The Indian youth is not saving as much as is required instead pays more tax. Individuals who use tax-saving financial products do not choose them with long-term objectives in mind.
Most of people uses the Public Provident Fund (PPF) and the Employee Provident Fund (EPF) to invest and take advantage of tax benefits. The next most popular products are home loans interest and life insurance premium. Only a minor component of their incomes is invested in equity-linked saving schemes (ELSS) and tax savings mutual funds (MF).
National Pension System (NPS) is a new defined contribution pension scheme. Besides providing NPS tax benefit, it also helps investors create a retirement corpus. Financial planning is crucial if you want to achieve various goals, such as buying a home, getting married, educating your children, and providing for a comfortable retirement. Following a disciplined approach using these five steps will help you meet your goals.
- Start early: Most of us consider retirement to be a distant future and wait until our forties to start planning. However, starting early will provide investors the benefit of the compounding effect of earning returns on the earnings. In addition, individuals must invest during the first quarter of the financial year. This provides them with sufficient time to make any re-adjustments that are required to meet their overall objectives.
- Choosing the right asset mix: NPS allows subscribers to invest in equity, government securities, and corporate bonds. Choosing the optimal asset allocation among these products will help maximize the returns on this tax-saving investment product. A younger subscriber may invest the permissible maximum in equities to earn higher returns in the longer period. Alternatively, a person closer to retirement needing stable returns may choose to invest in government securities. On maturity, 60% of the accumulated corpus may be withdrawn and the balance is converted to an annuity plan, which provides a regular income through pensions.
- Diversify: Many investors choose to invest in one or two financial products. However, negative market conditions may significantly impact their returns. To avoid this risk, diversifying the investment portfolio to include different kinds of assets is advisable. This mitigates risks by ensuring that even if one product is not performing well, the shortfall in returns could be recouped through other investments.
- Stay updated: It is very common for individuals to make an investment and then forget about it. This is a blunder, because staying updated on the market conditions and their effect on the portfolio performance is crucial. When you are aware of the portfolio performance, you will be able to make the necessary changes to mitigate market-related risks and safeguard returns as well as investment principal.
- Remain disciplined: Economic conditions and emotions play a vital role in the decision-making process. Investors may discontinue investing and/or exit their investments due to severe economic conditions. However, it is important to bear in mind that in addition to being a tax-saving option, NPS is a long-term plan. Subscribers must continue following a disciplined approach towards their investments to ensure profits in the longer run.
Investing is not only a tax-saving option, but also a disciplined approach to wealth creation over a longer period. If you haven’t already started, the time to commence is now and stay disciplined to ensure financial stability and security during the post-retirement years.
