Why Union Budget 2017 Must Give the Nod to Target-Date Funds

In its February 2014 board meeting, market regulator SEBI alluded to “a long term product such as Mutual Fund Linked Retirement Plan (MFLRP)” as a part of its 'Long Term Policy for Mutual Funds in India'. Since then, some fund companies have launched their versions of retirement funds.

However, the regulator is yet to issue guidelines to pave the way for a defined MFLRP product. With Union Budget 2017 on the anvil, one hopes that the MFLRP segment is promulgated in the form of Target-Date Funds.

What are Target-Date Funds?

As the name suggests, target-date funds focus on a pre-set year of retirement. For instance, if you are 30 years of age, and intend to retire at the age of 60, then you will invest in a fund with a target date of 2047.

Target-Date funds are structured as fund-of-funds. They operate on the principle of asset allocation. In their initial years, target-date funds focus on wealth accumulation by largely investing in a combination of domestic and global equity funds. As the target-date approaches, the portfolio acquires a conservative bent with equity allocation being trimmed in favour of fixed income funds.

Simply put, a target-date fund can be a one-stop shop for accumulating a retirement kitty.

In the US, several billion dollars are invested in target-date funds. It certainly helps that target-date funds are often the default choice under defined contribution plans such as 401(K).

Retirement Planning and India

While awareness about retirement planning has grown over the last decade or so, it continues to be a bit of an alien concept for several Indians. Perhaps one can chalk it up to cultural factors. We have been a country of joint families wherein post-retirement, parents are provided for by their children. But thanks to a combination of factors such as growth of nuclear families, higher life expectancy, and cost of living, the need for retirement planning is real.

Successive governments have nudged citizens to independently provide for retirement as well: From opening up the National Pension System (NPS) for all citizens in 2009, enhancing its tax sops in Union Budget 2015, to launching the Atal Pension Yojana for those in the unorganised sector. The message is clear: Focus on retirement planning.

Tax Treatment and Benefits

The allure of tax benefits can be a strong motivator while making investment decisions. Let’s take the example of Equity Linked Savings Schemes (ELSS), a niche segment in the Indian mutual fund industry with assets of INR 501 bn (3% of industry assets) as on Dec 2016.

From Dec 2011 through Dec 2016, assets under ELSS have risen at an annualised rate of roughly 20%. That is no mean feat considering that the investments are subject to a three-year lock-in. To put things in perspective, over the same period, the broader category of other equity funds has grown by 25%.

So, what makes the niche ELSS category tick—tax benefits! Investments in ELSS are eligible for deductions under Section 80C of the Income Tax Act.

To enhance the appeal of target-date funds (and thereby facilitate retirement planning), it is pertinent that investments therein be made eligible for Section 80C deductions.

Another area which must be simultaneously addressed is the tax treatment of fund-of-funds. In India, fund-of-funds never took off. While the latter can be attributed to a variety of reasons, none is more significant than tax treatment.

Irrespective of their underlying investments (equity funds or fixed income funds), fund-of-funds are taxed akin to fixed income funds. Since the tax treatment for fixed income funds is more punitive (versus equity funds), fund-of-funds have been at a disadvantage.

Hence the need for regulatory intervention to ensure that target-date funds enjoy the same tax treatment as equity funds. And what better platform than the Union Budget to iron out these regulatory matters, and launch target-date funds on a strong footing.

How the Investor Wins

Presently while planning for retirement, investors can choose from NPS, small savings schemes (Public Provident Fund) and retirement plans of insurance companies. Target-date funds can effectively close the circle of retirement-focused avenues. 

The potential for ancillary benefits—inflow of long-term monies into mutual funds, greater influence of domestic institutional investors in markets, multiplier effect of higher consumption from retirees—is strong.

Hopefully, the Finance Minister will agree, and give the nod to target-date funds in Union Budget 2017.

The Corporate Jungle Book

“It's a jungle out there

Disorder and confusion everywhere

No one seems to care

Well I do

Hey, who's in charge here?

It's a jungle out there”

Title track – Monk

Written and Performed by Randy Newman

My young nephew is quite fascinated by wildlife. Often, he picks a pictorial book and educates me about various species of animals. Over time, our conversations got me thinking about uncanny similarities between wild animals and humans. Oddly, several human variants of the ‘animal’ kind can be found in the workplace, making the latter a corporate jungle.

Here’s a list of creatures you are most likely to encounter in the corporate jungle:

The Vulture

Vultures are scavengers i.e. unlike predators which hunt their prey, vultures feed on dead animals hunted by predators.

The corporate jungle is full of vultures who feed on others’ work and accomplishments. Vultures exist across hierarchies—from those who steal credit for work done by their co-workers, to managers who feed off their subordinates’ achievements. A variety of factors ranging from incompetence, insecurity, lethargy to malevolence can give rise to the corporate vulture.

Have you encountered a colleague or manager who is nowhere in the picture when a project is initiated and the hard yards are being put in. As the project approaches completion and success is in sight, he suddenly appears. Thereon, the corporate vulture is firmly in-charge and hogs the limelight and accolades.

Finally, here’s a tell-tale sign of a vulture in a leadership role: Even when he’s speaking for the team, he always uses ‘I’, rather than ‘we’.

The Chameleon

Chameleons have the ability to change their colour in response to environmental conditions such as light and temperature. In other words, the chameleon can assume different avatars at different occasions.

The corporate chameleon focuses solely on self-preservation. To achieve his goal, he always swims with the tide, and is committed to being non-committal.

Consider a sales manager who in his meetings with the engineering department agrees that their product line is the best-in-class, and that there’s a need to impress the same upon customers. When he meets customers, the sales manager rues that his engineering department’s products aren’t in line with customer requirements. Furthermore, he will enthusiastically support the CEO’s proposal to shut down the engineering department and migrate to a different business segment.

The Queen Bee

The queen bee is at the centre of a bee colony. She leads a charmed existence and is both followed and protected by other bees. To be fair, she does her bit for the colony by producing the workforce.

However, the corporate queen bee can be put on a pedestal despite being the most unproductive member of the workforce. She draws her power from proximity to someone in the top brass. For instance, she can be completely clueless when it comes to her work, however, she will be unambiguously aware of the CEO’s favourite cuisine, colour and birthday.

If you come across an HR professional dishing out instructions on acquiring clients to the sales team, or a marketing manager tutoring the tech team on how to write codes (and, the inane advice being gleefully lapped up), you’ve encountered the quintessential corporate queen bee.

The Bear

Despite the notion suggested by cuddly teddy bear toys, bears can be ferocious beasts. Not only is their size and demeanour intimidating, a charging bear can make even the bravest skip a beat.

Similarly, the corporate bear relies heavily on intimidation. His walks and talks aggressively for no apparent reason. Even a routine conversation can be laden with threats. His belief stems from the line of thought that “bullying is the mantra to success”. Like most bullies, the corporate bear is a coward deep inside, using his ‘tough guy’ demeanour to hide his insecurities and inadequacies.

Here’s an example of a corporate bear in action: For an opening wherein holding an MBA degree is listed as a prerequisite, the CEO starts the interview by declaring “I hate MBAs and think all MBAs are dumb”. Another classic trait: a honcho who uses every annual performance review to put down his employees, even if they’ve beaten their targets by a handsome margin.

The corporate bear is most likely to use the phrase: “Because I said so”.

The Chimpanzee

Chimpanzees spend most of their time in treetops away from the rest of the jungle population. They are largely harmless to other species. Also, despite their ability to use tools, they are perceived as clowns, thanks to stereotyping.

The corporate chimpanzee goes through the motions, neither causing any harm, nor being particularly productive either. He will typically be the faceless and voiceless individual who follows the crowd. He is most likely to say “I agree” in just about any scenario.

Identifying the corporate chimpanzee isn’t difficult. He’s the one who regularly gets walked over; the one routinely transferred from one department to another for no logical reason. When things go south, he finds himself in the line of fire; oddly, when things pan out, he never gets any credit for the success. The evolved corporate chimpanzee is aware of his precarious position and tries hard to fly under the radar at all times.

Disclosure:

All the corporate animals and incidents mentioned in this article have been drawn from real life. Any similarity to actual events or persons is intentional 😊