Q. I am 24 years old and earn ₹10 lakh a year. I spend ₹1.5 lakh towards personal expenses and invest ₹1.5 lakh in PPF. I still have ₹7 lakh to invest. I'm ready to take extreme risks. I have already invested in shares and MFs. Can you guide me on other investment options that can yield high returns?
Naren Babu
A. Double check if the ₹1.5 lakh that you mention as spending towards personal expenses covers all your expenses for a year. To answer your question, it is not a good idea to invest all of your surpluses in equities and MFs (presumably equity funds). It would be best to divide your investments between equities, debt and other safe options, through an asset allocation plan.
Before deciding upon where to invest the money, we suggest you list the goals towards which you are investing. Once you do this, you will have a clear idea of your less than 3-year, 3-to-5 year and 5-year-plus goals. While equities and equity funds are good options for 5-year-plus goals, for shorter term goals you need safer instruments which could be a combination of bank deposits, corporate deposits and debt mutual funds.
You also need to buy insurance products that protect you or your dependants from unexpected events. If you have dependants or plan to marry, do get a pure term insurance plan that will pay a lump sum to your nominees in the event of your death. Sign up for a medical insurance policy that can cover you for hospitalisation expenses. It would also be prudent to create an ‘emergency fund,’ equal to half of your annual salary (₹5 lakh), in deposits with a leading bank to draw on in the case of illness, job changes or interrupted income.
Q. I am 33 years old. Considering both its extended 80C tax benefit and lock-in period, do you think NPS is a good investment option?
Ramanathan N.
A. Given increasing longevity, the size of retirement corpus that all of us will need to see us through our post-retirement years, is very large. Getting to that corpus will be very difficult without including equities in our retirement portfolio, as only such investments convincingly beat inflation rates in the long run. Therefore, if you are accumulating a corpus towards retirement, taking on market risks is inevitable.
Once you accept that equity investments must form a major part of your retirement portfolio, you have multiple investment avenues to choose from that can channel your money into stock markets — active mutual funds, index funds, ULIPs and the National Pension System (NPS).
So, what are the pros and cons of NPS compared to the other options? On the plus side, NPS is quite a flexible scheme. It allows you to invest through lump sums or monthly instalments. You can split your investment in any proportion of your choice, between equities, corporate bonds and government securities. You can also choose between seven fund managers based on their performance.
You are allowed to change your allocation as well as fund managers at any time. Compared to active funds or ULIPs, NPS manages your money for a very low fee.
Your investments in the NPS, apart from qualifying for section 80C benefits of up to ₹1.5 lakh a year, also entitle you to section 80CCD benefits for another ₹50,000. Taking stock of returns over the last five years, equity funds under NPS have delivered 6-8.5% returns (as the market has been volatile), the corporate bond plans have delivered 9-10% and government security plans 9-10.5%. The last two beat most competing debt options.
On the minus side, NPS requires you to lock in your money until retirement. While early withdrawal of up to 25% of your contribution is allowed, it is subject to many conditions.
These rules can be inconvenient if you find the NPS schemes underperforming. The scheme also does not allow you to withdraw your entire accumulated corpus and use it as you please, even after retirement. Under NPS rules, 40% of your maturity amount must be handed over to annuity providers who will pay you a monthly pension. NPS also does not enjoy EEE status at the time of your final withdrawal and you may suffer taxes at higher rates than most other retirement options. It may, therefore, make sense to mix and match NPS with other retirement avenues.
