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Union Retirement Fund NFO: Should you invest for silver years

Union AMC has launched ‘Union Retirement Fund’, an open-ended retirement solution oriented scheme having a lock-in of five years or till retirement age, which is 60 years (whichever is earlier). The New Fund Offer is open till September 15, 2022. The minimum investment required is ₹1,000. In solution oriented schemes targeting retirement, there are a total of 25 existing schemes across nine fund houses. These schemes broadly fall into equity, debt and hybrid baskets. Let us look at what Union Retirement Fund has on offer.

Retirement fund utility

Financial goal-based investing helps bring focus to the process of corpus accumulation. In this case, the goal is having a nest egg for your retirement. Whether the equity MF route is the only one to build such a corpus, can be debated upon. We will come to that later.

On the face of it, the five-year lock-in helps the investor to stay invested. But any form of lock-in reduces the flexibility in switching if the fund performance is poor. But, it can be argued that having a mandatory restriction in terms of withdrawals does overall help investors, specially those who have the habit of buying and selling regularly, remain focussed on the long-term goal by staying disciplined.

Asset allocation plan

Under normal circumstances, the asset allocation pattern of Union Retirement Fund will be 65-100 per cent in equity, 0-35 per cent in debt and 0-10 per cent in real estate investment trusts and infrastructure investment trusts. The scheme does not intend to invest in debt securities having structured obligations (SO rating) and/or credit enhancements (CE rating). The scheme may take equity derivatives positions and debt derivative positions up to 50 per cent of the equity and debt assets. So, the fund will be a equity-oriented scheme for all practical purposes, more like an aggressive hybrid fund.

Union Retirement Fund comes in direct and regular plans, growth and IDCW options. It will be managed by Vinay Paharia and Sanjay Bembalkar.

Individual investors (sole or first unit holder) whose age is less than or equal to 55 years at the time of investment can invest in the scheme.

The fund’s benchmark is S&P BSE 500 index (TRI). This benchmark is common for peers such as Nippon India Retirement Fund – Wealth Creation and SBI Retirement Benefit Fund – Aggressive Plan.

The NFO allotment date of Union Retirement Fund will be September 22 and the scheme will re-open for ongoing sale and repurchase on September 29.

Existing retirement funds performance

There are about 25 existing schemes in the retirement solution-oriented sub category. Instead of painting them with one brush, one should look at the different fund approaches and asset allocation patterns.

There are half a dozen funds with pure-play an equity-focussed approach. We have selected them based on the nature of equity index benchmark (Nifty 500 TRI and S&P BSE 500 TRI). See the table below for the performance (except SBI Retirement Benefit Fund- Aggressive Plan).

An analysis of the funds’ performance vis-a-vis their benchmark shows half of the schemes in 1-year period and 80 per cent in the 3-year period underperformed the benchmark. From an absolute performance perspective, the funds have returned -0.89 per cent to 15.78 per cent in 1-year period, and 12.41 per cent to 24.09 per cent CAGR in the 3-year period. In the five year period, there are only 3 funds and only one among them has outperformed the benchmark viz: HDFC Retirement Savings Fund – Equity Plan (it also did well in 1 and 3-year periods).

Our take

There is nothing special in terms of investment strategy in this new retirement fund. The scheme will invest at least 65 per cent of its net assets in equity and equity related securities, because the fund manager offer superior risk reward payoff. The 65 per cent aim will also generate equity fund taxation for investors. The portfolio will be constructed on the basis of a combination of topdown and bottomup approach, which is not striking.

The very idea of having a plain-vanilla equity fund, with just a mandatory lock-in, as a retirement can simply be replicated by any investor if they don’t touch the investment in a broader market equity index fund/actively managed diversified equity fund for 5 years. While retirement is a hard reality for many, the solution of selecting one fund for achieving the goal may not be optimal from a risk perspective. A mix of funds will be ideal. If your retirement is 10-plus years away, you can afford to own a fully equity portfolio. You can use the passive fund route to achieve this. If you have a higher risk appetite, use Nifty Next50 Funds or Nifty Midcap 150 funds to your core holding of Nifty 50 or Nifty 100 funds.