2 pension funds that also save tax

If you thought equity-linked savings schemes were the only mutual fund products you could invest in to save tax under Section 80C, here's a surprise.

Mutual fund pension plans, targeted towards your retirement corpus, can also help you in your tax planning. These are debt-oriented balanced funds that take equity exposure of up to 40 per cent (as opposed to 65 per cent equities in regular balanced funds), while keeping the remaining in 'safer' debt instruments.

Currently, there are two MF pension plans on offer - Templeton India Pension Plan and UTI - Retirement Benefit Pension Fund. Both these schemes offer section 80 C tax benefits.

For instance, if your taxable income is Rs 300,000, and if you invest Rs 100,000 in TIPP or UTI RBPF, your taxable income comes down to Rs 200,000. As these schemes target your retirement, they mandate that you stay invested till the age of 58. Early withdrawals attract a high exit load. Of the two, we suggest you take a look at TIPP.

Consistent performance

TIPP has shown consistency over a long period of time. Over the past three and five years, TIPP returned 16.1 and 20.1 per cent, respectively, as against 15 and 17 per cent for corresponding periods by UTI RBPF.

We took the standard deviation of all balanced funds for the past three years and checked out the extent of fluctuation of the scheme's returns from that of its average return for the same period. TIPP has the lowest SD and stands third on the risk-adjusted returns charts.

On the other hand, UTI RBPF, in the past year, has managed to return only 7.7 per cent despite investing 15-20 per cent in equities. Even a one-year bank FD earns eight per cent. Besides, the fact that the fund, which can invest up to 40 per cent in equities, is benchmarked against the Crisil MIP Blended Index (that has 15 per cent allocation to equities) doesn't work in its favour.

Regular dividends

Once you turn 58, you can either withdraw the full amount (without exit load) or choose to receive a pension in the form of dividends. If you choose dividends, you are entitled to receive dividends in the form of pension.

TIPP has consistently given an average of 12 per cent dividend per annum for six years now. Even if you choose the dividend option at the time of investment, you will start receiving dividends only once you turn 58.

Portfolio

TIPP has consistently maximised its equity investments. As per its December 2006 portfolio, its top three sectors are banks, information technology and auto companies. It also invests in debt scrips of high credit quality.