Retirement Funds: Best Indian Investment Options

Retirement planning is an important part of every individual's financial plan. It is essential to save enough to look after yourself and your dependents after you retire. Once retired, your primary source of income stops, and you have to rely on your savings and investments. With proper retirement investments, you can easily avoid financial crunches. There are several investment options for retirement in India, including pension plans, the National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs), Systematic Investment Plans (SIPs), health insurance plans, Public Provident Fund (PPF), Senior Citizen Saving Scheme (SCSS), Mutual Funds/Equity, and more. These options offer varying benefits, such as regular income, wealth accumulation, tax benefits, and capital preservation. It is important to choose the right investment portfolio based on your risk tolerance, market fluctuations, objectives, and goals.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored pension scheme that was launched in January 2004 for government employees. In 2009, the scheme was opened to all Indian citizens between the ages of 18 and 70. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers tax benefits under Section 80C and Section 80CCD.

• Voluntary and long-term investment plan: The NPS is a voluntary scheme, which means individuals can choose to opt into it. It is a long-term investment plan, encouraging people to invest regularly in a pension account during their working life.
• Withdrawals and annuity: After retirement, subscribers can withdraw a portion of the corpus as a lump sum. The remaining amount is received as a monthly pension or annuity. The current rules allow individuals to withdraw up to 60% of the total corpus as a lump sum, with the remaining 40% going into an annuity plan.
• Tax benefits: The NPS offers tax benefits for both employees and self-employed individuals. Employees can claim tax deductions on their contributions under Section 80CCD(1) and Section 80CCD(1B). Self-employed individuals can claim tax deductions on their contributions under Section 80CCD(1) and Section 80CCD(1B). Additionally, employer contributions to NPS are eligible for tax deductions under Section 80CCD(2).
• Flexibility: The NPS offers flexibility in terms of investment choices and fund managers. Subscribers can choose between the Active Choice and Auto Choice options. The Active Choice allows investors to decide how their money is invested across different assets, while the Auto Choice invests money automatically based on the subscriber's age. NPS subscribers can also change their scheme preference, fund manager, and investment option.
• Online and offline account opening: Individuals can open an NPS account either online or offline. To open an account offline, individuals need to find a Point of Presence (POP), which can be a bank or financial institution, and submit the necessary documents. For online account opening, individuals can visit the NSDL website and link their account to their PAN, Aadhaar, and mobile number.
• Two types of accounts: The NPS offers two types of accounts: Tier-I and Tier-II. Tier-I is the default pension account with restrictions on withdrawals. Tier-II is a voluntary savings account that provides more flexibility in withdrawals.
• Low cost and portability: The NPS is one of the lowest-cost pension schemes globally and offers portability across employment and location.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a government-backed, voluntary savings-cum-tax-reduction social security instrument in India. Introduced in 1968, the scheme aims to mobilise small savings for social security during uncertain times by offering an investment with reasonable returns and income tax benefits.

Features of a PPF Account

PPF accounts have a lock-in period of 15 years, with the option to extend the tenure by 5 years. The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per annum. The interest rate for PPF accounts is currently 7.1% per annum, compounded annually. The interest and maturity amounts are tax-free under Section 80C of the Income Tax Act, 1961.

Eligibility

Indian citizens residing in the country, including minors, are eligible to open a PPF account. Non-resident Indians (NRIs) are not permitted to open new accounts but can continue existing ones until maturity. Only one PPF account is allowed per person, unless the second account is opened on behalf of a minor.

Benefits

PPF accounts offer guaranteed, risk-free returns, making them ideal for individuals with a low-risk appetite. The funds are not market-linked, providing stable returns. Additionally, PPF accounts offer tax benefits, with contributions eligible for tax deductions under Section 80C. The entire amount redeemed from a PPF account upon maturity is not subject to taxation, making it an attractive investment option.

Drawbacks

PPF accounts have a long lock-in period, and the interest rates offered are moderate compared to other investment options. There is no option for joint holding, and the annual contribution requirement may pose a challenge for some individuals. NRIs also face restrictions on opening new accounts.

Mutual Funds/Equity

Retirement planning is an important but often ignored topic, especially for those who feel that retirement is a long way off. However, with advancing age, health-related problems become a concern, and the cost of quality healthcare in India is increasing rapidly. Therefore, it is crucial to start planning for retirement early on to maintain financial independence and peace of mind.

• Potential for High Returns: Historical data shows that equity has been the best-performing asset class over the long term and has significant wealth-creation potential. For example, in the last 10 years, the total returns index of India's 50 largest stocks by market capitalization, the Nifty 50 TRI, yielded a 10.3% compound annual growth rate (CAGR).
• Outpacing Inflation: Equities can be well-suited for long-term investment horizons and can help investors stay ahead of inflation, which erodes the purchasing power of money over time.
• Diversification: Mutual funds offer diversification by investing in a variety of assets across different sectors and companies, reducing the overall risk.
• Debt Mutual Funds: These are low-risk investment options that can protect capital and generate regular returns.

How to Invest in Mutual Funds/Equity for Retirement:

• Systematic Investment Plans (SIPs): SIPs are a great way to invest in mutual funds for retirement. They allow investors to make regular, disciplined contributions from their monthly savings through auto-debit. SIPs also average the cost of purchase by taking advantage of stock market volatility.
• Longer Investment Horizons: The longer the investment horizon, the more wealth can be created through the power of compounding.
• Flexibility: Mutual fund SIPs are flexible, with no charges or penalties for missed instalments due to insufficient balance. Investors can stop or restart their SIPs at any time.
• Tax Benefits: Mutual funds are one of the most tax-friendly investment options in India. Long-term capital gains from equity and equity-oriented hybrid funds (with more than 65% gross exposure to equity) are tax-free up to ₹1 lakh per year. Long-term capital gains exceeding ₹1 lakh are taxed at 10%. Long-term capital gains from debt funds or debt-oriented hybrid funds (held for more than 3 years) are taxed at 20% after allowing for indexation benefits.

Examples of Mutual Funds/Equity Retirement Solutions in India:

• ICICI Prudential Retirement Fund - Pure Equity Plan: This fund has a lock-in of 5 years or until retirement, whichever is earlier, and primarily invests in equities. It has delivered strong returns, with a 5-year average return of 27.59%.
• HDFC Retirement Savings Fund - Equity Plan: Another fund with a similar lock-in structure, investing in large, mid, and small-cap stocks. It has also generated attractive returns, with a 5-year average of 27.02%.
• Nippon India Retirement Fund - Wealth Creation Scheme: This fund has a 5-year average return of 19.87% and follows a similar investment strategy, focusing on equity investments.
• Tata Retirement Savings Progressive Plan: With a 5-year average return of 20.18%, this fund also invests across large, mid, and small-cap stocks, offering a diversified approach.
• Aditya Birla Sun Life Retirement Fund - The 30s Plan: This fund has a 5-year average return of 17.40% and is designed for investors in their 30s, with a lock-in period applicable.

These are just a few examples of mutual funds/equity retirement solutions available in India. It is important to carefully consider your financial goals, risk tolerance, and investment horizon before making any investment decisions. Consulting a financial advisor can help you make informed choices that align with your retirement planning needs.

Senior Citizen Saving Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-backed savings option designed to provide financial security to senior citizens. The scheme is open to individuals aged 60 and above, as well as retired defence personnel and those who have opted for voluntary retirement between the ages of 55 and 60. The minimum investment amount is Rs. 1,000, while the maximum is Rs. 30 lakh. The current interest rate offered by the SCSS is 8.20% per annum, with interest payouts made quarterly. The maturity period of the SCSS is 5 years, but it can be extended for an additional 3 years after maturity.

One of the attractive features of the SCSS is the regular flow of income it provides. The scheme offers a safe investment option with guaranteed interest rates, ensuring a steady stream of income for senior citizens. The SCSS also offers tax benefits, with deposits qualifying for tax deductions under Section 80C of the Income Tax Act, up to a limit of Rs. 1.5 lakh per year.

The SCSS account can be opened at designated post offices or authorised banks in India, and individuals can hold multiple accounts, either solely or jointly with their spouse. The process of opening an SCSS account is relatively simple, and the scheme also allows for premature closure after 1 year, with a penalty on the interest earned. Overall, the SCSS is a safe and secure investment option for senior citizens, offering competitive interest rates and tax benefits.

Atal Pension Yojana (APY)

Under APY, subscribers have the option to receive a fixed monthly pension ranging from Rs. 1000 to Rs. 5000 per month at the age of 60. The monthly pension would be available to the subscriber, followed by their spouse, and after their death, the pension corpus accumulated at the subscriber's age of 60 would be returned to their nominee. The amount of monthly pension depends on the years of contribution and the amount chosen. For instance, for a monthly pension of Rs. 1000, the indicative return of the corpus to the nominee would be Rs. 1.7 Lakh, while for a monthly pension of Rs. 5000, the indicative return of the corpus would be Rs. 8.5 Lakh.

Subscribers joining the APY scheme at an early stage of age would be required to pay a lower monthly subscription amount compared to those joining at a later age. The Central Government will co-contribute 50% of the total yearly contribution or Rs. 1000 per annum, whichever is lower, for subscribers who joined the scheme up to 31st December 2015 and are not members of any statutory social scheme or income tax payers.

APY accounts can be opened online or offline by visiting a bank branch or through tablet banking. Only one APY account is permitted per customer, and exiting the scheme before attaining the age of 60 is allowed.

Frequently asked questions