NPS/National Pension System

 NPS, or the National Pension System, is India's voluntary, long-term retirement savings scheme. It was introduced by the Indian government in 2004 to provide retirement income to Indian citizens. I am writing this blog to bring out the features of the NPS and how it can help us in our retirement years/golden years.

Objective: NPS is designed to help individuals build a retirement corpus and ensure financial security during their post-employment years. It encourages systematic savings during one's working life.

Participants: NPS is open to all Indian citizens, including salaried employees, self-employed individuals, and even Non-Resident Indians (NRIs). It's also available for individuals in the organized and the unorganized sector.

Contributions: Subscribers make regular contributions to their NPS accounts during their working years. These contributions are invested in a mix of equity, fixed deposits, corporate bonds, liquid funds, and government securities, depending on the subscriber's choice.

Two Tiers: NPS has two tiers - Tier I and Tier II. Tier I is the primary retirement account with certain withdrawal restrictions, designed to accumulate savings for retirement. Tier II is a voluntary savings account with more flexibility for withdrawals.

Tax Benefits: NPS offers attractive tax benefits. Contributions to Tier I are eligible for deductions under Section 80CCD(1) of the Income Tax Act. Additionally, there is an exclusive tax benefit of up to Rs. 50,000 under Section 80CCD(1B), known as the "NPS Tax Benefit."

Flexible Withdrawals: In Tier I, subscribers can partially withdraw a portion of their accumulated corpus for specific purposes like education, marriage, or purchasing a house, subject to certain conditions. However, the primary aim is to provide a pension after retirement.

Annuity Options: At the age of retirement (usually 60 years), a portion of the NPS corpus (up to 60%) can be withdrawn as a lump sum, while the remaining amount must be used to purchase an annuity, which provides a regular pension income.

Regulation: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which oversees the functioning of various entities involved, including Pension Fund Managers (PFMs), Central Recordkeeping Agencies (CRAs), and Trustee Banks.

Portability: NPS is portable across employers and locations. This means subscribers can continue their NPS account even if they change jobs or move to a different city.

Market-Linked Returns: NPS investments are market-linked, which means the returns are not fixed but depend on the performance of the underlying investments. This provides the potential for higher returns but also carries some level of market risk.

In summary, the National Pension System (NPS) is a flexible and tax-efficient retirement savings scheme in India, allowing individuals to build a retirement corpus and secure their financial future. It combines market-linked returns with long-term savings discipline, making it a popular choice among those planning for retirement.

How investment in ELSS Mutual Fund is a superior choice over PPF

Section 80C of Income Tax Act 1961 allows investors to claim up to Rs 150,000 deduction from their gross taxable incomes by investing in eligible schemes. You can save up to Rs 46,800 in taxes (for investors in the highest tax bracket) by investing in 80C schemes. Some of the most popular tax-saving investments under Section 80C are Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), Public Provident Fund (PPF), National Savings Certificates (NSC), 5-year tax saver bank fixed deposits, life insurance plan (traditional and ULIP) and mutual fund Equity Linked Savings Schemes (ELSS).

In this blog post, we will compare and contrast the two most popular tax savings investments – PPF and ELSS.

What is PPF?

Public Provident Fund (PPF) is a small savings scheme of the Government of India. It is one of the most popular 80C investment options for Indian investors. You can open a PPF account with just Rs 100 in public or private sector banks or post offices. The minimum and maximum deposit amounts in a financial year are Rs 500 and 150,000 respectively. Since PPF is a Government scheme, your investment is risk-free. You will get interest on your PPF deposit based on interest rates which can be reset quarterly by the Government. PPF interest rates are linked to Government bond (G-Sec) yields of similar maturities. The current PPF interest rate is 7.1%.

PPF investment matures in 15 years. However, under certain conditions, you can take a loan from your PPF balance (between third and sixth year) or make pre-mature partial withdrawals (after 7 years). An account holder can withdraw prematurely, up to a maximum of 50% of the amount that is in the account at the end of the 4th year (preceding the year in which the amount is withdrawn or at the end of the preceding year, whichever is lower). Upon maturity of your PPF (completion of 15 years) you have the option of extending your PPF in blocks of 5 years. The maturity proceeds of PPF are entirely tax-exempt.

What is ELSS?

Mutual Fund Equity Linked Savings Scheme (ELSS) has been growing in popularity as tax savings investments among retail investors over the last several years. Investment in ELSS mutual funds like PPF, qualify for tax deduction under Section 80C of Income Tax 1961. However, unlike PPF, ELSS is market-linked and subject to market risks. Equity Linked Savings Schemes are essentially diversified equity mutual fund schemes that invest in equity and equity-related securities across sectors and market capitalization segments. An investor can invest in ELSS either in a lump sum or through Systematic Investment Plans (SIP). The minimum investment amount in ELSS can be as low as Rs 500.

ELSS funds have a lock-in period of 3 years. Investors should note that if you are investing in ELSS through SIP, each installment is locked in for 3 years. After completion of 3 years, you can redeem your ELSS units partially or fully without any penalty. Capital gains of up to Rs 100,000 in ELSS are tax-free and taxed at 10% thereafter. Dividends (now known as Income Distribution cum Capital Withdrawal Plan) paid by ELSS during a financial year will be added to your income and taxed according to your income tax slab rate.

Wealth creation potential – PPF versus ELSS

One of the main reasons for PPF being one of the most popular tax savings options for investors is the assurance of capital safety. Though equity is a volatile asset class, historical data shows that equity, as an asset class, has the highest wealth creation potential in the long term.

The chart below shows the growth of Rs 5,000 SIP in PPF and Nifty 50 TRI (a proxy for equity as asset class / ELSS) over the last 20 years ending 31st March 2021. You can see that with a Rs 5,000 monthly deposit in PPF you could have accumulated a corpus of around Rs 29 lakhs in the last 20 years (15 years maturity plus 5 years extension with contributions). Your cumulative investment would have been Rs 12 lakhs. With the same cumulative investment through monthly SIP of Rs 5,000, you could have accumulated a corpus of nearly Rs 65 lakhs.

The difference amount is huge Rs 36 Lakhs!

Life in and after Covid-19

Today, it's almost 35 days since we are all in lock-down in our respective places in INDIA with very minimal movement outside for just buying groceries or vegetables for our daily needs. There is one thing that has come out strongly in this time that is "Survival" is more important than to "MONEY". Not a single human today is thinking of going out to earn, but his priority has shifted to take care of himself and his family. Every morning we wake up just to thank god for another day and pray that all over the world everyone should be happy.

One more thing that has changed is the way we are working today. The dynamics had changed. Today working in plush offices which was a taboo once has changed, people today are more comfortable working from home. In fact, there have been some studies conducted recently which point out that many people who are working from home have increased their productivity. Now many reputed firms are planning to shift their workforce from offices to WFH which might be also financially very healthy for them. But it might be not good for the realtors whose plush offices are lying already vacant and many more buildings and complexes will join them which may have a negative effect on the real estate sector.

Business dynamics have also changed for a lot of businesses, as there has been a lot of business happening in many sectors without direct interaction with clients. It's only through web calling and explaining the products and now you can have your product sold. Now the client base has been widened. Today I don't need to be physically present before my client at his place, a person from the remotest place can have access to clients far away through just the internet, which has changed the whole dimensions of business.

Going forward the one who changes himself with the dynamics of the market will only be the survivor and people who still think that the old trends of doing business, will slowly fade away.
Today again the theory of Darwin "Survival of the Fittest" has come to my mind and i feel that going forward this theory will be remembered again and again.............................

LIFE HAS CHANGED INDEED.

Investing in Bonds Funds- A wise idea?

As the equity markets are volatile and the economic scenario is too turbulent, people are looking at safe investments avenues. The first thing that comes to mind for an investor is bank fixed deposits. But with the interest rate scenario looking downward, the best instrument for investment for safe and secure returns is Dynamic bond funds.
What is dynamic bond fund?
Dynamic bond fund can be an alternative for fixed deposits.  The investment pattern of this type of schemes is into AAA/AA rated papers and p1 deposits. These funds are inversely related with interest rates. As the interest rates are reduced, the returns generated by these funds increase and vice versa. These funds have generated around 14% returns in the last 1 year. The investment horizon for these funds should be anywhere between 1-3years. These funds can be advised to clients who look for safe investment and returns more than the bank fixed deposits. But these funds too come with risks. Risk of investment( junk bonds) etc.

Customers who look to invest in these type of schemes should first take a proper advice from their financial advisors about the track of the fund managers, and also the schemes previous performance.

Note: The views expressed are in general and readers are advised to consult their respective advisors before investing.

Compounding-The 8th Wonder of the World

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” ― Albert Einstein.

In the book, “Once Upon a Wall Street”, Peter Lynch, one of the most successful mutual fund managers the Wall Street has ever seen, narrates a story. “Consider the Indians of Manhattan, who in 1625 sold all their real estate to a group of immigrants for $24 in trinkets and beads. For 362 years the Indians have been the subjects of cruel jokes because of it – but it turns out that they may have made a better deal than the buyers who got the island. At 8% interest on $24 ( note: let’s suspend our disbelief and assume they converted the trinkets to cash) compounded over all those years, the Indians would have built up a net worth just short $30 trillion, while the latest tax records from the Borough of Manhattan show the real estate to be worth only $28.1 billion. Give Manhattan the benefit of doubt: That $28.1 billion is the assessed value, and for all anybody knows, it may be worth twice that on the open market. So Manhattan’s worth $56.2 billion. Either way, the Indians could be ahead by $29 trillion and change.  

This little story shows you the power of compounding and the points out the fact that the earlier you start investing the better it gets.

Illustration

Let’s try and understand this through an example of two friends, Ram and Shyam. Both start working at the same time at the age of 23. Ram starts saving when he turns 25 and invests Rs 50,000 every year. Assuming that on this he earns a return of 10% every year, at the end of ten years, Ram would be able to accumulate Rs 8.77 lakh. After this, due to financial constraints Ram is not able to invest any more money. But at the same time he does not touch the fund that he has already accumulated, hoping to live of it when he retires.

He lets the Rs 8.77 lakh grow and assuming that it continues to earn a return of 10% p.a., he would be able to accumulate around Rs 95 lakh by the time he turns 60. So the Rs 5 lakh (Rs 50,000 x 10 years) he had invested in the first ten years of his working life would have grown to Rs 95 lakh. This even though he stopped investing entirely after the first ten years.

Now let’s take the case of Shyam. Shyam believed in enjoying life, spending freely rather than saving regularly. However, at the age of 35 as reality dawns, he starts putting aside Rs 50,000 every year. Unlike his friend Ram, who stopped after the first ten years, Shyam religiously invests the amount each year for all of next twenty five years i.e. till he turns 60. Now, assuming he also earns a return of 10% per year on his investments, in the end, Shyam would have managed to accumulate Rs 54.10 lakh.

Putting it differently, even after investing Rs 50,000 regularly for twenty five years, Shyam has managed to accumulate Rs. 41 lakh lesser in comparison to Ram. Remember Ram has ended up investing only Rs 5 lakh in total over the ten years that he invested. In comparison, Shyam over the twenty five years invested Rs 12.5 lakh (Rs 50,000 x 25 years). So even by saving two and half times more than Ram, Shyam has managed to build a corpus which is 43% lower! This happened because Ram started investing earlier which in turn allowed the money to compound for a greater period of time.

Also as the corpus grows, the impact of compounding is greater. Ram as we know had managed to accumulate Rs 8.77 lakh after ten years after which he stopped investing, allowing the accumulated corpus to compound for twenty years more. In other words, the total life of the investment was for thirty years. However, had his investment time frame been till he turned 55 i.e. had the money compounded for twenty five years instead of thirty then at the end Ram would have accumulated a corpus of around Rs 59 lakh. By choosing to let his investment run for just an additional five years, Ram managed to accumulate Rs 45 lakh more.  

Real Life Illustration

In terms of a practical example, let’s take the case of HDFC Equity Fund. The five year return of this fund is around 9.31% p.a. On the other hand, from inception (December 1994), the fund has returned 20.2% p.a. Now, had an investor invested say Rs. 50,000 five years back, the investment would have grown to around Rs. 78,000. However, had the investment been made at inception (allowing the money to compound over a greater period of time) the investment would have grown over 24 times to around Rs. 12 lakh.

As mentioned in the beginning of the column, Albert Einstein himself has called the power of compounding the eighth wonder of the world. In this article we have given various examples of how potent this power is when combined with its ally --- Father Time. It’s never too early nor too late to begin investing. Or to put it differently, better late than later. 



This blog is taken from Yahoo Finance.......................

Is Buying Gold Jewellery In Installments Wise.....

Gold is one of the most sought after commodities in an an average Indian's life, especially when it comes to festivals or weddings. So naturally, the escalating prices are a cause for great concern for many Indian families. Gold prices have surged to such astronomical levels buying gold has become next to impossible for families with modest income.Perceiving this difficulty and owing to the drop in sales, various jewelers have come up with indigenous schemes to lure buyers.Schemes like buying gold in investments where you have to pay only just 11 out of 12 installments, the last installment will be footed by the jeweler itself. You'll own the gold jewelry after the completion of the tenure.ExampleMrs. Sunita from Delhi decided to buy 20 grams gold as an investment, but realised she lacked sufficient funds. A jeweler offered a scheme under which she could buy gold jewelry after one year at the prevailing market rate after paying 12 monthly installments. The jeweler also offered to pay the 12^th installment after she had completed the 11th installment.That means for jewelry worth Rs 60000, she had to pay Rs 55000 in 11 months, and Rs 5000 would be borne by the jeweler. She thought it was a good option. She sought to buy gold as an investment and under this scheme she would make both and investment and get herself an ornament.Did the buyer benefit from this scheme?The only benefit that a buyer gets is purchasing gold in installments. But from a buyer's point of view, this type of scheme has more to lose than to gain.Here's why one should not to buy gold under the jewelry schemeLet's examine the limitations of buying gold jewelry through this scheme:-          The installment paid, can be used only to buy the jewelry, and it cannot be redeemed against gold biscuit or coins. The jewelry also carries the making charges, and its purity is lesser than the biscuit or coin. So if we compare 10 grams gold biscuit to gold jewelry, then buyer would gain if he chooses the gold biscuit. Let's check the comparison:

Details	Gold Jewelry	Gold Biscuit
Quantity	10 Grams	10 Grams
Purity	22 K	24 K
Making Charges	Up to Rs 30/Gram	Nil
Resale Value	Lower due to impurity	Full Return Value

-          The buyer is under an obligation to the seller to purchase the gold at the prevailing market rate. If at the time of booking jewelry, the gold rate is Rs 2800/gram but after the completion of installments, the rate increased to Rs 3000/grams, then buyer has to pay Rs 2000 extra for every 10 grams due to change in price of gold.-          If the main purpose of a buyer is to invest, then buying jewellery is not a wise choice. The jewelry is not made of 24 carat gold, and it also carries some making charges, so the return value of jewellery would be much less when compared to gold coin, biscuit or bars.Other attractive options to buy gold in installmentsThe buyers have many other options to buy gold at a cheaper cost and at a better quality. Some of the options include:-          If the buyer wants to buy gold after 12 months under the installment pattern, then it would be a better option if he buys Gold ETF in the stock market every month and averages out the inconsistency. He can also buy it in E-Gold format (National spot exchange) where he can buy as low as 1 gram gold. After 12 months, he can sell the gold in electronic form and buy the gold jewellery from the proceedings, or if he wants to carry it longer then he can keep it in the DEMAT A/c.-          If the buyer wants to invest in a coin or bar, then he also has the option to put the money every month in a recurring deposit account for 12 months and earn interest on the money and buy gold with the maturity proceedings.The basic flaw in the gold jewelry scheme is that jewelers not only earn interest on the buyer's installment but also sell the jewelry after earning a handsome margin. For 20 grams gold jewelry, he earns Rs 600 making charge and sells 22 carat gold at rate of 24 carat gold. So he earns approx 8% extra by selling gold of 22 carat purity.For jewelers, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer's installment whereas buyers, who cannot distinguish whether they are buying gold as jewellery or as an investment, are always set to lose out in this type of deal.

The Power of Systematic Investment

A lot is said about savings and investments and we find many instruments to save our hard earned money. But the question is, are we investing in a proper way and are we able to beat the inflation with our investments and also creating wealth.

People have the habit of investing their hard earned money in traditional instruments like F.D's, NSC, Post office Savings, Bonds etc, because of the fear of loosing their money by investing it in risky instruments like Equities, Mutual Funds, Commodities etc,.

Today we have so many options to invest our money. A person who has a disciplined approach in investing his money can beat inflation and also make his money grow at a faster pace than investing it in fixed income instruments.

Systematic Investment Plan is the best way of investing in a disciplined manner in mutual funds to beat inflation and also create wealth in long term. To make you understand please find a simple example:

SYSTEMATIC INVESTMENT PLAN
Returns Calculator
Monthly Investment Amount Rs.				500	/-
Investment Period In Years				20
Returns Expected (% Annualised)				20.00%
End Value of your Investments
		Rs.	12,38,097
Amount actually paid		Rs.	1,20,000
Times amount gets rolled-over			10.32

A disciplined and systematic investment approach of investing just Rs.500/- every month in a diversified equity mutual fund gets rolled over 10.32 times in a span of 20 years on an expected annualised returns of 20%. This is called the power of Systematic Investment Plan.

Today, there are so many innovative products, the choice is of the investor how he wants to invest and which product suits his requirement.