Investment options for retirement planning: Part II

The choice of the financial instruments and timing depends on an individual’s risk appetite reflecting personal circumstances and general market conditions. An investment decision for one’s objective may not suit the needs of the other.In Part II of the series, let’s look at how we can choose the right investment options

The right investment is a balance of three aspects: Liquidity, Safety and Return

There are various investment instruments which helps to maximise returns for retirement income. The following are the few investment options:

Public Provident Fund (PPF):

PPF is one of the best investment options for long-term saving. The scheme is guaranteed by the government and aims to mobilize small savings with reasonable returns and tax benefits. It has a higher lock in period of 15 years which, however, can be further extended every 5 years on application by the subscriber. Partial withdrawal is also allowed. The rate of return is determined by the Government. The rate of return currently is 7.10%.

The PPF scheme  enjoys  tax benefits under Section 80C of the IT Act, 1961 and deduction up to Rs 1.5 lakh per annum is allowed under this scheme. PPF follows the EEE (Exempt-Exempt-Exempt) model of taxation which implies that the interest earned and the maturity amount both are exempted from taxes.

National Pension System (NPS)

Initially launched exclusively for government employees, the NPS is now open for all Indian citizens on a voluntary basis. This is a government-regulated, low-cost pension plan. This is the only scheme that provides tax benefits over and above Rs. 1.5 lakh exemption limit. The holder has the option to design their portfolio and choose the scheme and fund manager accordingly to one’s risk appetite. On retirement, they can withdraw a partial amount (40%) which is tax free and use the remaining amount for availing regular income or for buying an annuity plan from insurance companies.

Atal Pension Yojana (APY):

APY is a scheme by the Government of India. The scheme is mainly for those employed in the unorganised sector and is administered by PFRDA. It guarantees minimum pension ranging from Rs 1,000 to Rs 5,000 per month depending on the individual’s contribution. This scheme is available to Indian citizens between age 18 – 40 years. In order to encourage these individuals, the Government also commits an annual contribution equivalent to 50% of the subscriber’s contribution or INR 1,000, whichever is lower. The Government offers this facility to those not covered by any statutory social security schemes and those who do not qualify to pay income tax.

Pension plans of Insurance companies

Several insurance policies are a viable investment option for your retirement plan. Some of them are Unit Linked Insurance Plans (ULIPs) and Endowment Plans. Understand various insurance plans while investing and choose the one that will help you take care of all your retirement goals. The IndiaFirst Guaranteed Retirement Plan is one such option that offers guaranteed financial protection for your second innings.

As per Section 80C, the premium paid towards life insurance policies up to the maximum limit of Rs. 1.5 lakh is eligible for tax deduction and deductions are applicable if the amount of premium paid in a financial year is 20% of the sum assured amount of the policy.

Fixed Deposits

Fixed deposits are traditional saving options which gives assured returns and are considered to be safe. It also allows flexibility to park and withdraw funds for different time period.

Small saving instruments

Small saving instruments such as Post-office deposits, NSC, provides higher interest rate than Fixed deposits offered by the Banks, enjoys sovereign guarantee and have low risk profile.

Mutual Funds

A mutual fund pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio.

If looking for an element of growth and creating wealth, the investors can opt to include mutual funds in their retirement plan portfolio. Equity Linked Savings Schemes (ELSS) is a mirror image of a diversified equity fund, with tax benefit t U/S 80 C. If the investors look among equity funds, the large-cap funds are at relatively low risk while the small-cap funds tend to give high-risk high return benefits. There are others like Debt Funds and also Balanced/Hybrid Funds which can be suited to different class of investors with differing risk appetites.

The risk/reward trade-off is the key to choosing investments that are right for you, because most people have different ideas about how much risk they should take with their money. Some are conservative and want to keep it someplace safe, like a Fixed deposit or postal savings investment. Others are more aggressive and are willing to invest it in the equity markets.

Reverse Mortgage

A ‘Reverse Mortgage’ is a financial product designed to help senior citizens monetise their residential property to supplement their regular cash flow. It is a loan offered by banks and housing finance companies against a home where the elderly can continue staying. It takes place through the sale of the property after the passing of the beneficiaries or earlier if they wish to vacate the premises. After recovering the principal and the interest, the remainder of the money received by the bank is remitted back to their heir. In India, any citizen over the age of 60 years with the maximum loan tenure of 20 years can avail of this. This is a relatively new concept in India and can be used if there is a property in a big city and less income from other sources.

In the end, you (the investor) have to decide how comfortable you would be with your investment and also the return you need to generate on your portfolio. But please do start at the earliest!!!