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8 questions to ponder over if you are an NRI Investor

Prathiba Girish Financial Freedom, Financial Planning, NRI, Personal Finance, Retirement January 31, 2019January 30, 2019financial planning for NRIs, investing for NRIs 0 Comment

While the basic steps of financial planning are similar for most people there are certain situations which are exclusive to NRIs. What I have seen from interactions with a few of them are as follows.

Are you sure about retiring in India?

While most NRIs are very clear that the children will be educated abroad and in all probability, will never return to India, they are unsure about their intentions of settling back in India post retirement. This can be challenging for retirement planning and deciding if it makes sense to hold on to real estate assets accumulated in India.

Have you insured your health adequately?

Most NRIs have huge global cover currently and hence are in a good position to take care of any medical emergencies should they arise. These are typically provided by the company and hence it can be a cause for worry. What would happen in case of a sudden loss of job? It would mean you dip into your savings for medical emergencies.

In most cases, while people are aware of the need for a personal cover, they have put it off till they retire. Health insurance is available only to healthy people. It is possible that by the time you retire, there is some ailment which has crept up. This will make it difficult to get insured or at the least have undesirable exclusions in the policy.

Have you taken Critical Illness insurance?

Health insurance will cover your medical bills. What happens if you are unable to retain employment due to a critical illness? While this is an important insurance for everyone, all the more so for NRIs, since losing income in an alien land can be even more traumatic. Also note that, while this is expensive in India, it may be affordable in other countries. Do check and ensure you take adequate CI cover. For more details on this subject, you can read an earlier blog of mine.

Have you done Estate Planning?

Again, this is true for most clients, since somehow coming to terms with the fact that death is inevitable is never easy. But in the case of NRIs, this is crucial, especially, when you have assets as well as dependents in multiple countries. Do understand that assets in different countries are governed by different laws. Hence, make a will in India for your Indian assets. Separately, consult with specific experts in countries where you have properties and other assets and plan for them as well.

Have you considered tax implications outside India while making Indian Investments?

As an NRI you may be paying tax on your global income. What is tax free in India need not necessarily be tax free in the country where you reside. It is very important therefore to consult with both your Indian advisor and your advisor in the place of your residence. It is important to seek and heed to the advice of both professionals before you decide on a particular investment.

Do you believe investing in India can only be done in INR?

There are attractive options available in India to park currency of your choice. Check what these are and compare return and risk before you choose your instrument of choice.

Have you closed your EPF account on leaving your Indian employment?

Since it is etched into us that EPF investments give tax-free assured-returns, there is a lot of inertia in taking any action on this. In most cases its good and ensures a huge corpus gets accumulated for retirement. But as per new rules, interest paid on EPF accounts once there is no fresh contributions is fully taxable.

Have you taken care of these minor but time-consuming changes?

If you have multiple bank accounts as a resident, you need to review and close them or convert them to NRO or NRE status. Schemes like Sukanya Samruddhi which is available for residents is not for NRIs, hence you will have to look at closing such schemes. It may be a good idea to have a check list of things to be done on your next visit to India and keep adding to it.

Managing all of this remotely on your own can be challenging if you are an NRI and having a trusted financial advisor who can advise you on these matters as well as execute, will help manage the situation.

Finwise is a personal finance solutions firm that helps both residents and NRIs plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: Emre Aliriz on Unsplash.com

So, what does it mean to become Financially Free?

Girish Ganaraj Financial Freedom, Financial Planning, Personal Finance, Retirement January 23, 2019January 23, 2019financial freedom, financial independence, financial planning, retirement 0 Comment

Dear readers, as I said in my last article, the most significant words that I have experienced since becoming an independent adult have been “Become Financially Free”. So, how did these words happen? And what do these words mean?

As I mentioned in my earlier post, early in our careers, (am talking about 1999-2000), like most people our age, we were merrily travelling along life’s highway, earning, spending and salting away a bit for the future, and ticking away at various “achievements” which were largely material acquisitions. But our middle-class genes also automatically built in some caution and I remember that we had started thinking about what should be the financial goal that we should be looking to build to “be comfortable”. At that time, the number “x” seemed both luxurious and unattainable and hence that was the number that we set ourselves a “target” to reach.

Of course, as a few more years passed by (by about 2005-6), the number started looking small! Not because our nest egg was getting closer to the number though, since we had continued to follow a fairly haphazard (in hindsight) approach to building wealth – a second house, some bit in the stock market, some insurance, etc. Just that “x” suddenly seemed both “within reach” and “not enough”. So, the target became larger (about “3x”) and we continued to earn and spend while saving up.

As we entered our middle years (around 2011-12) and our kids started growing up, life began to resemble a treadmill. Just that while the run in itself was enjoyable, the faster we went, the faster the treadmill also seemed to go and the ultimate destination seemed like a mirage. The target again started seeming “not enough”. That’s when we consciously decided to slow down the treadmill and asked ourselves a few questions.

What kind of lifestyle did we desire for ourselves and our children?
How much of a role should debt play in our lives?
What is really the corpus that we wanted to “be comfortable” for the rest of our life?

Our search for answers to these questions helped us fulfil our need for financial security as well as discover the concept of “financial freedom”. Essentially, Being Financially Free in the simplest way meant having enough money that one need not have to work for money for the rest of his or her life. That said, it isn’t as one-dimensional as that. Being Financially Free necessitates the following

Having enough money to ensure that all foreseen (and unforeseen) expenses are taken care of
Still having money post that to take care of all future events/milestones until one’s death
Making sure that assets are in the right form to enable one to live the lifestyle that one has planned for
Last but not the least, making sure that your money is invested wisely enough to ensure that it is not getting eroded by factors such as unplanned expenses, inflation, market cycles, illiquidity, concentration, etc.

This process also helped us recognize the fact that how much people go wrong in their understanding of money and their efforts to build wealth. And 2 reasons stood out

Underestimating the long term – both in terms of inflation as well as asset composition
Lack of direction – Building assets doesn’t necessarily build adequate wealth, unless one knows what are one’s milestones and goals

In our personal case, as we underwent and completed the comprehensive planning exercise for ourselves, we discovered that the “number” we were looking for to be “comfortable”, rather “financially free” was about “10x” from the original number we started with, and that too in current value terms. We now know what is the number we are working towards, and we also have a clear understanding of what are our future financial milestones and how we need to plan for them.

As an aside, our personal experiences with money helped us set up Finwise, a firm that helps busy people achieve their financial goals, grow their wealth substantially and work towards financial freedom. In a way, we ourselves were our first “financial planning” customer!

I hope our story helps you understand what it means to “Be Financially Free”. Do let me know your thoughts at getfinwise@finwise.in.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For advice, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: Stockified.com, shot by ab-dz

The 3 most important words I have said as an adult

Girish Ganaraj Budget, Financial Freedom, Financial Planning, Personal Finance, Retirement January 9, 2019January 23, 2019 2 Comments

Becoming an adult is one of the biggest thresholds that a human being crosses in his or her life. For a young one on the verge of this threshold (for context, we are talking here about the legal definition of crossing the age of 18 years), it comes with the promises of many excitements and thrills. It is about being an independent person (As Bollywood would say – apne pairon par khada hona), owning a driver’s license, the right to cast a vote, legally marrying a partner and much more. It also comes with the sense of responsibility of having to fend for oneself officially since he or she is no longer on someone’s dependent list. It is also about being responsible about making many important life choices, including partner and career.

So, all of my readers, tell me, which do you think are the most important 3 words that you have ever said since becoming an adult? While I am sure there would be many, am putting down below a few which I would think make the top of the list.

Right at the beginning, there’s the cliched but very important “Mujhse shaadi karogi / karoge”. Arguably one of the biggest decisions that a young adult makes is to select his or her life partner and these three words signify a huge commitment that one makes, one that is expected to last the entire lifetime. These 3 words would count as some of the most important words said, and rightly so.

But there are others. As the early excitement wears off adulthood and responsibilities begin to make themselves felt, 3 more important words are uttered, this time, “Buy a house”. Important because, these signify a long-term financial commitment that the young adult makes from the meagre salary that he or she makes, all for the promise of “apna ghar”.

And then, as the years pass by, either due to personal choices or egged on by familial pressures, the next set of 3 words get uttered, these being “Start a family”. Again important, because, apart from long-term financial commitments, these words also add the responsibility of bringing up new lives in this world, with the right set of values, just as the adult was brought up, many years back.

There may be more, but I would guess the above 3 would largely be the 3 biggest decisions that any adult would take in his or her life, especially in their early adulthood years. I have to admit, I have uttered all the above, and whenever I said them, they felt to me at that time to be the most important words that I have uttered until then.

So then, which of these 3 were my most important words, you ask? Well, while at the time I found each of these to be very important, let me say that my most important 3 words are none of these, especially with the benefit of hindsight. So, what are my most important 3 words?

My most important 3 words were uttered some years back, in what I would like to think was a moment of enlightenment. And they were – “Become financially free”.

Let me explain. Like most adults my age, I was caught up in the race to build assets and fulfil responsibilities, and like all others, went about “ticking” off the various “goals” – namely marriage, first house, second house, children, nice cars, latest gadgets, name it. Thankfully, both me and my spouse Prathiba come from middle-class families and still remember those struggles that our parents went through in bringing us up. Somewhere, as we were zipping along merrily through this “tunnel”, prudence prevailed and we also started looking for the light at the end of it.

It was then (about 8 years back) that Prathiba and me decided that we would become first debt-free and then work towards becoming financially free. We achieved our first goal of becoming completely debt-free about 5 years back and since then are working our way towards achieving financial independence. For us, financial independence means having enough money or assets to take care of our major goals in life, allowing us to work towards one’s passions.

Following this and emboldened by our own experience, Prathiba left a lucrative private sector career and founded and successfully runs a Financial Planning firm called Finwise Personal Finance Solutions some years back, which helps families plan for and achieve financial independence.

As far as I am concerned, I spent a few more years in the corporate world to bolster our financials and have recently left the corporate world to join Prathiba and grow Finwise to the next level. This would have been unthinkable a few years back, but timely planning as well as diligent focus over the last few years has allowed us to take this bold step.

So, now that you have heard my story, what’s yours? Have you discovered 3 new words that seem important to you? Do you wish to get on the path of financial independence? Do write in to me with your thoughts at getfinwise@finwise.in.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image credit: Unsplash.com, Shot by Victor Rodriguez

Why I will not be investing in NPS despite the removal of tax on withdrawals!

Prathiba Girish Financial Planning, Government Savings Schemes, Pension, Personal Finance, Retirement, Tax Savings December 20, 2018December 19, 2018financial planning, national pension scheme, national pension system, NPS, retirement, Retirement planning, saving for retirement, Tax benefits, tax saving 0 Comment

National Pension Scheme is not as popular as the government would like it to be. In order to make it on par with other investment options, changes have been made constantly and the latest was announced last week. The biggest and most talked about change is that now NPS enjoys fully EEE status where it was earlier partly EEE and partly EET.

EEE (exempt, exempt, exempt) essentially means there are tax exemptions (up to specified limits) available while you invest, the capital appreciation when you stay invested is exempt from tax and there is not tax exemption when you withdraw.

At this point, a quick recap on how withdrawals from NPS are treated currently will help. It is compulsory to invest 40% of your accumulated corpus in an annuity scheme which gives you pension. The remaining 60% can be withdrawn after you attain 60 years of age. Currently out of the 60%, 40% can be withdrawn tax-free while the remaining 20% is taxable.

Going forward, once the changes announced are implemented, the entire lumpsum withdrawal of 60% will be exempt from tax. The pertinent point to note is that it is still compulsory to buy an annuity with 40% of the corpus and the pension received will be taxable. Therefore, EEE is only for the lumpsum withdrawals. While this is a welcome improvement, it is too minor to change one’s decision on whether to use NPS as a significant investment vehicle.

Taxation is evolving in recent years, as is evident with the long-term capital gains measure introduced for equity investments. I strongly believe that while it is an important factor, it cannot be the only factor in deciding on the vehicle of investment.

If you recall in my previous article I had said that I would not invest in NPS for several reasons, many of which are still applicable, hence my stand in principle remains the same. Let me recap the reasons why I would not invest in NPS, even in its improved avatar.

The corpus is locked in until one turns 60. I have come across numerous clients who want to retire as early as their late 40s. With NPS, your funds will not be at your disposal if you choose to retire early, the only option being to withdraw 20% of your corpus and investing 80% in annuity.

The annuity from NPS currently does not give good returns. It is possible to have an annuity with better returns through investments in mutual funds and if lack of knowledge is a constraint, one can engage a financial planner to help with the same. Compulsorily locking funds with the pension provider alongwith poor returns is a stiff price to pay for investing in NPS.

However, there is a possibility that one could still consider investing to the extent required for extra tax savings of upto Rs 50000 per year, given this change.

Lastly, if you are a central government employee, you can cheer some of the other changes like increased contribution by employer (Govt.), etc. While you stay invested, choose your asset allocation wisely and keep track of it regularly to make the best of the situation.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. Please reach us at prathiba.girish@finwise.in or +91 9870702277.

Hype and hysteria surround Indian weddings – what about your investments?

Prathiba Girish Financial Planning, Personal Finance, Retirement December 5, 2018December 5, 2018financial planning, investing, marriage, wedding 0 Comment

Weddings are big in India, it is an event for which people plan and save for years, sometimes decades. The recent celebrity weddings have the attention of the entire nation. There is so much interest in what did the bride and the groom wear, the jewellery, the locations, the food, the guests… Everything is scrutinised and fed for public consumption which we lap up hungrily. What’s wrong with that? Who doesn’t want to look at beautiful people and extravagant weddings? True, it’s all quite harmless to be an animated spectator to a celebrity wedding.

But look closer home and chances are that you will see the same thing being repeated. The focus is always on the event. Somewhere, one forgets that the wedding itself signifies a happy beginning rather than a happy ending.

Curiously, in my many meetings with customers, I have noticed that we often behave the same way when we invest. We speak to a lot of people, make a conscious choice of the product and pat ourselves on our backs when we actually execute our decision to buy. But what after that? Are these reasons for the investment not important to remember later, when one decides to take a sudden decision to liquidate that investment prematurely due to a sudden (hitherto) unplanned need?

All the initial research and focus signify a happy beginning in your investment’s journey and its extremely important to stay focussed even later during the lifetime of the investment. One needs to invest with a purpose and a clearly articulated expectation from the investment. Expectation is again a two-way street where you need to put down what is it that you will commit to do eg. quantum of money you are willing to invest, the time for which you will stay invested and therefore the kind of returns you expect to make.

With many of my clients, I have noticed simply naming the investment with the purpose brings in a lot more focus and avoids knee jerk reactions which could greatly harm the portfolio. For eg. if you are saving for your child’s education you could name it “Anu education fund”. The other thing which keeps you on track is understanding the volatility and having realistic expectations from your funds.

Remember, while the act of investing itself is the wedding, the financial plan required to support it is the marriage, and just like in a marriage, it takes a lot of effort and time to keep investments on track. You must review your investments with your planner at regular intervals and evaluate if you would invest for the same purpose in the same scheme if you had to do it now. If the answer is yes then you are sorted, else it’s time to rethink and learn from your earlier decision. Wishing you the very best in your wealth building journey.

We would like to thank our unnamed friends whose wedding image has been used in this blog, with permission.

There are some things money can’t buy, for everything else there can be a financial plan!

Prathiba Girish Financial Planning, Personal Finance November 5, 2018November 5, 2018Diwali, financial planning, money and diwali, prosperity 3 Comments

It’s the time of the year when there is so much hope, joy and festivity in the air. I have beautiful memories of Diwali. This was a festival we looked forward to as children and we would count the days to Diwali and await it with great excitement. I keep asking myself what is it about Diwali, that makes it so special.

Diwali caters to all our senses. It suggests bright colours and lights, the lovely fragrance of flowers, the sound of music and crackers, and of course the aroma and taste of great food. We used to stay in an independent house. The road which lead to our house was a dead end and I remember practising rangoli so that I did justice to my half of the road. My neighbour was really artistic and would effortlessly make neat, large rangolis in front of ours. The camaraderie we shared planning these rangolis brings a smile even today after twenty years.

We had marigold torans on the doors and the rose petals soaked in rose water in a mud “urli” lent a beautiful touch. And we would deck our hair with fragrant jasmine, without which no festival is complete down south. Diyas were simple and made of mud, not painted and nothing fancy, but the string of diyas on the compound wall made the whole house come alive.

The food is altogether another story, preparations would start days earlier with one sweet or savoury item being made in decent quantities every day. I remember the days when Amma would scream her lungs out and expect us to come and help. Both my brothers and me would help her for all of 15 minutes and the moment the first batch was ready we would scoot with our spoils. The coconut burfi, thenkuzhal, murukku, ribbon pakoda and karanji were made only on Diwali and we would attack the food with complete enthusiasm.

The crackers would be purchased at least a fortnight in advance and split equally amongst us under our watchful eyes, we would not budge during this exercise lest the sibling gets a better deal. Once this was done our trading would start can you trade your rockets from some flowerpots? The list would go on. New dress was non-negotiable. The rustle of silk and women in their beautiful kanjivarams is so intrinsic to Diwali.

Forward to today, I struggle to create similar memories for my children. They do enthusiastically help in making the rangoli, and help me string lights on the windows. But they are kind of taken aback by my excitement to make all the traditional sweets at home. Dutifully they do their bit and help me in preparing the same. My son asks “why are you making so much? Who is going to eat them?’’ They are not really interested in the traditional sweets or savouries unless I think of a way to incorporate some cheese, chocolate or some such thing into it. My defence that Diwali is not the same with store-brought sweets falls on deaf ears. The kandils and flowers are in place and so are the rangolis and diyas. What is needed to bring a smile to our faces and warm our hearts is the getting together of family and friends in the old-fashioned way.

This is a time when realization dawns that happiness and memories are formed from small inconsequential things and with meeting and greeting loved ones. It is truly like the ad “there are somethings money can’t buy”. So true! Think back and you will agree that your happiest memories are not about your material acquisitions but about experiences that have brightened someone else’s day along with yours. May the spirit of Diwali live in us all year through and help us value the simple things which bring so much joy.

We at Finwise wish you and your family a very happy, prosperous and safe Diwali!. Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

Title inspiration : MasterCard. The intent of this blog is to share a similar thought as what MasterCard intended – that life’s simple pleasures cannot be bought with money.

You can be young and without money, but can you be old and without it?

Prathiba Girish Financial Planning, Retirement October 24, 2018October 24, 2018 1 Comment

While young people who are just venturing off and finding their feet may find themselves without money, this brings to mind an image of positivity. It brings to mind carefree days, huge potential, unlimited possibilities and is indeed a happy picture.

When you flip the coin and look at a senior citizen who has no money, what is the image your mind conjures up? Is it of loss of dignity, dependence, despondence and tension caused by uncertainty about the future?

We all know the importance of being self-dependent in the twilight years. Yet somehow you find many a senior citizen cash strapped and living a very cautious, uncertain life, and depriving themselves of small luxuries which are so rightfully theirs, earnt over a life time of prioritizing everyone’s needs above theirs and being thrifty.

When I look around I find so many senior citizens who are asset rich but are having a tough time making ends meet. These are seniors who have real estate worth lakhs, but think very hard before booking a ticket to the music program that they have been really looking forward to.

In most cases while savings of their lifetime lies locked up in the form of a house, the children contribute towards their day to day needs. This automatically gives the children the upper hand and the parents think and rethink basic wants and needs since they have to dip into the pockets of their children.

On rare occasions where I have approached these senior citizens to monetize their house, seek professional help to invest the proceeds and live a life of a much better standard in a rented house, I am met with shock and disbelief. In all these cases the children are well settled and the estate is not going to make much of difference when its time. However the same has a potential of giving a wonderful, carefree life filled with much cherished experiences to the seniors. ‘

The common objections to this are

This is our hard-earned asset. How can we sell it?
At this age, you want us to shift houses every year or so? We are too old to manage house hunting, shifting etc.
What will we leave behind to our children when we are gone?

Each of us have our own belief systems. I feel shifting to a better house even if you are doing it repeatedly is worthwhile, especially given the fact that your second innings is with financial independence.

Of course, you are not expected to do the actual hunting and shifting, you will be surprised at the level of service available when you can afford the cost. All it takes is a proper real estate agent and a good mover and packer to get you settled.

Why worry about leaving behind something for your children? The greater worry should be of being at their mercy and expecting support in your life time. As for estate, I am sure your children will not have a problem when you leave behind wise financial instruments as compared to a tax-unfriendly, illiquid difficult-to-split piece of real estate.

I am sure there would be other views and would love to hear them. Do drop a comment on what path you would like your parents to choose if they are caught in a similar situation.

Finwise has significant experience working with retired customers and helping them live their second innings with financial security. We are a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

And you thought women can’t handle finances?

Brindha Rao Financial Planning, Finwise Woman, Personal Finance October 19, 2018October 22, 2018 2 Comments

Looking out at the azure sky with your morning cup of coffee, watering the ferns, listening to the wind chimes softly sing their song and smiling to yourself.

This is the dream my retired life is made of. A white picket fence is welcome too.

When you about to think how clichéd that sounds, let me tell you it is possible. The prime factors for the said situation being good health – physical, emotional and financial.

This image is for representative purposes only

How did I come up with this, you may ask. Meet Mrs. M, in her 80s, who I would like to call a Finwise Woman. I had the opportunity to meet with her some months back and interview her for this piece. As I walked into her spacious and well decorated apartment, I couldn’t help wondering if I had entered the wrong house. A confident mother, who brought up her kids all alone, who worked hard through her prime years, who is today proud that her children are well settled, who has excellent knowledge in the finance and investments world, who is seasoned in the trading market, Mrs. M is an inspiration to every one of us.

When life upset her with the sudden demise of her husband in her late 40’s, she picked up the pieces and decided to stare right back at the challenges ahead. She started out as a financial advisor for mutual funds, insurance, ULIP etc. as taking up a full-time job meant she would be away from her young kids, moved to be near her family and started re-building her life. From ground zero.

Often having heard and observed her family members who were stock market savvy, she began to invest small amounts in stocks. She managed her finances well and gave the best possible education to her children, and saved wisely.

Today she is financially independent, manages her home and investment portfolio, which is so good it can give any financial planner a run for their money! As I chatted with her over tea, I realised it was not just her courage that stood by her all through, it was also her willingness to learn under any circumstance , the confidence to rise above the challenges and her wisdom and forethought in planning.

This interview was so much better than any other luncheon meetings I have been to. I returned home with a head full of inspiration, a heart full of admiration and a story to write about.

Here’s to the Finwise woman in her. And in you.

This article is written by Brindha Rao, our guest writer. I would also like to thank an unnamed family friend, whose image has been used, with permission. She is an equally good candidate for being a Finwise Woman, being a savvy and financially independent woman in her own right.

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. If you wish to consult us, please reach me at prathiba.girish@finwise.in or 9870702277.

Should you invest in PPF or ELSS to save tax?

Prathiba Girish Tax Savings October 3, 2018 0 Comment

As some of you would have picked up in the recent financial news, the interest rate on PPF has been increased to 8% from 7.6% from this month. This will again lead to many people wondering if PPF is better than ELSS going forward.

While there are many options available to you for saving tax under section 80C, today we will compare PPF and ELSS. You my know that PPF is a debt investment and ELSS is an equity investment. Normally comparing the two would be like comparing apples to oranges. Since these are the most popular investment options for people who have not exhausted their 80C limits with EPF contributions, the comparison is justified.

Before we go about comparing the two, let’s understand the basic features of both.

You can invest in PPF by opening a PPF account at your bank or post office. The interest rate on PPF is announced on a quarterly basis. The current rate w.e.f 1^st Oct 2018 is 8%.

The maturity is 15 years, and it can be renewed for a block of 5 years after the maturity. It’s an illiquid instrument and forces you to park your money for 15 years. This can also work to your advantage if you lack the discipline to hold on to your investment for a long time.

Equity linked Saving Scheme (ELSS) is an equity mutual fund with a 3 year lock in. Please note that not all equity MFs provide tax benefits under 80C, there are certain funds specifically denoted as ELSS that only do so. Since it is equity there is not fixed return like PPF and the returns are based on the market performance.

Having said that they have beaten the PPF returns by a huge margin over the last 10 years. The below table shows returns for Rs 1 Lac invested in various ELSS schemes at the date of inception vs the same amount invested in PPF on the same date. As you can see, over an approx. 20-year period the money has multiplied 55 times in ELSS vs about 5.3 times in PPF. Even over a 5 year period, ELSS has multiplied 2.6 times vs 1.5 times for PPF.

Scheme Name	Launch/ Investment Date	Amount Invested	Current Value as on 25-09-2018	ELSS Scheme Returns (%)	PPF Current Value	PPF Returns (%)
Franklin India Taxshield-Growth	10-04-1999	1,00,000	55,36,304	22.89	5,32,755	8.97
HDFC TaxSaver-Growth Plan	31-03-1996	1,00,000	51,10,910	19.1	7,65,027	9.46
ICICI Prudential Long Term Equity Fund (Tax Saving) – Growth	19-08-1999	1,00,000	36,74,500	20.75	5,11,967	8.92
IDBI Equity Advantage Fund – Growth Regular	10-09-2013	1,00,000	2,64,000	21.14	1,52,544	8.7

Source: Advisorkhoj.com

Bear in mind the following while making a choice

Invest with a long-term horizon of 15 years and stick to it, do not link your investment time horizon to the exit clause of the scheme
The returns from equity will be volatile and may even be negative over the short term. Be prepared to hold on to your investment despite double digit negative returns in the interim. If you can digest volatility, see that performance is negative in short runs and still not panic, ELSS may be a good option
Importantly your portfolio will have an asset allocation towards both debt and equity. You should choose PPF if you are looking to augment your debt portfolio, though ideally debt investments are made for shorter time frames and equity for longer time frame
Last but not the least, important to remember the choice of ELSS fund is also important, and the choice must be made with adequate diligence. In case you are not equipped to do that, you should reach out to your financial planner.

Now that you have seen the pros and the cons of both, what should you do? If your investment is for the long term (i.e. at least > 7 years), I would recommend you invest in ELSS. Expect volatility along the way, don’t panic, don’t withdraw in 3 or 5 years, tighten your seat belts and watch the magic of wealth creation unfold. If the volatility is something you cannot handle, PPF would be your option, but remember that it will only preserve your wealth.

Should you invest in National Pension Scheme?

Prathiba Girish Retirement March 17, 2017 0 Comment

Should you invest in National Pension scheme?

I have been asked this question repeatedly over the last couple of months. Hence, I decided to pen down the pros and cons that you need to consider while deciding if the product is meant for you. Before we get started on the same, let’s summarize all that is known about NPS. These are facts that are available aplenty all over the web but for ease of understanding have summarized below.

What is NPS?

National Pension System (NPS) is a scheme initiated by Government of India to provide old age security and pension for all citizens of India. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Why was NPS introduced?

This scheme was introduced by the government to shift from defined benefit to defined contribution scheme. It was initially introduced to all government employees and was mandatory for all employees joining service after 1st Jan 2004, it was opened to all citizen in 2009.

Who can Invest in NPS?

Any Indian Citizen (both resident and non- resident) between the age of 18 and 60 on the date of submission of application can join NPS.

How to apply for an NPS Account?

You can procure your PRAN application form from any of the Point of Presence – Service Providers (POP-SP) you wish to register with. One can also apply online.

Who manages the money?

You get to choose from the seven provident fund managers mentioned below andyou can change the fund manager once a year without any exit load.

HDFC Pension Management Company Limited
ICICI Prudential Pension Funds Management Company Limited
Kotak Mahindra Pension Fund Limited
Reliance Capital Pension Fund Limited
SBI Pension Funds Private Limited
UTI Retirement Solutions Limited
LIC Pension Fund Ltd.

How does this work?

The scheme is based on unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon joining. Subscriber can contribute directly or through the Employer. With PRAN, the disadvantage of shifting the NPS account due to change of employment is done away with, since PRAN is portable across geography and employer. An investor can open only one account during his/her life span.

There are two schemes available for subscription

Tier I NPS account

This is known as retirement account, withdrawals from this account is restricted. Tax benefit under section 80CCD is available only for investment in tier I account. On retirement or closure of the account, part of the corpus accumulated has to be compulsorily assigned towards annuity. Currently 60% of the corpus can be withdrawn and the rest will be retained to provide annuity. Minimum annual contribution for this account is INR 6000, however minimum contribution while opening this account is INR 1000.

Tier II NPS account

This is an investment account, withdrawal from this account can be done at any time as per need. No tax benefits are available for this account. In order to open Tier II account one must compulsorily open a Tier I account. Minimum annual contributions for this account is RS 250 subject to year-end holding of a minimum of INR 2000, however minimum contribution while opening this account is INR 1000.

What are the different fund options?

NPS offers 3 fund options

Equity – investments in equity funds capped at a maximum of 50%
Corporate bonds (C) – no maximum cap, it can be upto 100%
Government securities (G) – no maximum cap, can be upto 100%

You have two options for deciding the percentage allocation towards the 3 funds. Under Active choice you get to choose your own asset allocation subject to a maximum of 50% in equity. The allocation can be changed once every financial year.

Under Auto choice the allocation is done automatically as per your age. You can shift from Auto to Active once in a Financial Year.

What about maturity and premature withdrawal?

On exit at retirement age, 60% of accumulated corpus can be withdrawn as lumpsum, of which only 40% tax free and 20% taxable. The remaining corpus (40%) will be utilized to purchase an annuity to provide monthly pension. However, the subscriber can choose to not withdraw as lumpsum and utilize the entire corpus for purpose of annuity.

On exit from NPS before retirement age, which is possible after 10 years of starting the scheme, only 20% of the corpus can be withdrawn and the remaining 80% needs to be compulsorily used for purchase of annuity

On death, the entire corpus can be withdrawn as lumpsum by the nominee/legal heir.

What are the most compelling reasons in favour of NPS?

Tax concessions

For NPS, tax deduction for contribution can be done under three sections

Employee contribution

Contribution upto Rs.1,50,000 under section 80CC (this includes mandatory deduction for NPS)
Additional Deduction for voluntary contribution upto Rs. 50,000 under section 80CCD

Employer Contribution

Upto 10% of basic salary put into the NPS by the employer on behalf of the employee is deductible without any limit.

Cost structure

The expense ratio is very low and ranges from 0.1% to 0.21% when compared to 2.00% and higher in equity Mutual funds and insurances. This can boost returns over the long term substantially

Liquidity

Unlike many other products this is truly a long-term product meant to secure your retirement. It can be an advantage given that it forces the subscriber to stay invested over long periods of time.

Ability to tweak Asset Allocation

Allocation to equity and debt can be changed once a year under active choice.

What could be the disadvantages of NPS?

Compulsory Annuity

NPS investments mature when the subscriber attains age 60. If the corpus is in excess of Rs 2,00,000 at maturity then 40% of accumulated corpus has to be compulsorily used to buy annuity. Simply put, in this case you would pay a lumpsum (minimum 40% of accumulated corpus) to receive a series of payments which could last for a specific period or your life time.

The returns on annuity in India has been extremely poor. Assuming you get great returns during your accumulation phase, the investment can still be undone with very poor returns during your annuity phase. Further pension received from annuity is taxable.

Taxation at maturity

NPS maturity proceeds are taxable, as mentioned earlier only 60% can be withdrawn at maturity out of which 40% is tax free whereas tax is payable on the remaining 20%. Further pension received from annuity is taxable.

Liquidity

While the lock in period is huge, this apparent lack of liquidity can work to the advantage of investors who discontinue investments started with a long term horizon at the smallest of pretexts and do not stick to their retirement plans. For disciplined investors who earmark funds for retirement and persist with the plan, this can be a huge drawback..

Tax deductions

I am assuming that the 80C limit is taken care of by EPF contributions which is the case with most salaried investors in the 30% tax slab. For others where investments need to be made to avail of 80C exemptions, ELSS is a better bet (more on that in my next article).

Contributions to NPS are exempt from tax under section 80CCD to the extent of INR 50000 per annum. For a person in the 30% tax bracket this could lead to tax savings of approx. INR 15000 per year but for those in lower tax brackets, this amount is reduced to INR 10000 and INR 5000 respectively and does not provide a compelling argument in favour of investing in NPS.

Cap on Equity Exposure

The expense ratio being low is a huge plus and a very compelling reason to invest, but one needs to bear in mind that maximum asset allocation to equity under active choice is pegged at 50%. Given the long-term nature of NPS, this maximum cap of 50% limits the upside which aggressive investors could get by increasing their allocation to equity.

Given the overall arguments, I will not be investing my money in NPS in its current avatar and would rely on my discipline and knowhow to build a sizeable corpus. As an investor, the knowhow part can be outsourced to your financial planner. If you plan to give this a miss do ensure that you have discipline to set aside finances for your retirement and have the will power not to dip into your nest egg till you retire. If this seems unlikely you should consider investing despite knowing the pitfalls!