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Retirement Planning in Modern Times-Part-3

In this article, We will give a brief on popular investment products available. In the next article, We will cover the areas, we have to be careful, while selecting these investments.


Bank Deposits

This is the most common and popular form of investment for a common man in India. Most of the banks are offering 7-9 % pa as interest depending on the term and type of the deposit. The interest on bank deposit is taxable. Even though, this is one of the best investments as far as safety is concerned, the real return (Interest rate – Inflation) is very low and can even be negative in some cases. In an era of high inflation, this may not be a good investment for long term goals. In India, the highest percentage of household savings is invested here. In reality, this is not helping us in creating good wealth over the long term due to low inflation adjusted returns. This is the reason why the saying – Indians are good savers, but not good investors of money.

Employees Provident Fund (EPF)

This is a compulsory savings for employees in the organized sector, by way of monthly deduction from their salary. Employer is also contributing to this.  The employees’ contribution is eligible for tax deduction under section 80C of the Income Tax Act. The amount is invested in debt instruments and offers return of 8-8.5% currently. The interest rates are declared every year and can change, depending on the economic conditions and government policy. There are some restrictions to withdraw amount from this fund, during active service, which ensures a good accumulation at the time of retirement. The accumulation is tax free, if it is withdrawn at retirement, or after 5 year service.

Public Provident Fund (PPF)

PPF is one of the best investment schemes for long term goals.  At present, this gives a return of 8% compounded annually. The main attraction of this is that the entire interest earned along with capital is tax free on maturity. The term of the scheme is 15 years which can further be extended in blocks of 5 years, with or without contribution. The investment is flexible because you can deposit any amount between 500 -70,000 in a year and keep the account active. The maximum is capped at 70000 in a year and this is eligible for tax benefit under section 80C. There is a facility of loan from 3rd year and partial withdrawal facility from the 7th year.

National Savings Scheme (NSC)

This is a 6 year savings scheme, which offers 8% compounded half yearly. The scheme is eligible for tax deduction under Section 80C. The interest earned is taxable, but treated as reinvested and is eligible for 80 C benefits in the first 5 years.

Post office Monthly Income Scheme (POMIS)

This is a 6 year investment scheme, which offers 8% return, payable monthly. On maturity, there is a bonus of 5% in this scheme. This is one of the ideal schemes for senior citizens to ensure a monthly income after retirement. The maximum amount permitted is Rs. 4.50 lakhs in a single account and Rs. 9 lakhs in a joint account. There is no section 80 C benefits for this and the interest payable is taxable.

Senior Citizens Scheme

This is a 5 year scheme, which offers 9% interest payable quarterly. Persons above 60 years and retirees above 55 can join the scheme. Maximum investment permitted is 15 Lakhs. Investment upto 1 Lakh is eligible for tax deduction under 80C, but the interest payable is taxable. The scheme can be extended by another 3 years.

New Pension Scheme

NPS is a pension plan where you can invest during your working years and withdraw when you retire. This is open to all, both employees and businessmen. This is similar to a mutual fund. There are 3 funds, the customer can select in this scheme.

Fund E: Invest upto 50% in equity, Fund C: invest 100% in corporate bonds. Fund G: invest 100% in government securities

The is an auto choice also in which case 50% will be invested in equities, 30% in corporate bonds and 20% in government securities till the customer reaches age 35. From age 36, the equity and bond component will reduce and the government securities will increase. You will have only 10% each in equities and bonds, by the time you reaches age 55.

This scheme is having the least fund management charges in the industry and can offer a decent return in the long term. Tax benefits are available under section 80C and there is a proposal to make the withdrawals also tax free in the Direct Tax Code.

Life Insurance

Life Insurance is essential for an individual because this offers the unique protection to the family in case of untimely death of the bread winner. Now there are different policies available in the market, with so many add on features. Term policies offer protection in case of death only, while endowment/money back policies offer both protection and savings. ULIPs offer the customer, a chance to invest in equities. The premium paid is eligible for tax benefits under section 80 C and the maturity benefits are tax free, subject to certain conditions.

Returns from endowment/ money back plans will be in the range of 5 to 6%, while that of ULIP will be depending on the fund performance and the charges under the policy.

Gold

Of late, gold is becoming a popular asset class. This is mainly because of it’s low or negative correlation with other asset classes. The price of gold is not linked to the economy or performance of any industry. So this can add stability to the portfolio. Investment in gold is now possible through Exchange Traded Funds (ETF) which has lot of advantages over investments in physical gold. Gold can be an asset class in everybody’s portfolio.

Silver

Silver has appreciated never before and has given more than 70% returns last year. The scarcity of the metal and its high demand for industrial applications makes it a good investment avenue.

Real estate

Real estate prices have sky rocketed in the recent past because of the huge demand for housing and commercial purpose. The tax benefits attached to these investments, availability of home loans at lower rates also contributed to the growth in this sector. Depending on the economy and availability of bank loans, there can be fluctuations in this sector. This can also be a part of the portfolio for all investors.

Shares

Investments in shares of good performing companies offer better returns on the long term. World over, this is considered to be the best asset class for creating long term wealth. But investment in shares requires the knowledge of the fundamentals of the economy, various sectors of business and various companies within each sector. This requires lot of patience and expertise.

The returns will be based on the performance of the company. The profit is tax free, if the share is sold after 1 year. There is a short term capital gain tax of 15% on the profits, if it is sold within 1 year.

Mutual Funds

Mutual Fund is a financial product that pools money from different individuals and invest on their behalf in various asset classes. The investment is done by experienced and qualified professionals called fund managers, according to the objectives of the fund, in diverse types of securities like Bonds, Debt, shares of companies, money market instruments etc. In India, mutual fund is one of the best regulated financial instruments and is regulated by Securities and Exchange Board of India (SEBI). For a retail investor, the best way to invest in mutual funds is Systematic Investment Plan (SIP). Let us see what is SIP?

SIP is investing a fixed amount of money at regular intervals rather than investing a lump sum at one go. By investing this way, you do not attempt to capture the highs and lows of the market. The essence of SIP is that when the markets fall, you acquire more units and acquire fewer units, when the markets rise. Hence the average cost per unit falls over a period of time. This is called rupee cost averaging and is one of the most beneficial investment strategies for a retail customer. An SIP started in the year 2000 in some of the select large cap equity funds have given a CAGR of above 18%, despite 2 market crashes in this period. This type of disciplined investment is ideal for retail investors to reach their financial goals in life.

Systematic Transfer Plan (STP) is a strategy to average out the cost of investment, when you are investing a lump sum amount in an equity fund. Instead of investing the amount in one go in equity fund, you can invest that amount in the liquid fund of the same fund house and request for transfer of a pre determined amount to the equity fund as per your choice. This will average out the cost per unit.

Systematic Withdrawal Plan (SWP) is one of the best way of withdrawing money from a mutual Fund especially for the retired persons for monthly expenses. You can instruct the fund house to redeem a fixed amount every month and credit to your bank account, to meet the monthly expenses.

Mutual fund investments are very attractive because of its high liquidity and taxation benefits.  If required, you can withdraw the money after 1 year, in equity mutual funds without out paying any tax. The dividends are also tax free. The long term returns are above 18% in good performing mutual funds in India.

How to go about?

We have discussed most of the popular asset classes in brief. But all these asset classes are not suitable for all. The selection of various investments in various proportions, to create a portfolio to suit your requirements is the most important step in financial planning. Similarly there are lots of areas where we have to be careful, in selecting these investments. We will discuss these important points in the next article.

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