Retirement is a major event
in our lives, it is the phase of life when after years of hard work you want to
relax, reflect and pursue things you never got to do while tirelessly running
the rat race.
For a comfortable
retirement life it is imperative that you have adequate financial security so
that you will not be bothered by money matters as you enjoy your retired life
that is where retirement planning comes in.
Retirement planning though
in India though is not an easy job, a high inflation economy combined with
investment preferences of people still tied to saving instruments like FD and
investments is gold and rampant mis-selling of financial products by banks and
financial institutions makes it tough to create a viable retirement plan which
will deliver post retirement.
It is imperative before we
discuss best investment options in India for retirement; let me summarize best practices for
creating a sustainable retirement plan, below point summarizes the same.
- Assess when do you want to retire
- Assess what kind of lifestyle you
want to maintain post retirement
- Asses how much financial resources
you would require for retirement
- Sit with your financial planner
and create retirement goals and a viable plan to achieve them
- Diligently follow the plan and
periodically review your progress
- Golden rule for retirement
planning is Start early and keep increase your saving as you progress
Now that we have defined
the best practices let us get into some of the best investment options for
retirement
- NPS ( National Pension Scheme)
National pension scheme is
offered by Pension Fund Regulatory and
Development Authority (PFRDA) started in 2009, subscription for the scheme has
increased to 123 lakh by the end financial year 2015-2016. Below are the key
features of the NPS
NPS is a voluntary defined contribution scheme (i.e. the
pension you receive depends on the retirement corpus accumulated over the
years)
1.
The investments are pooled together and managed by
professional fund managers appointed by PFRDA
2.
You have the flexibility of deciding the portfolio you
wish to invest in (bonds, bills, corporate debentures, and shares)
3.
At the time of normal exit from NPS, you would be
required to mandatorily purchase a life annuity from a PFRDA empanelled life
insurer.
4.
A citizen of India (whether a resident or a non-resident)
can participate in the NPS-All Citizen Model
NPS
provides freedom to its investors on how his money will be invested, it offers
two options- Active choice and Auto choice. In active choice investor can chose
which market instrument an investor should put in his money, see the choice
below
Key
drawbacks of NPS schemes
- Double taxation: NPS does not enjoy the Exempt-Exempt-Exempt status unlike Employees
Provident Fund (EPF) and Public Provident Fund (PPF). As per the current
tax laws, 60% of the accumulated retirement corpus will be brought under
the tax ambit, making it unpopular vis-à-vis PPF
- Low Returns: It will be difficult to beat inflation in long run with
NPS
- Mandatory annuity is not good
2.
Employee Provident Fund : Employee
provident fund is the most popular savings and retirement instrument in India,
Current rate of return on EPF is 8.75 %.EPF offer tax deductions also under
section 80C, withdrawals after 5 years of continuous service are tax free.
3. Equity Mutual Funds: Mutual
funds provide an ideal investment for your retirement plan, mutual funds
provides natural diversification so you do not need to worry about which equity
to pick, you can manage your risk by investing in a mix of large cap and
mid-cap funds, Equity mutual funds provide inflation beating returns and should
definitely be a big part of your retirement portfolio. You would need to
constantly monitor your portfolio and do yearly rebalancing to ensure you have
right performing funds in your portfolio.
Equity mutual funds have given returns in the range of
10-15 % in last few years and will continue to give double digit returns in
long run.
Bonds: Bonds also provide very good
avenues for long term investments, bond is basically a kind of loan provided to
government or corporate, returns vary with the quality of borrower, government
bonds are most secure and hence have lower returns, but there are long term 10
year -15 year bonds available such as IIFCL bond, HUDCO bonds which provide
good returns, some of them in the range of 10-12 %.
Equities : Equities can be very good
investment option if you are able to pick up the right stocks to invest in, when
investing in equities look at fundamental stocks which will do good in the long
run and not at short term punter stocks.
ETF: Exchange traded funds also known as
ETF’s are a good option for accumulating retirement corpus. ETF can be done
through Index or Gold. ETF units can be purchased by purchasing Gold units
every month. This will average your costs and you do not have to time the
market.
What should be an ideal investment plan for retirement?
An ideal investment plan should be a good mix of debt and
equity instruments. For normal investors, I would recommend invest in a mix of
equity mutual funds and PPF.
Your debt to equity should change as you age, please see
the graph below on how this should change
About the
Author: This post is written by Sarabdeep Singh, cofounder of Bodhik, a financial
Investment Advisor platform in India, to help every Indian manage his money in a better way.
Best Investment Options for your Retirement ( Guest Article Submitted )
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