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How to Successfully Plan for Retirement?

June 7, 2022

Retirement planning can be confusing and intimidating, with multiple financial products in the market, from both private and public sector entities, all advertising various benefits. Finding the one that suits your requirements, counters inflation, and offers you financial security can seem like a gamble. Some government-backed savings options can provide you with a safety net after your retirement, providing a regular income and comfort in your older years. The National Pension Scheme(NPS) is one such option that can be a great retirement companion. Let’s find out more about how to join NPS and use it to successfully plan for your retirement.

What is NPS Investment?

NPS is a voluntary social security scheme offered by the Central Government to employees from the public, private and unorganised sectors, with the only exception being people from the armed forces. It allows you to make regular contributions towards your retirement during your working years. After the age of 60, you can withdraw a part of the corpus in a lump sum, while the remaining portion is used to purchase an annuity plan for your future financial needs.

Why to Invest in NPS?

NPS is a dependable scheme that can offer you peace of mind and an adequate means of income after your retirement. If you are in two minds about how it can benefit you, here are some things to know:

  1. Help your money grow:

NPS invests your money in a combination of securities, including equity, corporate debt, government bonds, as well as alternative investment funds. Overall, these help you create wealth without exposing you to too much risk. The NPS schemedraws a good balance between high-risk equity and low-risk bonds. The equity investment is gradually reduced by 2.5% each year, after you turn 50. This allows your money to grow in value and beat inflation without putting you in a high-risk situation.You can use an NPS calculator for more clarity on returns.

  • Financial security in retirement:

You can withdraw your money from the NPS account after the age of 60 years. 60% of the total corpus can be withdrawn and used for your immediate needs. This could be to buy or renovate a house, travel, cover medical bills, or cater to any other needs that you might have. The remaining 40% is invested in an annuity of your choice, from a Pension Fund Regulatory and Development Authority (PFRDA)-registered insurance company. This ensures that you receive a regular income for life. The primary goal of the NPS is to replicate your income in retirement. Even though you won’t be working, you will still have a steady income to depend on.

  • Control your investments:

The NPS schemeoffers two options to manage your investments – auto and active choice. The auto choice automatically decides your asset allocation as per your age. This option follows the life-cycle based approach (moderate, conservative, and aggressive), which invests in equity when you are young and gradually moves to lower risk options as you age. The active choice lets you pick the asset class allocation on your own. You can decide which way to go based on your preference and goals. You also have the option to change your fund manager if you do not like performance of your current one and find that your investment has not shown sufficient growth.

  • Save tax:

NPS is an excellent tax-saving tool. You can avail of a tax deduction of up to ₹1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. You can claim an additional deduction of ₹50,000 under Section 80CCD (1B). Further, if your employer is contributing to your NPS, you can claim another tax deduction of up to 10% of your salary, including the basic pay and dearness allowance or equal to the contributions made by the employer towards the NPS under Section 80CCD (2).

To sum it up

With it government backing, balance between risk and returns and the tax savings it offers, NPS can be the perfect financial tool for retirement planning.Moreover, the minimum investment is only ₹500 for Tier I and ₹250 for Tier II accounts at registration, making it ideal for all income groups. You can use an NPS return calculatorandstart planning a successful retirement today.

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Functions of PFRDA (Pension Fund Regulatory & Development Authority)

June 5, 2022

The Government of India has initiated many programs for senior citizen over the years. These programs aim at fixing monthly pension schemes after retirement. In 2003, Parliament passed the Interim Pension Fund Regulatory and Development Authority Bill. The goal was to promote, regulate, and develop a pension system in the country.

After the preparation of the final system in 2013, the PFRDA came into being. It was an improved version of IPRDA and is a permanent act. It is the regulatory body for supervising the National Pension Scheme.

Earlier, the National Pension Scheme by PFRDA was for government employees only. But it was later extended to all Indian citizens. This includes non-resident Indians (NRI) and self-employed citizens.

Pension Fund Regulatory and Development Authority and its Functions

The PFRDA is the pension regulator for the National Pension Scheme. It functions towards the promotion and development of pension schemes. The Central Autonomous Body (CAB) has legislative, executive, and judicial powers. It is like other financial sector regulators in the country. These bodies include SEBI, RBI, IRDA, etc. It is a quasi-government organisation. The Indian government provides support, but the management is private.

The regulatory body has its headquarters in New Delhi. There are many regional offices across the country. A list of PFRDA functions is as follows:

  • Promoting pension schemes to secure the old age financial requirements of retired individuals
  • Regulating the pension schemes that fall under the PFRDA act (NPS and Atal Pension Yojana)
  • Protecting the interests of pension fund subscribers
  • Governing and supervising Tier-1 and Tier-2 accounts of the NPS
  • Registering and regulating intermediaries like Central Record-Keeping Agency (CRA), Pension Fund Managers, etc.
  • Training intermediaries to familiarise and educate people on the importance of pension funds
  • Educating stakeholders and the general public about the benefits of PFRDA NPS
  • Approving schemes and formulating the guidelines for managing pension fund corpus
  • Establishing a grievance redressal mechanism
  • Addressing grievances on the various pension schemes in the country
  • Regulating the regulated assets

Online Services of PFRDA

It is easy to apply for NPS both offline and online. The Pension Fund Regulatory and Development Authority (PFRDA) takes care of the same. The regulatory organization offers many internet services. These services encourage professionals to apply for different NPS by PFRDA. They include:

  • Pension Fund account opening through NPS
  • Processing contributions to the Permanent Retirement Account Number (PRAN).
  • Activating Tier-2 account
  • Updating subscribers’ personal information
  • Changing investment strategy
  • Changing the PFRDA pension arrangements
  • Downloading and accessing transaction statements through PFRDA NPS login
  • Processing withdrawal or departure requests
  • Filing complaints and queries
  • Printing e-PRAN and other documents

Conclusion

The National Pension Scheme is an initiative by the Government of India. It aims at facilitating a regular income for all subscribers after retirement. The Pension Fund Regulatory and Development Authority (PFRDA) governs the NPS. The PFRDA offers National Pension Scheme through four types of accounts. They are All Citizen Model, Corporate Model, Government Sector, and Subscribers accounts.

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How Does NPS Work for Government Employees?

June 2, 2022

The National Pension Scheme (NPS) is one of India’s most popular retirement benefit plans. The Pension Fund Regulatory and Development Authority of India (PFRDA) is responsible for regulating the NPS scheme. Investing in this plan secures your retirement while offering tax benefits under Sections 80C and 80CCD. There is also a lock-in period with the NPS, but withdrawal is permittedunder certain circumstances. The NPS rules and regulations for government and non-government employees differ significantly. Here is everything you need to know about NPS if you work for the government.

NPS Account Opening Online Rule

If you are a Central Government employee, NPS is mandatory for you if you joined the service on or after 1st April 2004. However, this condition does not apply to you if you work under the armed forces. NPS is also mandatory for State Government employees (except those employed under the West Bengal government).

As soon as you join the service, your employer wants you to submit an NPS application form to the Pay and Accounts Officer (PAO) and Drawing and Disbursing Officer (DDO). The enrolmentis then processed through the nodal officer.

NPS Contribution for State Government Employees and Central Government

Government employees can contribute to online NPS at the rate of 10% of the salary plus dearness allowance. The employer will make a matching contribution in this case. However, the employer contributions rates have been revised and increased to 14%. The rate revision was made effective from 1st April 2019.

Benefits of NPS for Central Government Employees:

  • Higher returns:

The salary you contribute towards NPS is invested in equity, alternative investment funds, corporate bonds, and government securities. It provides safer and better returns than any other scheme available due to the diversification of money in different asset types. The NPS interest rate can range between 9% and 12%.

  • Tax benefits: 

NPS allows you to claim tax advantage under section 80C of the Income Tax Act. You can claim tax exemptions of up to ₹1.5 lakhin a financial year. 

NPS Withdrawal Rules:

Premature exit before the age of 60 years:

  • If your accumulated corpus is equal to or less than ₹2.5 lakh, you will be provided with a lump sum payment.
  • If you have an accumulated corpus of more than ₹2.5 lakh, you must invest at least 80% of it in an annuity plan. The remaining 20% will be paid in one single sum to you.

Normal exit after the age of 60 years:

  • You are allowed to withdraw the lump sum amount if the accumulated corpus is less than or equal to ₹5 lakhs.
  • In case the corpus is over ₹5 lakhs, you must invest at least 40% of it in an annuity plan. The remaining 60% will be paid as a lump sum.

To Sum It Up

NPS is mandatory for all government employees. In case you work in the private sector, you can also start contributing to NPS and enjoy the benefits of relatively safer returns.

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How many mutual funds make a good Portfolio

If you are investing in mutual funds, you may have asked or been told about diversification and the number of mutual funds you should own to make your portfolio stronger, and safeguard your investments from sudden market risks.  

It is necessary to ensure that your investment portfolio is diverse and you don’t have all your eggs in one basket. At the same time, it is also true that too much diversification can prevent you from making high gains. This gives rise to the question of how many mutual funds you should have and how much is too much. 

Diversification vs. overdiversification 

Diversification of investments is done with the aim of spreading the risk out across a number of assets. If you have invested too much in the stocks of a single company, your investment is at greater risk, because if the company does not perform well, it’s share prices drop and so will your investments. To mitigate this risk, you should diversify your investments and invest in multiple companies, so as to ensure that even if one company does not perform well, the investments in the other companies helps you overcome that loss. 

However, investing in too many companies can result in you not being able to make the most of your investments. Even if one of your investments does really well, you will not be able to see a great difference in your corpus because your investments are spread thin and the investment in any one company is bound to be smaller. It is usually suggested that you keep your investments diversified across industries, but limited to a few companies per industry. 

How many mutual funds should you own? 

Since there are several types of mutual funds, let us talk about each kind of mutual fund specifically. 

Large-cap equity mutual funds make their investments specific to shares of large-cap companies. Investing in one large-cap mutual fund that is well researched and chosen diversifies your investments enough that a second one is not strictly necessary, but can be an option. Owning multiple large cap funds increases the chance that there is a significant overlap in the shares owned by these funds and does not really guarantee more diversity in your holdings. 

Mid-cap equity mutual funds, as the name suggests, diversify their investment across companies belonging to the medium capital spectrum. These companies have much higher growth potential compared to companies belonging to the large capital spectrum. However, the risk involved with mid-cap mutual funds is also considerably higher.  

There exist a lot more mid-cap companies than there are large-cap ones. This means that even if you invest in multiple mid-cap mutual funds, the chances that there is significant overlap in your investments is smaller. This means that you have more options to invest in, but only invest in mid-cap funds after you have throughly researched them and are confident in their prospects. 

Though the high potential return can increase appeal for these funds, remember that there is a higher risk factor associated with these funds, which may be detrimental for your overall portfolio if things do not go your way. For mid-cap funds too, you should limit yourself to two funds only. 

Small-cap mutual funds, as you can probably guess by now, invest in small-cap companies. Investing in them is a high risk, high reward strategy. If they do well, you stand to earn extremely high returns, but if they do not, you could lose out on a lot of your initial capital. Given the number of companies that fall in this bucket, the chances of your investments overlapping are smaller and the reason you should limit yourself to approximately two of these is more because of the risks associated with them. Again, only invest in small cap funds after a lot of thorough research. 

Debt Mutual Funds are investment schemes that allocate your funds to bonds and other similar market instruments. These are considered very safe and low risk investment which means that the returns are also low. You can probably invest in one or two of these as well, but investing in more than that means lower returns overall. 

Sectoral Mutual Funds allocate your funds to companies from one particular industry. This is very similar to investing in only one company, since if the industry as a whole sees a downturn, your investment in it will also take a hit. These funds are only a good option if you happen to be an expert in, or know a lot about, that particular industry. The number of sectoral mutual funds you invest in depends on the industries you are familiar with. If you’re not sure about a particular fund or industry, it is best pass on these them. 

Though there is no exact number that is right for everyone, anywhere from six to ten mutual finds is usually the number of funds you want to be invested in. But this, by no means, set in stone. You could invest in more or less depending on multiple factors, such as your risk tolerance, your expected returns, your knowledge of particular industries etc. You should always ensure that the funds you are investing in are of different types, rather than funds with different names but similar outputs. As always, please research thoroughly and consult your financial advisor before making any financial decisions. 

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