Retirement Funds: Investing In India's Future

Retirement planning is an important step towards financial security. It involves investing in plans that provide regular income post-retirement, so that one can maintain their standard of living and fulfil their retirement goals. In India, there are various investment options available to meet the risk appetite of individuals. These include pension plans, the National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs), Systematic Investment Plans (SIPs), health insurance plans, Public Provident Fund (PPF), bank fixed deposits, senior citizen saving schemes, mutual funds, and equity.

Pension plans

• Pension Plans
• Annuity Plans

Annuity plans help you secure your financial future with regular income payments for the rest of your life. With a pension policy, you have an accumulation phase during which you put money into the policy periodically. When you retire, you can use these accumulated funds to purchase an annuity, which then provides regular payments according to the terms and conditions of the plan.

There are two types of annuity plans:

• Immediate Annuity: These plans start providing payouts on a monthly basis right after you purchase the plan. They are beneficial for individuals who have just retired and have a corpus to buy the annuity.
• Deferred Annuity: This type of annuity plan has an accumulation phase first, where individuals can purchase an annuity and contribute funds regularly. The amount is invested by the insurance company to grow the corpus. You can then select a date to start receiving payouts from the accumulated corpus.

When choosing a pension plan, it's important to consider factors such as the returns, risk appetite, investment flexibility, and additional benefits offered. It's also essential to start planning for retirement early to take advantage of the power of compounding and ensure a comfortable retirement.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored pension scheme that was launched in January 2004 for government employees but was opened to all Indian citizens in 2009. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is available to anyone between the ages of 18 and 70, including non-resident Indians (NRIs). The NPS is a voluntary, long-term investment plan for retirement, where subscribers can regularly contribute to a pension account during their working life. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

There are two types of NPS accounts: Tier I and Tier II. The former is the default account, which is mandatory for Central Government employees, while the latter is a voluntary addition. The minimum NPS contribution is Rs. 500 per month or Rs. 1,000 per year, and there is no upper limit. However, for Tier I accounts, there are restrictions on withdrawals and the utilisation of the accumulated corpus.

The NPS offers two investment choices: Active Choice and Auto Choice or lifecycle fund. Active Choice allows the investor to decide how the money is invested across different assets, while Auto Choice invests money automatically based on the age of the subscriber. The NPS invests in different schemes, and subscribers can choose to invest in Scheme E (equity and related instruments), Scheme C (corporate bonds and related instruments), Scheme G (government securities and related instruments), or Scheme A (alternative investment funds). The earning potential of NPS is higher compared to other fixed-income schemes, and subscribers can expect returns of 9% to 12%.

Upon retirement, subscribers can withdraw up to 60% of the total corpus as a lump sum, with the remaining 40% going into an annuity plan. If the corpus is less than or equal to Rs. 5 lakh, subscribers can withdraw the entire amount. Withdrawals are tax-free, but the annuity is taxable based on the income bracket. NPS subscribers can also make partial withdrawals of up to 25% of self-contribution for specific reasons such as illness, education, or marriage.

Unit Linked Insurance Plans (ULIPs)

ULIPs feature the flexibility of tailor-made life cover as per individual risk appetite. There are lower mortality charges for early investors, and part-withdrawals are allowed for immediate fund requirements. You can also expect tax benefits on premiums paid under Section 80C.

ULIPs provide the flexibility to manage your money. You will have control over your money through fund switches, premium redirection, partial withdrawals, and top-ups.

ULIPs are suitable for all salaried and self-employed individuals with dependents who seek a long-term insurance plan that offers the combined benefit of wealth creation and life insurance under a single policy.

ULIPs are also a good option for retirement planning. By investing in a good ULIP plan for retirement, the premiums paid during the ULIP tenure can help you avail the total amount upon maturity of the ULIP plan for your secure life post-retirement. Along with it, you get market-linked returns on your ULIP premiums, thus adding to the corpus.

ULIPs are also suitable for wealth creation, children's education, and individuals with a long-term investment horizon.

When choosing the best ULIP, you should select ULIP fund options as per your goals, choose an adequate life insurance cover, go for an extended investment tenure, and look for maximum tax-saving benefits.

Public Provident Fund (PPF)

Features of a PPF Account:

• Tenure: PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years.
• Investment limits: The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per financial year. Investments can be made in a lump sum or in a maximum of 12 instalments.
• Opening balance: The account can be opened with just Rs. 100 a month. Annual investments above Rs. 1.5 lakh will not earn interest and will not be eligible for tax savings.
• Deposit frequency: Deposits must be made at least once every year for 15 years.
• Mode of deposit: Deposits can be made in cash, cheque, demand draft (DD), or through an online fund transfer.
• Nomination: A nominee can be designated for the account at the time of opening or subsequently.
• Joint accounts: PPF accounts cannot be held jointly.
• Risk factor: PPF offers guaranteed, risk-free returns and complete capital protection as it is backed by the Indian government.
• Tax benefit: The interest and maturity amount are tax-free under Section 80C of the Income Tax Act, 1961.
• Partial withdrawal: Partial withdrawal is permitted from the 5th financial year onwards, with certain conditions applying.

How to Open a PPF Account:

A PPF account can be opened with either a Post Office or a nationalised bank, such as the State Bank of India or Punjab National Bank. Certain private banks, such as ICICI, HDFC, and Axis Bank, are also authorised to provide this facility. The following documents are required:

• Duly filled account opening application form
• KYC documents (Aadhaar, Voters ID, Driving license, etc.)
• Residential address proof
• Nominee declaration form
• Passport-size photograph

PPF Interest Rate:

The PPF interest rate for 2024 is 7.1% p.a., compounded annually. The interest is calculated on the lowest balance between the close of the 5th day and the last day of every month. To receive interest for a particular month, the PPF amount must be deposited within the first 5 days of that month.

PPF Account Eligibility:

Any Indian citizen can invest in PPF. One citizen can have only one PPF account, unless the second account is in the name of a minor. NRIs and HUFs are not eligible to open new PPF accounts, but they can continue contributing to existing accounts.

Mutual funds/Equity

Mutual funds are one of the most popular investment choices for retail investors in India. They work by pooling money from a large number of investors and investing in various financial securities like stocks, bonds, etc. The main benefit of mutual funds is that they offer risk diversification by investing in a portfolio of stocks or bonds across many sectors or issuers.

There are three main types of mutual funds:

• Equity mutual funds: These funds invest primarily in equities with the goal of capital appreciation.
• Debt mutual funds: These funds invest in debt and money market instruments with the goal of generating income.
• Hybrid funds: These funds invest in multiple asset classes such as equity, fixed income, gold, etc., with the goals of capital appreciation and income generation.

When investing in mutual funds, you can choose between lump-sum investments and Systematic Investment Plans (SIPs). Lump-sum investments involve investing a large amount all at once, while SIPs allow you to invest smaller amounts at regular intervals.

To start investing in mutual funds, you need to fulfil certain requirements, such as submitting a recent passport-sized photograph, proof of identity and address, a copy of your PAN card, and a duly filled KYC form. You can submit these documents to an Asset Management Company (AMC) or a Registrar and Transfer Agent (RTA) for processing.

You can invest in mutual funds through various channels, including:

• Mutual fund distributors: AMFI-registered distributors provide financial advice and help with transactions. They are paid commissions by the fund house, so there is no fee charged to investors.
• AMCs directly: You can invest by visiting their office or through their online portal. If you are a new investor, you will need to submit your KYC documents.
• Registered Investment Advisors (RIAs): RIAs do not receive commissions from AMCs, so they may charge a fee for their services. They can help you invest in direct plans, which have higher returns than regular plans.
• RTAs: These process mutual fund transactions on behalf of fund houses. You can invest in both direct and regular plans through RTAs.
• Online portals: You can invest through AMC or RTA portals, mutual fund distributor websites, or mobile apps provided by AMCs and RTAs.
• Stockbrokers: Stockbrokers offering online trading and demat services also provide online investment in mutual funds.
• Banks: Most banks offer wealth management services that include mutual fund investments.

When investing in mutual funds, it is important to consider your risk profile and investment goals. Consult with a financial advisor to determine which type of mutual fund and specific schemes are suitable for you.

Frequently asked questions