In today’s world where each and every individual is in a mad rush to realise his dream and loves to spend instantly in the hope of future income, it becomes very crucial for him to not only concentrate on his current inflows and outflows, but also plan for his future, particularly the post-retirement period. Retirement planning, in fact, should be the high priority goal of every individual. The fact, however, is that not many people put much emphasis on it in India, despite being aware of the fact that retirement planning is the most important part of the overall financial planning.
Planning for retirement, thankfully, is not that difficult. One of the most common ways to create a retirement fund is to construct a portfolio of various financial products which could generate a good income stream post retirement.
Here are some of the best investment options for retirement in the current scenario:
1. Stocks: Stocks, if invested carefully, can give you very good return in the long term. Since it generally is a long-term investment tool, you should consider buying good large cap and midcap stocks having strong and quality management and fundamentals as these kind of stocks give high dividend and their value also grows over time. The companies should have good corporate governance, and you should also look for consistency of returns before selecting a stock. You should invest in the stocks of those companies that have an easy-to-understand business model and a good track record of growing earnings. If the earnings of the company are growing, it means that the company is doing well. Also, watch out for the companies who have products whose demand is likely to grow in the years to come, like consumption and FMCG stocks.
2. Mutual Funds: Mutual Funds are another investment vehicle where you can invest a lump-sum amount or take the SIP route. You should look at a mix of funds like large cap, midcap, diversified and small caps. For this you can take the help of your financial advisor who will guide, monitor and rebalance your retirement portfolio. Mutual funds are believed to be one of the most popular and smart ways for investors to generate wealth or build wealth for retirement over the long term. They are a type of investment schemes that gather money from investors to buy securities. The investment portfolio of a mutual fund is continuously monitored by the fund’s portfolio manager or managers.
3. Public Provident Fund (PPF): PPF is another investment option which can be considered for retirement. The main advantage of PPF is that they give a fixed return. Since it is a government-backed instrument, investments made in a PPF account are safe. There is no risk involved. Minimum investment required is Rs 500 per month. One can open a Public Provident Fund account with a post office or a bank and start investing.
So far as taxation is concerned, PPF enjoys an Exempt Exempt Exempt (EEE) status, which means that the returns are exempt from tax, the maturity amount is tax-free and investments qualify for a deduction under Section 80C of the Income Tax Act, 1961.
In PPF an investor can avail a loan as well and can do so after the third financial year. This facility is available till the 5th financial year and loans can be taken once a year. Moreover, a PPF account can be extended for another five years after the completion of its tenure of 15 years. An investor who wants to play safe and wants fixed return should invest in this scheme. The only issue with this scheme is that returns from PPF have come down over the past couple of years. Also, PPF is not a liquid instrument like mutual funds or shares, but some investments can be made in this instrument for retirement purposes.
4. Rental Real Estate: Rental property can provide a stable source of income. It is, however, advisable to invest in a commercial space which can give you returns from day one. However, don’t just go out and start investing in real estate without doing your proper homework. We have seen that people start investing in real estate simply after knowing that some of their neighbours or relatives have did well with real estate. It is a serious life decision. Investing in real estate because someone else was successful with it is not the right reason to do it. Take the advice of a good professional who would understand your need and then suggest what to do. You should choose good location as commercial property provides returns through two routes — one is rent and the other is capital appreciation. Thus, if the location of property is good, the value of the property will definitely appreciate over time. Also, there will be less vacancy. Commercial real estate leases are generally longer, thereby helping you with the stability of your cash flow.
5. Bonds: A bond is an acknowledgement of a debt which means when you buy a bond, you give your money as a loan to the government or a corporation. Whoever borrows this, pays you interest for a fixed amount of time. The income which you receive in the form of interest or yield can be a good source of retirement income. Generally high-yield bonds pay higher coupon rates, but have lower ratings which make them a bit risky. You should invest in high-quality bonds who have a triple AAA rating. It should be kept in mind that the value of bonds will fluctuate as the interest rate changes. When the interest rate goes up, the bond prices go down and vice versa. However, if you hold these bonds till maturity, fluctuations should not matter.
Becoming rich and generating a big retirement corpus is not that difficult. It has been observed that anyone can become a crorepati if one starts early in life and sticks with it till retirement, no matter what happens. Keep INVESTING!
(By Amit Kachroo, Managing Partner, AANEEV Wealth)
(Disclaimer: These are the views of the author and not that of FE.com. Before investing in any product consult your financial advisor.)