Retirement Investing: Strategies For Indians To Grow Their Wealth

Planning for retirement is essential to ensure financial security and independence in your later years. With the right investment strategy, retirees in India can maintain their standard of living and have peace of mind that their essential living expenses will be covered. This is particularly important given that life expectancy in India has risen from 53-54 years in 1980 to 67-70 years in 2015, according to the World Bank. This means that retirement savings need to stretch further and for longer.

There are several investment options available to retirees in India, each with its own benefits and risks. These include pension plans, the National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs), Systematic Investment Plans (SIPs), health insurance plans, the Public Provident Fund (PPF), bank fixed deposits, and the Senior Citizen Saving Scheme (SCSS). It is important to carefully consider each option and seek expert advice to determine the right investment strategy for your individual needs and risk tolerance.

Diversify your portfolio to include a mix of products like small saving schemes, mutual funds and reverse mortgages

When it comes to investing after retirement in India, it's important to diversify your portfolio to ensure regular income and stable returns. Here's how you can do that by including small saving schemes, mutual funds, and reverse mortgages:

Small Saving Schemes

Small saving schemes are a great way to diversify your investments and are managed by the central government to encourage regular savings. They offer higher returns than bank fixed deposits and come with sovereign guarantees and tax benefits. Here are some small saving schemes to consider:

• Public Provident Fund Account (PPF): A long-term investment with a 15-year maturity period. It offers a minimum deposit of Rs. 500 and a maximum of Rs. 1.5 lakh per financial year.
• Senior Citizen Savings Scheme: This scheme is tailored for retired individuals above 60 years of age. It has a maximum investment limit of Rs. 15 lakhs and offers a high interest rate of 8.7% per annum.
• Post Office Savings Account: Similar to a savings account with a bank, this option allows only one account per individual with a minimum deposit of Rs. 500 and no maximum limit.
• National Savings Certificate (NSC): NSC has a 5-year maturity period and offers a minimum deposit of Rs. 1000 with no maximum limit.
• Sukanya Samriddhi Scheme: Introduced for the benefit of the girl child, this scheme has a minimum deposit of Rs. 250 and a maximum of Rs. 1.5 lakh per financial year. The account matures after 21 years or upon the marriage of the girl child after she attains the age of 18.

Mutual Funds

Mutual funds are another way to diversify your portfolio and can provide stable income. Here are some types of mutual funds to consider:

• Balanced Mutual Funds: These funds invest in a mix of equity and debt instruments, offering both capital appreciation and regular income.
• Equity Mutual Funds: These funds primarily invest in stocks and can provide fast capital appreciation, satisfying the urge for quick returns. However, they come with higher risks and should be approached with caution.
• Monthly Income Plans (MIPs): MIPs offered by mutual funds provide annual dividend payment options, yielding around 8% per annum.

Reverse Mortgages

Reverse mortgages are an option for senior citizens of India who own a self-acquired or self-occupied home. It provides an additional source of income, especially for those who do not have adequate income to support themselves. Here's how it works:

• The bank makes payments to the borrower against the mortgage of their residential property.
• The borrower is not expected to service the loan during their lifetime.
• Interest rates start at 8.50%, and the loan tenure can range from 10 to 15 years, depending on the age of the borrower(s).
• The maximum loan limit varies based on the property's location, with higher limits for properties within municipal corporations of major cities.

Consider investing in the National Pension System (NPS)

The National Pension System (NPS) is a government-sponsored pension scheme that was launched in 2004 for government employees and opened to all sections in 2009. It is a long-term retirement savings scheme designed to provide financial security to individuals during their post-retirement years.

Any Indian citizen between 18 and 60 years old can join the NPS. The scheme allows subscribers to contribute regularly to a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lump sum and use the remaining funds to buy an annuity and secure a regular income.

The NPS offers two types of accounts: Tier I and Tier II. Tier I is a mandatory retirement account, while Tier II is a voluntary savings account. You can withdraw money from your Tier I account after reaching 60 years of age, but there are restrictions on withdrawals. In contrast, you are free to withdraw your entire accrued corpus from the Tier II account at any time.

The NPS offers tax benefits for both salaried and self-employed individuals. Salaried individuals can claim a tax deduction of up to 10% of their salary (basic plus DA) under Section 80CCD(1) of the Income Tax Act, within the overall ceiling of Rs 1.5 lakh allowed under Section 80C and Section 80CCE. Additionally, individuals can claim an extra deduction of up to Rs 50,000 under Section 80CCD (1B), which is separate from the Rs 1.5 lakh limit under Section 80C.

Self-employed individuals can also benefit from the NPS. They can avail a deduction of up to 20% of their gross income under Section 80CCD(1). They are also eligible for the additional deduction of up to Rs 50,000 under Section 80CCD (1B).

The NPS provides flexibility in terms of investment choices. It offers two options: Active Choice and Auto Choice or lifecycle fund. Active Choice allows investors to decide how their money is invested across different assets, including equity, corporate bonds, government securities, and alternative assets. On the other hand, the Auto Choice option invests money automatically based on the subscriber's age.

The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers one of the lowest service charges among similar investment products. The scheme is also portable, allowing individuals to maintain the same account even if they change employment or move to a different city or state.

Overall, the NPS is a significant initiative by the Government of India to provide financial security to individuals during their retirement years. It offers flexibility, tax benefits, and the potential for higher returns compared to fixed-income schemes.

Invest in the Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a popular long-term investment scheme in India, known for its blend of tax benefits, returns, and security. Backed by the Government of India, it is a safe investment option that offers guaranteed returns. Here are the key features and benefits of investing in a PPF account after retirement:

Features of a PPF Account:

• Interest Rate: PPF accounts currently offer an attractive interest rate of 7.1% per annum, which is fully exempted from income tax under Section 80C. The interest is compounded annually and is determined by the Central Government, aiming to provide a higher rate than regular commercial bank accounts.
• Investment Limits: The minimum investment amount for a PPF account is Rs. 500, while the maximum investment is Rs. 1.5 lakh per financial year. Deposits can be made either as a lump sum or in up to 12 instalments.
• Tenure: PPF accounts have a minimum tenure of 15 years, with a lock-in period of the same duration. After maturity, investors have the option to extend the tenure by blocks of five years.
• Deposit Mode: Investments in a PPF account can be made via cash, cheque, demand draft, or online fund transfer.
• Risk Factor: As PPF accounts are backed by the Indian government, they are considered risk-free and offer guaranteed returns.
• Nomination: A PPF account holder can nominate one or more individuals (such as family members or friends) to be beneficiaries. This can be done at the time of opening the account or at any point during its tenure.
• Eligibility: Only resident Indian citizens are eligible to open a PPF account. The account can be opened in the name of an eligible minor, operated by their parents. Non-resident Indians (NRIs) cannot open new PPF accounts, but any existing accounts will remain active until completion of the tenure.

Benefits of Investing in a PPF Account:

• Tax Benefits: Investments in a PPF account fall under the Exempt-Exempt-Exempt (EEE) category for tax purposes. This means that deposits made are tax-deductible under Section 80C, and the interest accrued is also exempt from tax calculations.
• Loan Facility: Investors can avail of a loan against their PPF balance. The loan can be taken out between the third and sixth years of the account, with a maximum tenure of 36 months. The loan amount is limited to 25% of the total balance.
• Partial Withdrawal: Partial withdrawals are permitted under certain conditions, such as for medical emergencies or higher education expenses. After the completion of five years, up to 50% of the total balance can be withdrawn in a single transaction each financial year.
• Online Access: Investors can easily manage their PPF accounts online through net banking services. This includes checking the account balance, transferring funds, setting up standing instructions, downloading account statements, and applying for loans.

Put money into Unit Linked Insurance Plans (ULIPs)

Unit-Linked Insurance Plans (ULIPs) are investment products that provide the dual benefit of insurance and investment. They allow you to invest a portion of your premium in market-linked funds while also providing life insurance coverage. This dual-purpose approach makes ULIPs a good option for people looking for insurance protection and investment growth.

ULIPs are well-suited for investors with medium to long-term financial goals. The investments are market-linked, which offer better returns over the long term. ULIPs cater to many investors with varying risk profiles. You can invest in equity or debt as per your choice, making ULIPs suitable for low-risk as well as high-risk investors.

ULIPs are ideal for retired individuals as they offer the flexibility to choose the premium amount and payment frequency (monthly, half-yearly, yearly, or a lump sum). You can also select the funds to invest in and switch between them according to your requirements.

ULIPs offer the option of automatic switching between funds, allowing you to modify your investment portfolio based on market conditions or your changing risk tolerance without active involvement. Additionally, you can take advantage of the investment top-up feature, which lets you save any additional amounts in your existing investment and increase your savings according to your financial goals.

• Freedom to choose your life cover: In ULIPs, you can select the amount of life cover you want, typically ranging from 10 to 40 times your annual premium.
• Freedom to choose your investment type: ULIPs offer equity funds, debt funds, and balanced funds, allowing you to invest based on your risk appetite and goals.
• Liquidity: ULIPs provide the option of partial withdrawal, enabling you to withdraw a portion of your invested money to meet immediate expenses.
• Goal-based planning: ULIPs are structured to help secure key goals such as wealth creation, retirement planning, or saving for your child's education.
• Tax benefits: Under the Income Tax Act, 1961, you can save tax on your premium payments and receive tax-free returns under specific sections.

When investing in ULIPs, you need to make an initial payment, followed by annual, semi-annual, or monthly premium payments. The returns from ULIPs are market-linked, and by choosing the right plan and investment strategy, you can maximise your returns.

• Start early: Investing early gives your money more time to grow and reduces the risk of short-term market volatility.
• Invest regularly: Consistency in investing can help you accumulate a large amount over time, resulting in greater returns. Set standing instructions for automatic premium payments to keep your ULIP active.
• Take advantage of various fund options: ULIPs offer equity, debt, and balanced funds. You can switch between funds to take advantage of market conditions and get better returns.
• Review your portfolio regularly: Regularly reviewing your portfolio helps you monitor and track your investments, enabling you to make timely decisions to maximise returns.
• Avail tax benefits: The premium paid towards a ULIP is allowed as a deduction of up to ₹1.5 lakh per year under Section 80C of the Income Tax Act, 1961. The payouts received are also tax-free under Section 10 (10D).

Invest in Mutual Funds/Equity to generate a regular income and preserve capital

Mutual funds are a smart way to grow your money and achieve your financial goals. They are a type of investment vehicle where multiple investors pool their money, which is then managed by professionals and invested across various asset classes, including equity, debt, gold, and other securities. The gains and losses are divided among investors in proportion to their share of the investment.

When it comes to generating a regular income and preserving capital after retirement, here are some things to consider:

Types of Mutual Funds

Mutual funds can be categorised into several types, depending on their structure, asset class, and risk profile. Here are some common types:

• Equity Funds: These funds primarily invest in stocks or equities, offering high returns over the long term but with higher risk due to market volatility.
• Debt Funds: Debt funds provide stable returns and regular income by investing in fixed-income securities like government and corporate bonds, treasury bills, and other debt instruments. They are considered less risky than equity funds.
• Hybrid Funds: Also known as balanced funds, hybrid funds invest in a mix of equities and fixed-income securities, diversifying their portfolio to balance risk and return.
• Money Market Funds: These funds focus on short-term, low-risk investments like treasury bills, commercial paper, and certificates of deposit, offering capital preservation, liquidity, and stable returns.
• Retirement Mutual Funds: These funds provide a regular income to retirees, investing in lower-risk options like government securities. They usually have a lock-in period of 5 years or until retirement age, whichever comes first.

Choosing the Right Mutual Funds

When selecting mutual funds for your retirement portfolio, consider the following:

• Financial Goals: Clearly define your financial objectives, whether it's steady income, long-term growth, tax savings, or a combination.
• Risk Tolerance: Understand your risk tolerance and choose funds that align with your comfort level. Some funds are high-risk, seeking higher returns, while others are low-risk and focus on capital preservation.
• Historical Performance: Evaluate the fund's track record and consistency in delivering monthly income and overall returns.
• Fees and Expenses: Consider the fund's expense ratio and additional charges to optimise your investment returns.
• Fund Manager's Strategy: Stay informed about the fund manager's investment strategy and ensure it aligns with your financial goals and market dynamics.

Systematic Withdrawal Plans (SWPs)

To generate a regular income from your mutual fund investments, consider using a Systematic Withdrawal Plan (SWP). This allows you to withdraw a set amount regularly from your mutual fund investments, providing a structured and reliable income stream. With an SWP, you can set up automatic monthly withdrawals to meet your income needs.

Diversification

Diversification is essential to managing risk and enhancing the potential for stable returns. Mutual funds offer a great way to diversify your portfolio by investing in a mix of asset classes and sectors. You can also invest in different types of mutual funds to balance your portfolio, such as combining equity funds with debt funds or hybrid funds.

Tax Implications

When investing in mutual funds, be mindful of the tax implications, as they can impact your overall returns. Both equity and debt mutual funds have tax implications, and the gains are classified as short-term or long-term capital gains, depending on the holding period. Consult a financial advisor to understand the specific tax rules for mutual funds in India and how they apply to your situation.

Professional Guidance

Investing in mutual funds and equity can be complex, and it's essential to make informed decisions. Consult a financial advisor or a certified financial planner to help you build a retirement portfolio that aligns with your income needs, risk tolerance, and financial goals. They can provide personalised advice and guide you through the different investment options available.

Frequently asked questions