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Please ask your questions HERE and rediffGURU Milind Vadjikar, Association of Mutual Funds in India (AMFI)-registered MF distributor and Pension Fund Regulatory and Development Authority (PFRDA)-registered retirement financial planning advisor, will answer them.
Siddharth: I am 43 years old. I have invested in VPF since 2008 and it has grown to 64 lakh currently. But have not invested in NPS at all. Should I divert my monthly investment to NPS and start from zero or should I continue to invest in VPF to take advantage of compounding? Please suggest.
Interest on employee contribution to provident fund (EPF+VPF) in a financial year above 2.5 L is taxable after Budget 2021. Hence it is recommended that you may divert your monthly investments into NPS tier-1 account.
You may select active choice and allocate maximum possible amount to equity and the rest between Govt securities and corporate bonds.
Note that withdrawals from NPS are highly restricted, before 60 age, NPS being a pure retirement product.
The corpus accumulated in PF may be retained since it will continue to compound at the Interest rate.
Nitiksha: Planning for retirement is crucial, yet many people delay making key financial decisions. With options such as workplace pensions, private pensions, and state pensions, how can individuals determine the best strategy to ensure a financially secure retirement while optimising tax benefits?
Retirement is the one of the most important financial goal and the key is you won't get loan to meet that requirement.
Typically people neglect it in early part of their career and then get a rude shock when hardly 10-15 years are left for retirement and they can't meet target corpus amount despite heavy investments.
NPS is a great retirement product for every Indian.
In fact since its costs are so low that you won't find people promoting it or advertising about it.
NPS is similar to workplace pension but is available for businessmen and self-employed people too.
Except for a minimum 1000 per year in Tier 1 account there is no compulsion to invest and also there is no upper limit to investment. However you may automate your investment in NPS using D-remit feature.
Limited withdrawals are allowed subject to terms and limits.
You can change your fund manager if you are not satisfied with its performance and also you can have different fund managers for different asset classes.
EPS is an add-on to other sources of retirement income and can't be the only source since the maximum pension amount is limited to Rs 7500 per month.
Unit linked pension plans are like private pensions but are a poor and inefficient copy of NPS.
In India only Govt employees are eligible for state pension.
PPF/EPF are also avenues for building retirement corpus but interest on EPF contribution above Rs. 2.5 L in a financial year invokes tax and PPF has lower interest rate.
Best strategy to make financially secure retirement is to begin with a small amount from your first salary and later stepping up with increased income.
Most retirement products are eligible for tax benefits.
Anonymous: I have been making overpayments on my mortgage to reduce my debt faster, but a friend suggested that I might be better off investing that money instead. How can I calculate whether paying off my mortgage early or investing in stocks will provide a better financial outcome in the long run?
I disagree with the suggestion given to you.
You must primarily focus on faster repayment of the overdue loan. While doing so you may initiate investments towards other goals.
Although investment maybe less now but making a beginning will help inculcate sense of fiscal discipline.
As the loan becomes zero, entire EMI+ should move towards investments.
Don't get into that calculation since returns from markets are not guaranteed especially in short to medium term when they are expected to remain choppy due to geo political reasons. However your loan obligation has to be fulfilled every month irrespective of any other developments.
Anonymous: With the cost of living rising sharply, many households are struggling to stay on top of their finances. What practical budgeting techniques can help people manage their expenses more effectively without drastically reducing their quality of life?
You can get many budgeting methods online however the key is the strict fiscal discipline, optimal asset allocation and frugal shopping.
Few measures to improve monthly budget:
1. Mind your credit card spends and ensure timely payment.
2. Avoid impulse purchases.
3. Limit discretionary spending.
4. Avoid FOMO shopping.
5. Prefer E-Com/Q-Com to get price benefits but only from reputed portals.
6. Keep 6-8 month worth regular expenses coverage corpus as emergency fund.
7. Be adequately insured for life as well as health.
Given below are two budgeting methods:
1. 50/30/20 method
Traditionally in this method it advocates that 50% of your income should go towards essential needs, 30% for discretionary needs and balance 20% for investment, however I prefer to flip it in this way:
Investments: 50%
Essential needs: 30%
Discretionary needs: 20%
2. Pay yourself first budget
The pay yourself first budget is another simple budgeting method focusing basically on savings and debt repayment. With this method, you set aside a specific amount from each monthly income for savings and debt repayments, spending the rest as you feel appropriate.
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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
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