QUOTE OF THE WEEK:
One of the weaknesses of our age is our apparent inability to distinguish our needs from our greeds.
While planning your investment goals it is important to know what you want from your investments. Is it just the comfortable retirement or there’s more to it? This will help you make your investment plan accordingly.
YOUR FINANCE DEMYSTIFIED:
We may have worked all our life to ensure comfort for us and our family. But we often forget that there will come a time when we will retire and may not be able to live as comfortably as we do now. In order to ensure that we have ample resources to enjoy our retirement years, we need to start planning for our retirement almost as soon as we start working.
A PICTURE SPEAKS A THOUSAND WORDS...
Here are some options that could prove useful for planning your retirement while you are still working:
NPS: Building Substantial Corpus for Your Retirement
National Pension System (NPS) is a pension plan where you can invest during your working years and withdraw when you retire.
Retirement planning involves time and skill. Unfortunately, many of us hate finance and remain ignorant towards it. At the same time, we also remain ignorant towards our retirement planning. Some of us constantly delay our decision to make investments—saying there is a lot of time for our retirement. Most of us do make investment. However, we invest randomly in different investment options and prefer easy exit. Hardly anyone plans for retirement systematically. We need to understand that for retirement planning we have to focus on financial products where we can invest for long term and not touch our investment till we retire.
If you are serious about building a substantial corpus for your retirement, then you surely need to know more about National Pension System (NPS). A low-cost retirement solution, NPS can turn our retirement savings into a sizeable kitty.
Vikash Raj, chief executive officer, IDFC Pension Fund, said, “Though the revised guidelines have proposed to increase the management fees of NPS, the fact remains that it is the best long-term savings option in the market for everybody including those who don’t want to know anything about stocks, mutual funds and asset allocation.”
A slight idea
NPS is a scheme introduced by government of India to secure your future after retirement. NPS is a pension plan where you can invest during your working years and withdraw when you retire. The scheme is the lowest-cost retirement solution in the world with most generous tax benefits.
Benefits
NPS is portable. You can operate your account from anywhere in the country, even if you change your city or job. NPS is safe. It is regulated by PFRDA (Pension Fund Regulatory and Development Authority), with transparent investment norms and regular performance review of fund managers by NPS Trust. NPS allows you to view your NPS account statement 24x7 on Central Recordkeeping Agency. All transactions can be tracked online through CRA system. Employee can check fund and contribution status through CRA website.
Pravin Chordia, product manager-financial products division, India Infoline, “Tax benefit up to Rs. 1 lakh is available under section 80 CCD. Under the revised draft of the DTC (Direct Taxes Code), NPS is proposed to be brought under the EEE (exempt-exempt-exempt) method of taxation. This means that investors get a tax exemption at all three stages of investment, appreciation and withdrawal.”
Times gone by
NPS was launched by government of India for central and state government employees in 2004, as they shifted from a ‘defined benefit system’ to a ‘defined contribution system’ under the pension system in India. This is mandatory for all post 2004 government employees. NPS was then made available to every Indian citizen from 1 April 2009 on a voluntary basis.
Investment options
NPS provides a subscriber access to two personal accounts: Tier-I pension account & Tier-II savings account. Any individual between 18-60 years—who is citizen of India—can enroll in NPS. The retirement age for both the Tier-I & Tier-II accounts is 60 years. Tier-I account does not allow you to make any withdrawals before 60 years. Tier-II account allows you to withdrawal anytime.
In Tier-I account, minimum amount to be contributed is Rs. 500 and minimum contribution each year should be Rs. 6,000. For Tier-II account, the minimum amount to be maintained is Rs. 2,000 and no restrictions or charges on deposits and withdrawals. Tier-II account can be opened only if you have an active Tier-I account. You can choose your asset allocation or a fund manager if you are not satisfied by the performance. If you are unable to invest less than Rs. 6000 in any year, then a penalty charge of Rs. 100 is levied on the account.
Asset classes
Asset Class E (Equity market instruments) will invest in index funds such as BSE Sensitive and NSE Nifty 50 Index. The investment can be made up to 50% of the amount accumulated in the account.
Asset Class G will invest in central government and state government bonds. The investment can be made up to 100% of the amount accumulated in the account.
Asset Class C includes Corporate Debt, Liquid Funds of AMCs regulated by SEBI, fixed deposits of scheduled commercial banks, debt securities and credit rated infrastructure bonds. The investment can be made up to 100% of the amount accumulated in the account.
Flexibility is there
NPS gives you the option to choose how your money is invested. The Auto Choice option helps you to divide your money among equity, government debt and corporate debt-based on proportions defined by PFRDA. Funds are managed by professional fund managers appointed by PFRDA. These proportions change as your age increases. The Auto Choice option is for passive investors who usually don’t know much about stocks, mutual funds and asset allocation, added Mr Raj.
If you want to manage your account actively, then Active Choice option is perfect for you. You get to specify your own asset allocation in one of the three ways. You can invest in Asset Class E that is up to 50% in equity and remaining in corporate or government debt or both. If you are not an aggressive investor, then you choose Asset Class G (100% in government debt) or Asset Class C (100% in corporate debt).
Cost structure
The initial registration and account opening charges are Rs. 100 and Rs. 50 respectively, annual maintenance charge Rs. 350 and for each transaction there is a charge of Rs. 5. The account opening charges are charged only once at the time of the registration and annual maintenance charges are charged every year. The product does not have any hidden charge, elaborated Mr Chordia.
How to exit
At the end of the tenure (retirement), up to 60% of the corpus can be withdrawn from NPS and the remaining 40% will be invested in an annuity provided by insurance companies. A subscriber has to buy an annuity which will be at least 40% of the total corpus.
If you want to withdraw before 60 years of age, you would be required to invest at least 80% of the pension wealth to purchase a life annuity from any IRDA–regulated life insurance company. The remaining 20% of the pension wealth may be withdrawn as lump sum.
Pension will be given to the subscriber on a monthly basis based on annuity scheme chosen at the time of retirement. Withdrawal amount will be sent directly to the subscriber’s bank account. The withdrawal amount and the pension amount both are taxable. In case of death of a subscriber, nominee will receive 100% of fund value.
Read more:
A simple but effective way to plan your retirement
Awareness about NPS needs to be created among investors
Is Investing in Gold Close to Retirement a Good Option?
The current high price of gold indicates its rising demand.
If prices continue to rise in this manner, gold investments will surely provide handsome returns in the near future.
However, this option will work only for those who have enough money and time to invest in gold.
If you are retiring soon then investing in gold may not be the best option for you.
Here are some of the reasons for the same.
No regular income
Your working days provided you with regular income that you used to run your family. That source of income will stop once you retire. To ensure that you continue to get regular income, you need to invest in the right products. If you invest in gold, there is a chance that the invested funds will be blocked as gold may not provide you with continued income. It is a one-time investment and gain option which you would not require during or post your retirement. To maintain the regular expenses of your family, you must invest in instruments that will provide you regular income by way of dividends or interest. Prices of gold have been increasing since the past decade but one does not know where they would peak. Those who caught the prices of gold just when they began rising would be more advantageous than those who have entered later.
You need growth
If you invest before your retirement, you must ensure that those investments provide you good returns by the time you retire. The value of gold may be rising since a while but history has shown that gold has not always been stable when it comes to price. You must secure your investment in some instruments that show constant growth. However, do not entirely rule out gold as an investment option. Diversify your investments and allocate some funds to gold. Asset allocation helps you recover losses with another instrument when one fails.
Gold that you already own
Every Indian family owns some amount of gold jewellery. If you too own gold jewellery, it is time to find out its worth. The gold that you own is an investment already made. If you already have enough, you must avoid investing in gold again.
DID YOU KNOW?
According to a survey by Accenture, 39% believe that they are saving enough for their retirement, compared to the global average of 16%. Also, 68% Indians are more confident about knowing how much they need to save every month to guarantee their standard of living at retirement, compared to the global average of 33%, the report said.
IN THE NEWS THIS WEEK:
Amid all the grim news in the country, came one positive development. The Wholesale Price Index signifying inflation for July came in at a surprising 6.87%, down from June’s figure of 7.25%. If this trend continues consistently, it will not be long before the Reserve Bank of India decides to reduce its key interest rates, thereby stimulating growth in the economy.
India's inflation falls below 7% in July...Beats estimates
TERM OF THE WEEK
Fill or Kill Order
It means a market or limited price order to a stockbroker that is to be performed in its completeness as soon as it is presented to the exchange. If not so performed, the order is treated as canceled.
ABOUT FLAME
FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.
In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.
Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity.
This portal is but one of the various IIFL initiatives that would be part of FLAME.