Amit has been trying to save for retirement for several years. However, whenever the corpus grows large enough, there is an expense. He had to spend a significant amount last year on house repairs, maintenance, and new furniture. He wishes to enforce discipline in his retirement investments.

He has been investing in PPF and has received some tax breaks under Section 80C. However, interest in PPF has been steadily declining.

He has now researched mutual funds and discovered that equity mutual funds provide higher long-term returns. However, he is not an expert in selecting the best mutual funds. There are simply too many funds on the market.

Anand, his friend, then advised him to invest in NPS. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a voluntary retirement benefits scheme introduced by the Government of India.

Any investment in a Tier 1 NPS is tax deductible under Section 80C. Amit can claim an additional deduction of up to Rs.50000 under Section 80CCD(1B) because he has exhausted the deductions under Section 80C (Rs.1.5 Lakhs). Amit can also claim an additional tax deduction of up to 10% of his basic pay if his corporate employer contributes to NPS (for the benefit of the employees) under section 80CCD(2).

This suggestion from his friend Anand could solve most of his retirement savings problems.

Because NPS can be done systematically through monthly contributions, it will not be a burden on his finances.

He can also invest in equity mutual funds at the same time. Depending on his risk tolerance, he can also allocate his exposure to corporate bonds, government securities, alternative investments, and equities.

The 30% that he saved on taxes on the additional Rs.50,000 (~ Rs.15,000 p.a) and 10% of his basic salary (~Rs.1,00,000 p.a) is again earning him a good return, compounding year on year.

He would not be in a dilemma to utilize this fund for some other financial goal. The NPS fund can only be used for his retirement because the funds are locked in until his retirement (age 60) or voluntary retirement after the age of 55. He can receive up to 60% of the total investment at the age of 60, tax free, with the remainder distributed as pensions.

Amit intends to invest in NPS for his retirement and has finally found a solution to his problems. #pension #retirement #NPS

Anand and Amit joined the company shortly after graduating from college.

Anand’s father had asked him to contribute an extra Rs.8000 per month (~Rs.1 Lakh per annum)to his Provident Fund. He agreed because he was only paying a portion of his salary and getting to spend the rest. Amit had not considered this addition at the time.

Anand took out a loan a few years later and planned to use the Rs.8000 to repay his loan. So, he couldn’t contribute further. By then his corpus in the PF had grown considerably.

This is when Amit realised the power of a meagre Rs.8000 savings. He later began investing an additional Rs.8000 in the provident fund.

They have both invested around 10 lakhs in their twenty years of corporate experience, but their returns are not the same.

The rate of interest ‘r’ and the time in years ‘n’ are two important factors that influence the compounding effect of investment. While we are focused on the returns, we often overlook the importance of time.

The longer the duration of the investment, the greater the return.

The Illustration assumes an 8% interest rate. Person 1 – Anand and Person 2- Amit

#compounding #investment #financialplanning

By making some lifestyle modifications, we want to make our lives more comfortable.
From an Android to an iPhone, an apartment to a villa, a hatchback to an SUV, and from one car per family to two. In our daily lives, we don’t give much thought to these changes.

Over time, every adjustment we make to our lives has an effect on our finances. Understanding the effects of these changes can aid in making decisions about what expenses to add and what to cut, what is affordable and what is not.

Whether we should spend the additional income now or save/invest for the future is a question we should ask ourselves.
An increase in income with relatively minor lifestyle changes will accelerate the process of accumulating wealth.