How Does a Pension Scheme Work in India?
How a Pension Plan Works?
Pension plans are mainly for 3 basic needs.
01) Capital after Retirement
02) Life Insurance Cover &
03) Tax Benefits
Now, How Pension plans exactly work? Well, Pension Plans work almost same like mutual funds. There are only few minor differences. The Fund Manager of Pension plan builds a Portfolio. Now, the investor invest in the Pension Plan. So What the Pension Plan will do?
Well, first of all it will deduct the premium for Life Insurance Cover. After that it will deduct various administrative charges and expenses to operate the fund. And whatever remains, it invest in the Equity.
There is only single major difference between Pension Plans and Mutual Funds is, administrative charges. In case of Mutual Funds, the Entry load is 0%. Means your 100% money will go towards buying the units and investing in the stock market. While in case of Pension Plans around 10-20% of your total corpus will be spend behind buying the life insurance cover and paying other administrative charges while rest of the money will go towards investing.
In other words, Pension Plans are High entry load mutual funds which in addition provide you the Life Insurance Cover.
Pension Plans or Mutual Funds? -
Many people ask that, weather they should go for Pension plans or Mutual Funds? Well, The answer is, one should go for Mutual funds. Because Pension Plans are nothing but the opaque mutual funds. Rather than one should buy a term life insurance policy separately and mutual funds separately. This will be a cheaper option.
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