What exactly are our investment options...
What exactly are our investment options. Let’s check out:
Mutual Fund:
A Mutual Fund is a professionally managed Medium or vehicle that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual fund is managed by professional managers who have deep knowledge and understanding of Stock Market, Bonds, money market.
These are considered as best investment instruments due to the sheer variety, low costs, tax benefits and professional management. One can invest in Mutual Fund as per their risk appetite.
Equity mutual funds, which invest up to 100% money in stocks, can easily give 12-15% returns a year on an average in the long run. This makes them ideal for those with a high risk appetite. Long-term capital gains from equity mutual funds (with over 65% equity exposure) are tax-free, making them all the more attractive.
Those with slightly lower risk-taking ability can opt for equity-oriented hybrid funds, which invest 65-70% in stocks and the rest in fixed income securities such as bonds and treasury bills.
Those with limited risk-taking ability, for instance people close to retirement, can go for debt funds, which invest in government and corporate bonds.
One can start SIP (Systematic Investment Plan) to invest regularly. This is disciplined approach towards investment which is vital for earning good returns over a longer time frame. SIP also minimizes the effects of investing in volatile markets. It helps you average out your cost by generating superior returns in the long run.
The NPS is a government-initiated retirement scheme. Under this, you have to contribute at least Rs 6,000 a year in a Tier-I account and a Tier-II account. The money in the Tier-I account cannot be withdrawn till retirement. There are no limits on Tier-II withdrawals. You need an active Tier-I account to open a Tier-II account.
The NPS offers three types of funds and you can divide your corpus between these as per your risk appetite. However, the exposure to E class equity funds cannot exceed 50%.
The funds are managed by eight companies-ICICI Prudential Pension Funds Management Company, IDFC Pension Fund Management Company, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Funds and UTI Retirement Solutions, DSP Blackrock Pension fund Managers and LIC Pension fund. However, investors have the liberty to choose their fund manager every year. The best thing about this scheme is the fund management charge, which is a bare minimum of 0.0009 per cent. This makes the NPS the cheapest market-linked financial product in the country.
Investments are eligible for tax benefits under Section 80C. However, the maturity amount is added to income and taxed accordingly.
Payments will be made once you reach 60 years of age. A part of your invested money (maximum of 60 per cent of your corpus) will be paid out to you as lump sum, and the balance will be mandatorily kept back as annuity. However, in case of untimely death, your nomination will receive this pension.
Employee Provident Fund:
Employee Provident Fund is a retirement benefit applicable only to salaried employees. It is a fund to which both the employee and employer contribute 12 per cent of the former’s basic salary amount each month. This percentage is pre-set by the government.
EPF accounts will now yield a return of 8.75 per cent annually. In EPF, the amount is paid at the time of retirement or resignation, whichever occurs earlier. In the case of a change of one’s job, the amount can be transferred from the old company to the new one.
Additionally, the amount invested in an Employees Provident Fund is exempt from tax under Section 80C of the Income Tax Act. Withdrawal from an EPF is subject to tax if it is carried out within 5 years of employment with the same employer.
With your employer matching your contribution and a tax-free guaranteed return of 8.5%, the product is attractive. If you contribute 12% of your basic plus dearness allowance every month (assuming you are 25 and earn Rs20,000 per month) to your EPF account and your employer matches the sum, by the time you retire, you would be able to save Rs1.38 crore, assuming the interest rate remains at 8.5% and you get a modest hike of 5% a year in your salary.
Public Provident Fund (PPF)
Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India. It also serves as a retirement-planning tool for many of those who do not have any structured pension plan covering them.
The account can be opened in designated post offices, State Bank of India branches and branches of some nationalized banks and ICICI Bank. You can deposit a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh in a PPF Account every year.
Duration of PPF Account is for 15 years. You can close your PPF account at any time 15 years after the date on which it was opened and withdraw the entire amount. At the end of 15 years, you can apply for an extension for another 5 years.
The Investments made in PPF Account in India are eligible for deduction u/s 80C. (Upto Rs. 1.5 Lakh) Also, no Tax is payable on the interest you earn on your PPF account investment.
Currently PPF offers interest rate of 8.7%
Pension Plan by insurance companies:
A Pension Plan is designed to generate regular income for individuals once they retire. Insurance companies offer various pension plans (also called as retirement plans or annuity plans) where a person has to initially invest either a lump sum amount or regular annual installments/ premiums over a period of time in return for regular income either for life or for fixed number of years depending upon the plan.
In case of an eventuality, the beneficiary will stand to get the sum assured plus the bonuses/additions, if any.
Under pension plans, insurance companies offer periodic monthly payments (annuities) to support the insured during their retirement.
Post Retirement planning
You now have a sufficiently big corpus. The next step is to allocate it in a way that ensures both regular income and safety of investment.
First assess the amount you need per month depending on your expenses and lifestyle. Then, based on your corpus and risk appetite, opt for an appropriate scheme.
To ensure a regular stream of income, you need to deploy your retirement corpus in the right products.
The ideal investment options after retirement are:
Senior Citizens Savings Scheme (SCSS)
SCSS is launched by the Indian government particularly for senior citizens. All seniors above the age of 60 years can invest in this scheme. Those who are above 55 years of age are also eligible to invest in this scheme but are subject to certain conditions. The scheme has a lower limit of Rs. 1,000 and an upper limit of Rs. 15,00,000.
The scheme has a period of 5 years and carries an interest rate of 9.2 per cent. The interest earned is subject to tax deducted at source. A penalty of 1.5 per cent is applicable on the amount deposited in case the deposit is withdrawn before 2 years and 1 per cent if the amount is withdrawn after 2 years but before the expiry of the term.
Investments under SCSS are eligible for tax deduction under Sec 80C of the Income tax Act.
Post Office Monthly Income Scheme (POMIS)
Are you looking for a guaranteed monthly income? Then monthly income scheme (MIS) offered by various post offices in the country is best suitable for you.
You can invest a minimum of Rs.1,500 and a maximum of Rs. 4,50,000 singly or Rs. 9,00,000 jointly in this scheme. The rate of interest offered on PO MIS is 8.4% per annum. On the plus side, there is no TDS on the POMIS. There is also, however, no tax rebate for investments in the POMIS. The maturity period would be 5 years.
Fixed Deposits (FD)
Offered by various banks and companies, you are better off opting for the fixed/bank deposits. Though the interest rates on the bank deposits are lower than the interest rates on company deposits, bank deposits are safer. Always choose deposits with AAA rating, as they are the safest from amongst all the deposits. Many banks offer FDs for senior citizens where they offer special rates for Fixed Deposits. (Extra Interest rate as compared to normal FDs)
Reverse Mortgage
Reverse mortgage is a wonderful option given to senior citizens for a regular source of income. You can pledge your house with a bank to receive income from the bank regularly for a set period of time. The amount received will depend on the valuation of the house and the term opted. A recent ruling on this scheme has made the income received from house property under this scheme totally tax free.
Pension plans are provided by insurance companies as well as mutual funds. They would invest a lump sum amount and provide you monthly income just as in the case of SCSS or MIS. Charges from insurance company provided pension or annuity plans are usually higher than mutual fund provided ones.
Retirement is an important milestone in your life and planning your finances for that is a long process not to be left for later stages of your life. The key to successful retirement planning is starting early, evaluating post-retirement needs and going for products that not only help you reach the targeted corpus but also protect it from the vagaries of the market.
What do you think about Investment Avenues for Retirement Planning? Please share your views.
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