• Retirement Planning

    Retirement Planning in India is not an easy job at all. Rising inflation numbers, slowing economic growth, fascination for Gold and off course too many financial products do not make life easy for any individual planning for retirement. Mis-selling of financial products has only doubled the customer’s confusion.

    In this article, we will be talking about different retirement products available for investments in India. Retirement has two phases – Accumulation and Distribution. Accumulation phase is the period where you accumulate the amount required for your needs post retirement. Distribution phase is where the accumulated corpus is distributed well to suffice the post retirement needs. Let us look into financial products for investment pre-retirement and post retirement.

  • Pre-Retirement Investment Products

    1) Equities/Mutual funds : No matter how many financial instruments you pick, none of them can match the returns provided by equity related instruments such as Stocks and Mutual Funds. While investing in these instruments, make sure that you pick products for the long term i.e at least 10-20 years or more and your emotions are under control in this period.

    This doesn’t mean you have to stick to the product even though it is not performing well. Review the products every year or switch to better products only if something has gone wrong fundamentally. Mutual funds also give you an option of monthly SIP, where you can invest in a disciplined manner for your retirement. Equity related products are also tax free after 1 year of investment.

    2) NPS : New Pension Scheme or NPS is a another retirement product open to all individuals across the country. NPS has delivered annualized returns of around ~9 % in the last 4 years. This scheme is mandatory for government employees. The fact that fund managers of NPS scheme can also take exposure to equity and equity related instruments is also a positive for the scheme in the long run.

    NPS also provides tax benefit in the form of deduction under section 80C. Remember that it is mandatory to purchase annuity worth 40% of the corpus accumulated through NPS at the time of retirement. You can use these Pension Calculators from Govt. of India to calculate basic pension, family pension and pension commuted.

    There are some negative points also re NPS.
    A) The proceeds of maturity 60% are taxable.B)The returns on investments are less in comparision to mutual funds.3)Not an ideal options for person falling in 10%-20% slab of income tax.

    3) EPF : Employee’s Provident Fund or EPF is the most popular retirement saving instrument in India. Though it was introduced as a retirement product, not many see it so. The current rate of return from EPF is fixed at 8.1% p.a. EPF offers deduction up to 1 lakh limit under section 80C; interest from EPF is tax free and withdrawal is also tax free if there is continuous service of 5 years.

    Unlike NPS, EPF does not have any restrictions such as purchasing annuity. However, it is advisable to stay invested in this scheme by opting for EPF transfer whenever there is change of job. This would ensure that you reap the benefits of guaranteed returns along with power of compounding.

    4) ETF : Exchange traded funds, popularly known as ETF’s are also a good option for accumulating corpus for retirement. In India, ETF can be done through Index or Gold. Index ETF tracks the index and Gold ETF invests in Gold. You can purchase units of ETF by purchasing Gold units every month. You would thus benefit from cost averaging rather than investing in bulk and entail the risk of timing the markets.

    5) Bonds : Bond is a type of loan taken from you by a company or government and giving you some interest for the loan. You would have seen a flurry of bonds these days such as IIFCL tax free bonds, HUDCO bonds, inflation bonds, etc. Many of these bonds are for 10 and 15 year durations. Some of these bonds offer interest rates in excess of ~ 7.75% p.a. Do check the ratings of these bonds before investing in them.

  • Post-Retirement Investment Products

    1) Monthly Income Schemes : Post retirement, you would require schemes which provide regular income for you. Such schemes are popularly known as Monthly Income Schemes (MIS. Post office provides MIS.

    2) Monthly Income plan/MIS-Mutual fund : Monthly Income Plans (MIPs) are primarily ‘Debt oriented schemes’. These funds invest in a mix of equity and debt in the proportions of 20:80 or 30:70 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets.

    The major chunk (70 to 100%) of fund corpus is invested in interest yielding Debt instruments like ‘commercial paper, certificate of deposits, government securities, treasury bills etc., The remaining portion ( 0 to 30%) of the fund corpus is invested in Equity securities (stocks / shares).

    The debt portion ensures stability, safety and consistency, while the equity instruments in the portfolio boost the returns. MIPs are market-linked products (to the extent of their equity portfolio).

    MIPs aim to provide investors with regular pay-outs (through dividends). But, it is not mandatory for the mutual fund MIP scheme to provide regular income, as dividends are paid at the discretion of the fund house and subject to availability of distributable surplus.

    The average annualized returns for last 5 years is ~10-11%.

    3) SCSS : Senior citizens saving scheme (SCSS) is just the kind of retirement product you would need post retirement. This is the safest investment option for senior citizens. You can gain an interest of 8.6% p.a with a maturity period of 5 years. The account can be opened in post office or any nationalized banks.

    4) Reverse Mortgage : Reverse mortgage is a wonderful option given to senior citizens for a regular source of income. You can pledge your house with a bank to receive income from the bank regularly for a set period of time. The amount received will depend on the valuation of the house and the term opted. A recent ruling on this scheme has made the income received from house property under this scheme totally tax free.

    5) Pension Plans : Pension plans are provided by insurance companies as well as mutual funds. They would invest a lump sum amount and provide you monthly income just as in the case of SCSS or MIS. Charges from insurance company provided pension or annuity plans are usually higher than mutual fund provided ones.

    6) Liquid Funds and FD’s : The investment options given above do not give you proper liquidity. As senior citizens, you might need to put some amount aside as an emergency. To make sure that this amount also earns decent returns, you can opt for liquid funds or fixed deposits of varying tenures. Liquid funds are also tax efficient.

  • Conclusion

    These are the retirement products available for investment in our country. Ideal time to start saving for retirement would be 1-2 years after you get your first job. If you have not started yet, it is time to start now.

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