Money lying in bank account doesn’t equal investments
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I’m 43 years old and want to start building my retirement nest. Till now I was focusing on wealth creation. I have put money into Public Provident Fund (PPF), and term and health insurance policies. I have been investing in mutual funds for the past eight years, including systematic investment plans (SIPs) in HDFC Top 200, ICICI Pru Dynamic and BNP Paribas Midcap funds. I also wanted to know if the National Pension System (NPS) is good investment option and how much can I invest in it? My monthly income is Rs.2.15 lakh and total expenses come to Rs.1.2 lakh.
Wealth creation is a continuous process—it continues not only during your years of earning but also after you retire. The challenge is to create wealth after your earning years. That’s where many trip. The earlier you start the process of wealth creation, i.e. start investing, the more years you get to save and the more the power of compounding works in your favour. And during the years of consumption (retirement years) the key is how much we withdraw. If planned correctly, the withdrawals will be lesser than the interest earnings on the accumulated corpus and some part of the interest is used to protect inflation. This then leads to long-term wealth creation.
Your insurances are in order as you have a life insurance policy in the form of a term plan, as well as a health insurance plan. Do make sure that you review the same periodically taking into account inflation as well as the change in your lifestyle and financial goals.
Your investments are currently in the form of SIPs in equity mutual funds and PPF. This is a good combination of risk and safety. However, where you need to take caution is cash surplus. Prima facie, your potential to save is much higher than your existing savings. So do try to increase your investments as money lying idle in a bank savings account does not equal to investments.
You also need to review your investments on a regular basis. The performance of the investments with its benchmark and peer group will give a fair idea on the performance of your portfolio. Consistent underperformance for 2-3 quarters should make you change your investments for better performing funds. Further, a portfolio with large-cap, multi-cap and mid-cap funds can be a good combination within the equity space.
NPS is also a good option for long-term investment and can be a tool to create a retirement corpus. Under NPS, there can be two sub-accounts: tier I and tier II. The tier I account is mandatory and is a non-withdrawable retirement account which can be withdrawn only in a few instances. Tier II account is a voluntary savings available as an add-on to any tier-I account holder and can be withdrawn as per the subscriber’s needs. A subscriber has to put in a minimum annual contribution of Rs.6, 000 for her tier I account in a financial year. It follows a exempt-exempt-taxable model— exempt at the time of contribution, exempt at the time of earnings, and taxable at maturity. However, the recent Budget provision has made withdrawals from NPS exempt to the extent of 40% of the corpus at the time of maturity. This is over and above the additional deduction of Rs.50,000 under section 80CD (1B) of the Income-tax Act, 1961.
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