CHOOSE THE BETTER FINANCIAL INSTRUMENTS TO MEET YOUR RETIREMENT GOALS?
An investor may plan short-term and long-term investments according to his or her needs such as lifestyle need, living expense need, children need, health care & insurance need. Investor’s can plan based on their needs, how much money is required to get desired goals in a specific time horizon. One can make a meaningful plan to fulfill his/her financial goals such as a child’s higher education, purchase of house and other valuable assets, and planning for retirement etc.
The point is that an investor cannot decide to invest in the capital market due to fundamental uncertainty of corporate, rising inflationary trends & political uncertainty. The primary role of an investor is to protect the capital from market volatility and second, to optimize returns over a long-run. Building a corpus during the earning time of an individual and use that fund in future to fulfillment of their needs and main objective is an important aspect of comprehensive financial planning
What do you mean by retirement planning?
“Thinking about what you want to do when you are no longer working after 60 years is a process of retirement planning. Thinking about how you manage your expenses after retirement and manage your time without work is also called retirement planning. It is a process to think today about your future life and also for your beloved ones too. It is a multidimensional process; one can consider so many factors while making a comprehensive retirement plan.”
Retirement planning is one of the areas of financial planning. It is one of the most important goals in your life. Retirement planning generally includes two stages such as: Accumulation stage and distribution stage:
Accumulation stage is that stage when you create corpus over the period generally up to retirement and thereafter distribution stage starts, where you spend your created money up to life long.
These are some of the investment instruments that can form part of a retirement plan during the accumulation stage such as, pension plan, National pension plan(NPS), Public provident fund(PPF),Gold, e-Gold & Gold bond, land & building and equity mutual funds.
Public provident fund (PPF):
PPF is a 15-year investment scheme under the Exempt Exempt Exempt scheme (EEE) which an investor can invest a minimum amount of Rs. 500.00 and multiple of Rs100.00 therein up to Rs. 150000.00 maximum per annum (over a maximum of 12 installments per year) and avail the income tax exemption at the time of deposit, accrual of interest and withdrawal. At the end of 15 years, one can extend his or her subscription in blocks of 5 years or else close the account.
You may make a list of your current wants & desired goals and also make a commitment to achieve it. What you have committed in life, you have to plan accordingly and invest their in regularly. For numerical example, you determined to create a corpus for your retirement over a period of 15 years without any risk, you can deposit Rs. 150,000/- (One lakh fifty thousands) at the beginning of the each year in Public provident fund (PPF) and after 15 years you can get the amount of Rs.45,94,801/- with an interest rate assuming of 8.5% per annum. You take the benefit of the Income Tax Act every year under Section 80C and also avail the income tax exemption at the time of deposit of money, accrual of interest at every year and withdrawal of money from PPF.
The above amount is generate Rs.29675/- per month (7.75% interest in bank FDR), of your post retirement living expenses easily. It may not be sufficient to your post retirement expenses. You may choose other financial instruments in order to meet your post retirement expenses.
Equity Mutual Fund:
Mutual funds invest in capital instruments such as shares, debentures, bonds, Govt. securities commodities and other short-term securities which include treasury bills, commercial papers, promissory notes and certificate of deposit. Mutual fund is diversifying your money in to different Assets. You can invest, gold, debt, equity through mutual fund. It is very liquid and less risky than Equity, as fund units are professionally managed. It is highly operational transparent suitable for investor to achieve the financial target through systematic investment plan (SIP).
Price of bonds, government securities and non-convertible debentures carry an interest rate or coupon rate, which move inversely to market interest rates. This means if interest rates fall, prices of these bonds in the secondary market rise and thus value of assets appreciate in addition to coupon rate. Those who are investing the debt mutual fund over the long term will gain the benefit of rate cut.
Mutual funds help an investor to create a good portfolio mix due to its various categories of fund such as: large-cap funds, multi-cap funds, mid-cap funds, hybrid funds and debt mutual funds. Equity funds have greater risk of capital loss in comparison to hybrid/ diversified funds. One can invest a fixed amount in a mutual fund regularly such as daily fortnightly, monthly and quarterly in SIP. For example, if someone makes SIP per month only for Rs.10000 in diversify equity mutual at the age of 40 and after 240 months he/she will get Rs.131.63 lakhs assuming rate of return 14% per annum. The above amount is sufficient to generate Rs.85,011/- per month (7.75% interest in bank FDR) , of your post retirement living expenses easily. The above corpus can be achieved only by disciplined approaches irrespective of market volatility. Investment through SIP ensures discipline investment regardless of the volatility of the market movement. This helps an investor average his cost through market cycles and create a big corpus to achieve his or her goal without taking too much risk in the long run.
Focus on the long-term Investment
The S&P BSE Sensex yielded returns at a CAGR 8.83 per cent over the last 10 years. Historically, there has never been an instance of negative performance for a period of 10 years and above. As the tenure of investment increases, the probability of negative performance decreases.
Equities deliver strong returns with lower downside risk in the long term, compared to debt instruments such as bonds, debentures and govt. securities. Hence, equity and equity related investments should always be for the long term, ideally more than five years, and one can assume returns of 12–15 per cent per annum over a longer horizon.
Fixed deposits (FD):
Fixed deposit is good option for pensioners who are under the tax bracket of 10% and 20%. Fixed deposits are not providing positive returns in long-run due to post-tax and post-inflation factors. Suppose you have invested today in bank FDR with the rate of interest 8.25% per annum and you pay tax on highest slab i.e 30.90%. Post tax, return after one year will be 5.70%. Assume that inflation rate is 8% per annum, then post inflation return will be negative of 2.3%. On the other hand, the actual value of assets will erode due to inflation and tax effect. You should take into account the risk of inflation and interest rate (yield rate) while making investment. It may help you in distribution stage for meet your post retirement expense.
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