New Delhi: Retirement planning is extremely important for every individual. In order to make sure that their life is financially stable post-retirement as well, they must think of ways to have a regular income even after their retirement. A regular income ensures that you won't exhaust your saved money recklessly.
As retirement planning is a long term process, it is important that you take inflation into account so that it does not erode your retirement corpus. So you have to invest in such instruments which can generate inflation-beating returns.
If you are in your early twenties, you can invest in slightly riskier investment instruments which offer good returns as you will have time to recover in case things go downhill. If you are close to your retirement age, taking risks is not advisable as you will not have enough time to recover money in case the risks turn out to be non-rewarding.
Here are some instruments where you can invest to create a retirement corpus
Mutual funds: If you are in your early 20s or 30s and are not completely risk-averse, mutual fund investment might be a good option for you. For investors in their early 20s with a moderate risk appetite, diversified equity mutual funds are suitable investment options to create retirement corpus as they can give a CAGR between 12-15 per cent over a 20-year period. For conservative investors, debt mutual funds are a better investment choice as they are less volatile in nature and may generate 7-10 per cent return in long term.
Investors can also pick hybrid mutual funds to invest in both equity and debt funds in order to get decent returns with low risk. You need to keep in mind that the longer you stay invested, more returns you will earn. After you retire, put the accumulated corpus in a short tem debt fund or in a liquid fund and withdraw a fixed amount every month with a Systematic Withdrawal Plan (SWP).
If you are invested in equity funds, you can shift your accumulated corpus to debt mutual funds scheme which is less risky compared to equity mutual funds or hybrid funds when you retire.
New Pension System (NPS): NPS (National Pension System) is a defined contribution based pension scheme launched by Government of India with the objectives to provide old age income, reasonable market based returns over long run and extending old age security coverage to all citizens. It is a good choice to build a retirement corpus as it offers tax exemption of up to Rs 50,000 under Section 80CCD and up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
NPS offers two investment choices and you can choose depending on your risk appetite.
1. Active Choice: This option allows you to decide how your money should be invested in different assets. It further offers three funds or investment options:
(i) Asset Class E - Invests 50 per cent in equity stocks.
(ii) Asset Class C - Invests in fixed income instruments except for government securities.
(iii) Asset Class G - Invests only in government securities
2. Auto choice: This is the default investment option which invests your money automatically in line with your age.Since NPS is a pension product, you are expected to invest until your retirement. Upon maturity, you must use at least 40 per cent of the corpus to buy an annuity from a PFRDA-listed insurance company.
You can withdraw 40 per cent of the corpus tax-free. The remaining 20 per cent of the corpus can be withdrawn or can be used to buy an annuity. This 20 per cent will be taxed as per the income tax slab applicable to you.Public Provident Fund (PPF): PPF is a long-term investment instrument. PPF is an excellent investment instrument to build retirement corpus as it falls under EEE category which means the money you invest in PPF, interest earned on PPF investments and the maturity proceeds are all exempt from tax.
Since the lock-in period is 15 years, the power of compounding will offer a good return if you start saving from your early twenties. PPF interest rates are decided by the government every quarter. Currently, PPF offers 7.6 per cent interest rate which is compounded annually.
The PPF account matures in 15 years, which can be further be extended by a block of 5 years for multiple times.
Fixed deposit (FD): People who are looking for safe and secure investment options they prefer fixed deposits.
FDs offer fixed and assured income. Interest Rate on FDs varies from bank to bank. Most banks provide special interest rate to senior citizens. Fixed deposits interest rates are not as high as they used to be but they still remain the safest investment option.
If you are close to your retirement age, FDs might not be the best way to build a retirement corpus if you are in your early 20s or 30s as real returns (inflation adjusted) will be negligible.