Building a retirement corpus

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

Retirement planning has become a priority for investors seeking peace of mind and financial independence in advance years when the source of income dwindles. Relying on pension or provident fund alone, however, may not assure a financially comfortable retired life. It is, therefore, important to build a healthy retirement corpus through regular investments. Below are two excellent instruments to help you in this pursuit:     

Systematic Investment Plan (SIP) - Monthly savings and investment via SIP route is the most effective way to build a retirement fund. To accumulate inflation-beating returns, include equities in your portfolio. An SIP in equity instruments helps in averaging the cost and reducing the risk of timing the market. It makes the magic of compounding work for you, brings the much-needed discipline to investing and provides the flexibility to decide the amount, period and duration of the investment. 

National Pension Scheme (NPS) - NPS is a defined contribution based Pension Scheme launched by the government to extend old age security coverage to all citizens. The returns on the NPS scheme is market-linked. You can opt for an aggressive (heavy on equity), moderate (balance of debt & equity) or conservative (heavy on debt) profile depending on your age and risk taking capacity. Further, NPS qualifies for INR 50,000 (1B) or up to 10% of Basic & DA (no monetary ceiling) under 80CCD (2). This rebate is over and above 80 CCE limit of INR 1.50 lacs.

Below is a comparison of investment returns from various options to create a retirement corpus with a monthly investment of INR 5,000.

*EPF & PPF guaranteed return @8.7% & 8.75% respectively

*NPS & MFs, return assumed @12% & 15% respectively; subject to market risk

The graph clearly shows that the corpus generated by EPF and PPF may not be sufficient to make the ends meet at the time of retirement. Thus, exposure to equity markets, through Mutual Funds or NPS, is a must to generate a healthy corpus for a stress-free retirement.  

Originally published in The Times of India , Feb,19.