Financial Planning: Malhar Majumder
I am 18 and in my first year of college. I have been working in holidays to save for my future, and have saved Rs 50,000 in the past three years. Of this, I put Rs 20,000 in fixed deposits (according to my father’s suggestion). I have the remaining in cash. I try to keep my expenditure limited to my pocket money of Rs 1,500 a month. Please help me utilise my money better for the future.
What you have done so far is excellent. You are already a saver, and on the right track. Only, now you need to become an investor. Since you have started early, you have the time on your side. Invest your excess money in two mutual funds: 60 per cent in large cap, i.e. a mutual fund that invests in big companies; and 20 per cent in medium and small cap, i.e. a mutual fund that invests in medium-sized companies. The rest 20 per cent may be kept in a bank, which will see you through sudden need of cash. My second suggestion would be to monitor the performances of these funds you have invested, but don’t get worried or excited at any stage. If you can carry on with this advice, the future is all yours.
I am 26, and a freelance photographer. For retirement planning, is Public Provident Fund (PPF) better or is it the New Pension Scheme (NPS)? I am not familiar with the latter. How does it work? I can set aside around Rs 5,000 per month for my retirement. Is that enough to build a sufficient corpus over 20 years or so? How much would I approximately accumulate at the end of this period?
Both PPF and NPS are decent a choice for building a retirement corpus. These offer opportunities for growth, as well as save on taxes. While PPF offers a guaranteed return; the return in NPS will vary, depending on your choice of pension fund manager and their offerings. Add to that, PPF has a tenure of 15 years (though this can be extended), while the tenure of NPS is till retirement. Also, while you can take out lump-sum accumulation from PPF after the tenure, there would be a mandatory pension in NPS. However, going by your age, consider NPS over PPF. You may also open both Tier-1 and Tier-2 accounts there, and channelise your yearly investments in a way that a minimum Rs 6,000 annually is invested in Tier-1, and the rest in Tier-2. The Tier-2 account will offer you more flexibility in terms of liquidity. However, if you are opting for NPS, you need to keep an eye on the performance of your chosen fund vis-à-vis the other funds available. Without knowing your current lifestyle and future expectations, it is difficult to give an opinion regarding what would be an ideal monthly investment. Keeping this limitation in mind, a regular monthly investment of Rs 5,000, which, if revised upwards at regular intervals of say, one year, and if invested prudently for the next 35 years or so, may accumulate to a very decent corpus.
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The writer is director, Gliese Consulting. Views expressed are his own. Send your queries at firstname.lastname@example.org