Post-retirement is a phase that everyone ultimately has to encounter – some start planning for retirement early on, while others get to it much later. When it comes to investing for your retirement, it’s crucial that you look at long term investment plans and instruments that can provide stable returns to help you beat inflation, with very limited exposure to risk. This calls for a good retirement plan and it’s not complicated given the multiple options that are available in the market. The government-sponsored National Pension Scheme is one of the best investment options open to the working population today. Here’s a quick look at how it works and why it differs from other long term investment plans.
The National Pension Scheme is a voluntary defined contribution retirement plan that’s designed to allow subscribers to make regular payments to their pension plans during their employment period. Launched in 2004 for Central government employees, it was later opened for all in 2009. The program is one of the best investments if you are looking at it solely from a retirement planning angle and if you are targeting a tax-efficient long term investment plan.
According to experts, it’s estimated that investing in the National Pension Scheme will yield over 10 per cent post-tax returns.
Albeit the tax perks and retirement-targeted portfolio management, how does it stack up against its peers? An alternative to the pension scheme is the Public Provident Fund (PPF) which serves nearly the same purpose – it’s pitched as one of the best investment options in the country, particularly when it comes to retirement planning. The government scheme acts as a retirement tool for those who seek greater flexibility when it comes to their investments. If you’re a conservative investor looking for fixed returns that come with very limited room for risk, PPF is one of the best investments you can bank on.
With a PPF, you can subscribe to a 15-year plan that can be extended by an additional 5 years. An investor can deposit any amount ranging from Rs. 500 to Rs. 150,000 every year. If you have opted to invest the maximum permissible limit every year, you would have accumulated a corpus of Rs. 44 lakhs by the end of the maturity period. One of the benefits of investing in PPF is that the returns are guaranteed to the investor. Moreover, the advantage of investing in PPF is that the returns are tax-free and you are eligible for a tax relief of up to Rs. 1.5 lakhs. The double-pronged benefits of tax-free returns and a reduced tax outgo are hard to miss.
When coupling tax benefits, risk exposure and flexibility, the PPF is one of the best investment options available in the market. With the PPF, the investor has the option to withdraw the invested corpus when the investment term of 15 years comes to an end. However, with the NPS, the investor can only withdraw 60 per cent of the corpus at the time of retirement. The remaining 40 per cent will be paid to the investor as monthly annuity payouts – with a catch: this annuity will be taxable, just like any other income.
Unlike the PPF which a fully debt-oriented fund, the NPS allows the investor to diversify the portfolio across equity, fixed income and government securities. The investor has the option to channel over 75 per cent of the funds into equity, giving it a slight advantage over PPF in terms of returns. Although risk exposure is higher, over the long term, it is expected to generate higher returns when compared to fixed income securities, like the PPF.
What about other investment options like mutual funds?
Equity mutual funds are pitched to be one of the best investments to create wealth if your risk appetite can digest volatility. For the ones who are risk-averse, index funds are a better alternative since they are a lot less volatile and will offer better returns than debt securities over the long term. In India, you can invest in index funds that track the Sensex or Nifty and analysts have stated these funds offer annual returns of almost 12 per cent over the long term.
This would translate to an investment corpus of Rs. 1 crore in 20 years if you invest a sum of Rs. 10,000 at the start of every month.
Retirement planning is no easy task but if done in a disciplined manner, supported by wise investments, it can make a significant difference to your post-retirement life. At Finserv MARKETS, you will be able to select the right fund that meets your investment requirements and financial goals.