WHAT IS A PENSION FUND?
Pension funds, which are also known as retirement funds, is a kind of savings scheme where you (as an employee) invest a small portion of your income/salary into a designated savings plan. The main objective of this plan is to get a steady flow of income after you complete your active years of service.
Considering the fact that inflation in the county is growing, the pension fund has become a necessity for all. Even if you have a considerable amount of savings in the bank, you may still opt for a pension scheme because you never know when an emergency may arise.
A pension plan will help you get an income and support your family when you have no other income source.
In India, the pension funds are divided into two stages. The first stage is the accumulation stage wherein you pay or invest in the pension plan throughout your active work years until the retirement age. Once you attain the retirement age, the second stage begins, which is the vesting stage. In this stage, you start getting annuities until death.
TYPES OF PENSION FUNDS IN INDIA
In India, the pension plans are broadly classified into three types, which are:
The funds that are sponsored by an insurance company. In the fund, the investor’s money is invested in debts alone and is best suited for conservative and low-risk investors.
Unit Linked Plans invest the funds in both debt funds and equities. It is one of the most popular pension funds and lets the investors create a balanced portfolio.
Lastly, the National Pension Scheme, which is the government-sponsored fund. Under this scheme, the funds are either invested in government securities or debt securities.
BENEFITS OF INVESTING IN PENSION FUNDS
One of the most significant pension benefits is that lets you save for long-term. Whether you choose a scheme that requires you to invest a lump sum amount or smaller amounts, you get guaranteed savings. The pension funds create an annuity that you can use to invest further and get steady income post retirement.
Many pension funds offer a lump sum payback to the investor when they attain the retirement age or in case of their death, whichever event occurs earlier. This implies that the pension fund also gives you the benefit of an insurance cover.
Another benefit of investing in a pension fund is that it negates the effect of inflation and provides inflation-adjusted returns.
