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Retirement Planning in Modern Times-Part-4

In the last article, we have discussed the popular investment avenues available. In this article, we will discuss the merits/demerits of each of them and our recommendations.


Bank Deposits

Why to invest –Offers guaranteed returns, without any risks attached. Deposits upto 1 Lakh is insured by Deposit Insurance and Credit Guarantee Corporation of India. It is a Liquid investment because, premature withdrawal is allowed with a small penalty.

Why not to invest – Offers poor returns, sometimes lower than the inflation. Interest earned is taxable also.

What to do – We can park our contingency fund in Bank deposits. This can ideally be our compulsory expenses for 5-6 months including EMIs. Keeping more than 10% of our portfolio in Bank Deposits will pull down your investments in the long term. Our savings account also can be converted to a linked account, whereby the amount in excess of a particular level will be automatically converted into a fixed deposit, without losing the facilities of a savings account.

Employees Provident Fund (EPF)

Why to invest – It is a decent debt investment, allowed only for organized sector. It offers Section 80 C benefits and the withdrawal is totally tax free, if withdrawn after 5 years service or on retirement.

Why not to invest – This is a compulsory scheme for employees, returns are around 8% declared every year. No Option.

What to do – Even though it is a debt instrument, the tax free withdrawal makes it a good investment avenue for employees. Please avoid in between withdrawals and withdrawals when you are changing jobs. It is better to transfer the accumulation to the new employer so that the amount will be growing and can be used for retirement.

Public Provident Fund (PPF)

Why to invest – This is one of the best debt scheme with Sec. 80 C tax benefit. The entire accumulation is tax free on retirement even as proposed in the Direct Tax Code(DTC).Flexibility in depositing any amount between 500 -70 000  in a year is an attraction.

Why not to invest – The liquidity is less during the 15 year period.

What to do – This is a must for everybody, as part of their debt portfolio. The tax free withdrawal will be continued even after DTC, which will be useful for retirement benefits.

National Savings Scheme (NSC)

Why to invest – Another debt scheme with Sec 80 C benefits, which offers 8% return compounded half yearly.

Why not to invest – There is no liquidity in the 6 year period and return is only 8%, which is not tax free.

What to do – There is a proposal to remove the Sec. 80 C benefit to NSC, as per the DTC. Better not to invest, because there are better debt options available.

Post office Monthly Income Scheme (POMIS)

Why to invest – Ideal product for retired persons to ensure a monthly income. It gives 8% return payable monthly, and another 5% extra at the end of 6 year term.

Why not to invest – return of 8% is taxable and there is very little liquidity during 6 year period.

What to do – Retired persons can have some exposure to this for their monthly needs.

Senior Citizens Savings Scheme

Why to invest –offering the highest return of 9% in the debt category, and interest is payable quarterly. The term of 5 years can be further extended by another 3 years.

Why not to invest –Return of 9% is taxable. Upper limit for investment is 15Lakhs only.

What to do – Ideal debt scheme for retired persons to ensure quarterly money inflow.

New Pension Scheme (NPS)

Why to invest -The scheme is similar to Mutual Fund, with limited equity exposure and least fund management charges. This can create better returns over long term.

Why not to invest – Very poor liquidity till retirement. Limited exposure to equity can create only average returns.

What to do – Direct Tax Code may bring NPS under EEE category (Tax free withdrawal), which will makes it very attractive. This will emerge as one of the best retirement planning tool.

Life Insurance

Why to invest – This is a unique instrument which gives protection to the family in case of untimely death of the bread winner.

Why not to invest – Investment oriented plans offers poor returns because of their limitations in investments and high charges under various heads.

What to do –Treat insurance premium as an expenses and not as an investment. Go for Term Insurance policies and enjoy the low premium benefits and invest the balance amount in instruments with good returns. But ensure, your life is insured as per the human Life Value (roughly 6-7 times of your annual income). Please ensure that, you disclose all existing diseases at the proposal stage itself, to avoid any confusion latter.

Gold / Silver

Why to invest – Almost zero or negative correlation with other asset classes, makes them ideal to include in the portfolio. Silver and gold had the highest returns in 2010.

Why not to invest – Problems in storage, Safety and quality.

What to do – We can have 5-10 % of our portfolio invested in this, to diversify. Gold ETFs and e-silver will be the ideal way for investments instead of material investments.

Real estate

Why to invest – very good appreciation in recent past. Easy availability of bank loan for housing sector and attached income tax benefits.

Why not to invest – real estate prices have sky rocketed and scope for further appreciation is limited. Interest rates are on the rise and tax benefits are under review.

What to do – Everybody should go for one house for self use and avail tax benefits too. Anytime is the right time for this. Investment in the second house has to be considered only after constructing a portfolio with more liquid assets like mutual funds. Otherwise a small percentage in interest rate can make your EMI unaffordable.

Shares

Why to invest –World over, equities have delivered the highest returns over the long term. In a growing economy like India with GDP growth is around 8%, equity returns will be high in the coming years.

Why not to invest – Companies with good management, with low debt burden and operating in high growth sectors can give good returns. Selection of good companies to invest is a difficult task for the common man.

What to do – Don’t procure any shares without understanding the business and fundamentals of the companies. Don’t listen to the tips and rumours from anybody and invest. Invest in good companies on a regular basis for long term wealth creation.

Mutual Funds

Why to invest – This helps the investors to invest in equities with the help of professional fund managers. Their research and analysis will help them in identifying good companies to invest which will reduce the risk.

Why not to invest – since the investments are in equities, this can create short term volatility, which can upset the investor.

What to do – Regular investments in mutual fund by way of SIPs is one of the best way to create long term wealth. Investor can create a core portfolio with 3 or 4 large cap funds with long term performance history and then can go for 1 or 2 midcap/thematic fund. For Debt allocation, they can think of debt funds or Monthly Income Plans (MIPs).

Conclusion

Always follow the asset allocation as per your age and years to retirement. For equity exposure, mutual funds will be the ideal option, to benefit by the professional fund management. Withdrawal from equity mutual funds after 1 year is tax free. For Debt investment, PPF will be the ideal option because of it’s tax free status on withdrawal. After retirement, we can think of POMIS and Senior Citizen’s savings scheme for a regular income. Real Estate can be limited to one house for self use and investments in Gold/silver can be limited to 5-10% our total portfolio. Insurance premium is to be treated as an expense and go for Term insurance policies for a decent value to ensure protection to the dependants. Go for health insurance also to protect against the huge medical inflation and increasing longevity.

By careful selection of ideal investment instruments and regular reviews, we can accumulate enough money for our retirement to ensure a decent standard of living for those Golden years in Life.

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