Five smart investment avenues to plan your retirement

7 MinsDec 20, 2021

Retirement is a vital financial goal and an inescapable truth of life. The earlier you start investment planning for your retirement, the better it is. This will allow your money to compound and you would be able to build a sizeable corpus.

5 smart investmensts

Ideally, you should begin planning for your retirement during the wealth accumulation or asset building phase of your life. With more time in hand, you can take a calculated risk and invest in high-risk asset classes. This is essential to counter inflation.

Here are certain smart investment avenues to plan your retirement:

1. Stocks and equity Mutual Funds – For wealth creation over the long term, equity mutual funds remain one of the most promising asset classes. Mutual Funds will help you diversify the portfolio, enjoy the economies of large-scale investing, invest regularly in small amounts (with Systematic Investment Plan), and ensure liquidity.

There are a variety of equity mutual fund schemes: Large-cap Fund, Large & Mid-cap Fund, Mid-cap Fund, Small-cap Fund, Multi-cap Funds, Flexi-cap Funds, Value Funds, Contra Funds, Dividend Yield Funds, Tax-saving Funds, etc.; each with distinct risk-return traits and other characteristics.

Plus, you have solution-oriented Retirement Funds. These mutual funds have a lock-in period of five years or till retirement age, whichever is earlier. Selection is the key because if this kind of fund underperforms, there is no option to exit and switch to another scheme. This could weigh on the overall performance of your retirement portfolio.

When planning for retirement, invest regularly and systematically. Make your payday, your SIP day and also contribute a lump sum when you have surplus money such as a bonus.

Select a suitable mutual fund scheme.

2. National Pension System (NPS) – This is a Government of India scheme whose objective is to provide old age security in the form of pension. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). To participate in this scheme, you need to be 18-65 years of age and a citizen of India. NRIs are also eligible to invest in NPS.

You have broadly two accounts – Tier I and Tier II – under the NPS Account.

Type of NPS Account

ParticularsTier ITier II
TypePension AccountInvestment Account
Choice of NPS account openingMandatoryVoluntary
Minimum Contribution at the time of account opening (Rs)5001,000
Minimum amount per contribution (Rs)500250
Minimum total contribution in the year (Rs)1,000-
Minimum number of contributions1 per financial year-
WithdrawalsSubject to certain conditions and limitsFree to withdraw

The type of funds under NPS include Equity (E), Corporate Bonds (C), Government Securities (G) and Alternative Investment (A) (maximum investment permitted in Alternative Investment is 5%). You can either opt for Active Choice or Auto Choice. Under the Active Choice, the maximum equity allocation permitted is 75% until you turn 50 years of age, and thereafter the allocation will gradually reduce as per your age.

Under the Auto Choice, your money is invested dynamically as per your age into equity, corporate bonds, and government securities with three life cycle fund choices––aggressive, moderate, and conservative––suitable to your risk profile. Since returns from NPS are market-linked, the selection is crucial.

Contributions made to NPS Tier I Account entitles you to a tax benefit under Section 80C, 80CCD (1B). Plus, if your employer also contributes to your NPS account, then the tax benefit under Section 80CCD (2) of the Income Tax Act, 1961 will also be available to you. There are no tax benefits for contributions made into the Tier II account.

3.Public Provident Fund (PPF) – PPF is suitable if you have 15-20 years or more before you retire. It is a government-backed scheme with the following salient features:

EligibilityThe applicant needs to be a Resident Indian
Entry AgeNo age is specified
(Guardian can open PPF account for minor)
Interest rateCurrently at 7.1% p.a. and reviewed quarterly
Tenure15 financial years (plus the first year of investment)
On completion of 15 years, the account can be extended in a block of 5 years
Minimum InvestmentRs 500 p.a.
Maximum InvestmentRs 1,50,000 p.a.
(Any number of deposits in multiples of Rs 50 in a financial year)
Tax BenefitUp to Rs 1,50,000 under Section 80C;
Interest earned is exempt from tax and so are the maturity proceeds
Can be opened atOnline and through Axis Bank branches
Who cannot investHindu Undivided Family (HUF);
Non-resident Indians (NRIs); and Person of Foreign Origin
NominationA nomination facility is available

If you contribute regularly and diligently to your PPF account you can build a secured corpus for your retirement. You can contribute annually, quarterly or monthly.

You also have the option to extend your PPF Account in blocks of 5 years. This way you can continue to enjoy tax exemption and earn returns on it.

[Also Read: The Prudent Approach to Your Retirement Planning]

4. Bank Fixed Deposits and Debt Mutual Funds – To earn fixed and secured returns, a bank fixed deposit remains a good option, particularly when you are nearing retirement. But to get the most of your bank FD, choose your investment tenure thoughtfully. Choose the interest reinvestment plan or cumulative option and avoid premature withdrawals. Also at maturity, if you do not require the money immediately, consider renewing your FD to compound wealth better.

Debt mutual funds, too, are an alternative, provided you are ready to assume market-linked returns. There are a variety of debt mutual funds with distinctive investment characteristics. Select the one most suitable for you, taking into account where interest rates are headed, the re-investment risk, credit risk, and liquidity risks, among others. Always assess risk appetite and investment time horizon while investing in debt funds. You can select the debt mutual fund suitable for you online.

5. Gold Exchange Traded Fund and/or Gold Saving Funds – The yellow metal is a hedge for your investment portfolio and a store of value during economic uncertainty. So, irrespective of how many years away you are from your retirement, strategically hold some portion of gold. Hold it in the form of Gold Exchange Traded Fund, Gold Savings Fund, and Sovereign Gold Bonds --they are smart ways of investing in gold.

Always review your retirement portfolio on time to ensure you achieve financial independence and are on track to living the advancing years of life in bliss.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply