTI Retirement Fund	43.05	20.78	12.86	10.40	4,298.74
Nippon India Retirement Fund – Wealth Creation	24.47	42.88	19.09	10.32	2,937.92
Aditya Birla Sun Life Retirement Fund – The 30s	16.24	30.00	10.12	10.12	350.57
Aditya Birla Sun Life Retirement Fund – The 40s	15.69	26.21	9.03	9.37	106.83
Axis Retirement Savings Fund – Conservative	14.50	20.50	8.05	9.13	74.39
ICICI Prudential Retirement Fund – Hybrid Conservative	15.36	19.37	8.55	8.84	56.29
Tata Retirement Savings Conservative	28.31	13.90	6.60	8.76	166.74
HDFC Retirement Savings Fund – Hybrid Debt	19.42	13.39	8.32	8.57	155.26
SBI Retirement Benefit Fund – Conservative	12.85	12.89	8.62	8.39	168.42
Nippon India Retirement Fund – Income Generation	18.27	14.17	7.09	6.84	165.87
ICICI Prudential Retirement Fund – Pure Debt	13.72	6.70	4.71	6.44	127.94
Aditya Birla Sun Life Retirement Fund – The 50s Plan	13.01	12.26	5.15	5.36	28.73
Aditya Birla Sun Life Retirement Fund – The 50s Plus – Debt	12.18	5.56	3.69	3.99	19.97

Data Source: AMFI India

In the table above, we have covered all the retirement funds (part of solution funds category), which are actually hybrid funds in nature. Considering the specialized nature of these retirement funds, and their sync with financial planning, we have considered the regular plans as a benchmark instead of direct plans. The idea is that investors will prefer to go through the broker route to get value added information and advice on such investment. There are 26 open ended retirement plans in India, which range from aggressive to conservative; in their investment approach. These 26 retirement funds, manage a corpus of ₹24,737 Crore between them; quite small for a category. Out of these 67 funds, the AUM is fairly well spread across the various fund names with a total of 8 such fund schemes having AUM of more than ₹1,000 Crore. Here are the highlights of the performance of Retirement Plans across time frames.

• The return dispersion is quite high and that is largely because this is a combined list of conservative and aggressive retirement plans. Since this is not entirely a homogeneous group, the dispersion should be read accordingly. On a 1-year returns basis, the fixed maturity plans (FMP) universe in India has generated maximum returns of 55.32% and minimum returns of 5.56%, showing substantial variation due to the variations in the portfolio mix and portfolio strategy of various retirement funds. The average returns over a 1 year period are 25.68%, which is fairly impressive, but it must be remembered that this is a heterogeneous group, so averages in the short run have limited import.
• Based on 3-year CAGR returns, the open-ended Retirement Funds universe in India generated maximum returns of 26.70% and minimum returns of 3.69%, showing a fairly high variation on a 3-year time frame basis. The average returns CAGR over a 3-year period were 12.22%, but here the returns have less impact as an average number due to the wide variations in the portfolio mix and the performance of retirement funds.
• Based on returns since launch, the Retirement Funds universe in India generated maximum returns of 21.06% and minimum returns of 3.99%, showing a fairly high variation on a longer time frame basis. The average returns since launch were 12.03%, but here again, the wide variance make the average a suspect measure.
• It must be noted here that most of the retirement funds insist on a minimum lock-in period of 5 years. Hence the 1-year return and the 3-year return may be only of technical value and not of practical value. From a practical standpoint, it is the returns since launch that will matter.

The retirement funds are a very heterogeneous group ranging from high equity to high debt to a balance of equity and debt. The 5-year lock-in for these retirement funds acts as a natural hedge against too much of short-termism in the investment approach. Investors must also compare the TER (total expense ratio), before taking a call.

GLANCE AT THE PGIM INDIA RETIREMENT FUND NFO

Here are some details of the PGIM India Retirement Fund NFO you must know to decide on investing in the fund.

• The NFO of PGIM India Retirement Fund opens for subscription on March 26, 2024 and will close on April 09, 2024. Being an open-ended debt scheme, the fund will offer buy and sale at NAV linked prices. However, being a retirement solution oriented fund, it has a minimum lock-in period of 5 years or reaching the age of 60, whichever is earlier.
• On the Standard SEBI Risk-O-Meter, the PGIM India Retirement Fund will be ranked as a high risk Fund. The high risk is due to the predominant exposure to equities that the PGIM India Retirement Fund plans to take. It will have a small allocation to debt and a much smaller allocation to REITS / INVITs also.
• The PGIM India Retirement Fund NFO offers an opportunity for investors to plan their retirement through a very smart solution fund with a minimum lock-in period of 5 years. This lock-in period is to ensure that investors take a long term approach to retirement. In reality, retirement goals are normally for a period of 15 years to 20 years at the bare minimum and that is the time taken by equities to operate to full potential.
• Investors can invest in the NFO of PGIM India Retirement Fund in minimum size of ₹5,000 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO. The question of Exit loads do not arise since the fund already comes with a minimum lock-in period of 5 years or the age of retirement, whichever is earlier. Additional investments can be made in minimum size of ₹1,000 and in multiples of ₹1 thereof. For SIP investments, the minimum requirement will be 5 SIPs of ₹1,000 each at the bare minimum.
• The fund comes with a minimum lock-in period of 5 years from the date of allotment or the date of attaining 60 years of age, whichever is earlier. However, in the case of premature withdrawal due to attaining the age of 60, exit loads may be applicable at the extant rates. The lock-in of 5 years will be applicable for redemption and also for transfer-outs from the fund. Any switch will also be allowed after 5 years only.
• The PGIM India Retirement Fund NFO will offer the growth option as well as the IDCW (income distribution capital withdrawal) payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different based on the TER imputed to the fund. All fund units will be issued at a face value of ₹10 only. The NAVs of the growth plan and the IDCW plan will also be different if dividends are declared.
• The fund will have a portfolio mix of predominantly equity to classify as an equity fund for income tax purposes. However, the fund will invest a small portion in debt, REITs and INVITs. The scheme is best suited to investors looking to plan their retirement over the next 15-20 years and those who are willing to take the risk of equities for the long term.
• The fund will be benchmarked to the S&P BSE 500 TRI index. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. This benchmarking is used to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund managers for the PGIM India Retirement Fund will be Vinay Paharia for the equity portion and Puneet Pal for the debt portion.
• The PGIM India Retirement Fund NFO will allocate 75% to 100% of its corpus in equities while the balance will be allocated between debt and REITs / INVITs. Due to equity exposure being above 65%, it will be classified as an equity fund for tax purposes. Hence short term capital gains (held for less 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% after a minimum threshold exemption of ₹1 Lakh per financial year.

The PGIM India Retirement Fund NFO is an opportunity for investors to systematically plan for their retirement through a long term growth portfolio that is dominantly equities. The solution approach is an added advantage of the PGIM India Retirement Fund.