Important Principles Of Financial Planning

 

So, how should you conduct your financial life in the New Year? Read on to know the path that you must follow…

Well, another year has just rolled over. We, at Axis Bank wish that all your dreams are fulfilled in the coming year. Bearing this in mind, to ensure that the New Year keeps you financially healthy indicated below is what Budget could have in store for you and how you should adapt yourself to it…

• To begin with, it is NOT the time to replace your financial plan with a brand new one as you would do with a calendar. It is important to maintain continuity even while making small adjustments and course corrections to your existing plan.
• Your income may not witness the same jump in 2013 as it has over the past few years, simply, because corporate India is still reeling under the slowdown that our country has been witnessing off-late. So, you may need to tone down your expectations on income growth.

• On the expenditure front, the double digit inflation at the consumer level still remains a disturbing reality. You would do well to wisely tighten your belt even while hoping for some respite.

• Your savings plan may have taken a hit recently due to the unrelenting price rise. It’s time for you to put it back on track by curbing expenditure. The lethal combination of low income growth and high expenditure growth could adversely affect your future financial health. Maintaining your target savings rate should be the top priority. Remember, financial prudence demands that you pay yourself first.

• Your investments could need a bit of tweaking. Interest rates are likely to drop in the New Year. You would do well to lock into fixed deposits now at attractive rates. Gold has been on an uptrend for the past decade and may justify some caution. Equities have gone nowhere since 2007. Its recent performance has been inspiring and could well throw a pleasant surprise in 2013. Make sure you have sufficient exposure so that you do not miss the bus. Real estate prices have remained at uncomfortable levels recently and so may be the case in 2013.

• Borrowing costs are likely to come down in 2013 in tune with the general fall in interest rates. However, this should not stop you from trying to repay your loans and striving to become debt free at the earliest.

• Your current insurance could need some review to account for major changes in your family/professional circumstance and in your income/expenditure pattern. Any increase in liabilities should also be taken into account. And, do remember to pay your premium in time to keep your policies alive.

The fundamental principles of finance remain unchanged as ever. Just a bit of dynamism is what would be required to tide over the temporary circumstances. And, here’s wishing you the best of financial health in 2013!!!

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Should You Prepay Your Mortgage Or Invest?

Home loan

The home loan not only offers tax benefits but also helps build an asset that has the potential to appreciate in value – property. The tax benefit is not only available for interest payments but also for principal repayments. Besides, if Rakesh is a first time home buyer, he gets an additional tax benefit of Rs 1 lakh on the interest paid on the home loan. In other words, the home loan should be left untouched. Rakesh should continue to pay the EMIs as and when they become due.
The tax benefit is not only available for interest payments, but also for principal repayments.

Car loan

Unlike a home loan, a car loan does not help build an asset that will appreciate in value. In fact, once the car is purchased and starts being used, it will only depreciate in value. Besides, car loans are expensive. Clearly, Rakesh should repay the entire car loan. If the bank levys a prepayment charge on Rakesh, he should negotiate this with the bank and either have it reduced or cancelled. In any case, even if there is a prepayment charge, he should pay this off and repay the entire loan.

Invest the balance

Now Rakesh will be left with Rs 11 lakh (Rs 15 lakh – Rs 4 lakh used to repay the car loan). He should invest this money. In fact, this money will provide Rakesh security that in case of any unfortunate circumstance due to which he is unable to repay the entire home loan, he can use these funds to do so. Rakesh should invest this money based on his risk-taking capacity and tolerance (either invest in gold, debt, equity, or partly in each of these options).
Endnote
Not all loans are bad. If a loan helps you build an appreciating asset and offers you tax breaks on capital repayments and interest payments, it’s worth holding on to it. However, repay loans that are pure expense loans with no tax breaks.

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Securing Your Child’s Financial Future

 

How much life and medical cover is required for you and your children were some of the topics discussed in this week’s personal finance call-in show Smart Money. Host Vivek Law, editor, Bloomberg TV India, and Monika Halan, editor, Mint Money, also talk about strategies to build corpus in the long term. Edited excerpts from the show aired over the last weekend:
Vivek: Monika, when you have a child, how do you plan for the child’s future?
Monika: Most people get really worried when there is a child in the family and they start knee-jerk investment plans and unfortunately they all end up buying child plans. But I think we need to look at it a little differently. Step back and look at what is the purpose of financial planning for the child and it is always not about the products that you are buying. Financial products really come at the end of the process. So I would like to break it up into two parts. One, you look at protection, and the second, you look at products. So when we look at protection, the first thing is to insure your life and not that of the child. When you buy a child plan, you end up insuring the child’s life and if you as the breadwinner is not there, then the child and the family has the money to go on for education and the other goals. So in protection that’s pretty much the first thing.
Vivek: That would mean you take a basic term cover for yourself as a parent?
Monika: Yes, basic term cover which should be 8-10 times the annual income. The second of course is a medical cover. You are protecting not just the child’s medical bills but also your savings which gets depleted due to an emergency.
Vivek: So how much should that cover be? I know lot of parents who have Rs.1-2 lakh medical cover from their employer and they think it is enough.
Monika: Per child, I would say have between Rs.2-3 lakh. If you do not have your office giving you an additional cover, I think it makes sense to take a family floater on top of that, maybe another Rs.5-7 lakh. So that in case there is an emergency, you are prepared. One more very important thing which most of us don’t do is to write a will. It is a very scary process when you sit down with your partner. We have been through the process, it really makes you think of what will happen to your children when you are not there to drive the money which may come as a large corpus. So actually simulate it and then build that plan, write that will, put down very detailed plan of when that insurance money comes how is it to be used, what kind of investment products are to be used and then only make that plan.
Vivek: What about the whole process of corpus building? It will take 15-20 years. What’s the best way?
Monika: The Public Provident Fund is a really fantastic tax-free instrument. Exhaust the limit of Rs.1 lakh. You also need equity exposure. You have large-cap and balanced funds for that. Since you are looking at 15-20 years, you can have mid-caps if you have risk appetite. And I wouldn’t go against a 5-10% exposure in a gold fund. So these are your three basic building blocks. The second part is in whose name is the money? I am going to take a fairly radical view here and say do not buy it in the child’s name. Are you sure what your child is going to be at 18 or 20 years of age? What if he wants to blow it up in a start-up and you want him to study further? So its not that you want to hold him back but possibly that maturity may not be there to deal money. So make the investments in your own name.
Vivek: So there should be four categories—large-cap, balanced, mid-cap and gold funds. However, the number of schemes could vary depending on the amount of investment or should it be no more than 6-8 anyway.
Monika: That’s right. No more than 6-8 funds because you don’t need that much diversification.
Audience queries
Vivek: Sreekar, you seem to have bought a lot of mutual funds?
Sreekar: There were a lot of recommendations from family friends. Hence, I put lot of money in different funds.
Vivek: Right, but I think way too many funds, isn’t it?
Monika: What we see in your portfolio is something that we see in a lot of other portfolios. Sreekar, I have looked at your SIPs and it seems that you are a very high-risk investor. Do you see yourself as one?
Sreekar: Yes, you are right because I do not have dependants. But I am getting married soon.
Monika: You will have to cull out two of the mid-cap funds and buy a large-cap fund, even maybe a balanced fund so that there is more balance in the portfolio. Look at funds as a part of your diet. You can’t just have proteins. You will need the moderating influence of carbohydrates. Don’t just go fully into one part of the market. Spread it out and when markets are doing well and when mid-caps are doing well, it’s very attractive to buy those extremely high-return funds but that’s where portfolio diversification is important and in times like this, if you had two large-cap funds, your portfolio wouldn’t be in the red today. I think that really is one of the big changes that you need to make. You have another question on systematic transfer plan. What exactly is your need?
Sreekar: There is a lump sum in my savings account. I want to move it to an account so that it can take care of my SIPs and I am also planning to buy a flat.
Monika: For people who may not know, a systematic transfer plan is a way to make your lump sum get invested slowly into an equity product and not at one shot. You buy a debt fund and then slowly transfer that money at periodic intervals into equity. It’s a way of averaging out the price. In your case, you seem to be in the 20% tax bracket. The fund for you is a ultra short-term debt fund.
You will pick the growth option and you have to remember that you will buy the ultra short-term debt fund from the same fund house whose equity plan you want to transfer the money to.

Courtesy: www.livemint.com

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Factors You Should Consider For Prudent Asset Allocation

 

While all of us aspire to create wealth for ourselves and for the comfort of our families, in today’s time of rising cost of living, it is imperative to understand a host of factors before one binges into a risky asset class such as equities to achieve one’s life goals. Although, equities appear the best investment option to make the most of in a stock market rally, it is not very wise to nest all eggs in one basket. This is sometimes comprehended by people only in conditions of adversity (such as a sharp decline in stock market), when investors have parked a large portion of their corpus in a particular asset class (in this case, equities).

It is vital for you to understand that not all assets move in the same direction at the same time. If equities are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments, real estate will also be witnessing a down-turn at the same time or vice-versa. Hence it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal turbulence. You see, planned asset allocation acts as a shield to protect your wealth during uncertain economic conditions and market volatility.
Allocating your hard earned money wisely…
Well, here are some factors which one must take while you intend to allocate your assets – hard earned money wisely, as they provide a comprehensive picture.

• Your Age:

Your age is an important factor that you must consider while deciding your asset allocation. If you are a young investor of say 20-30 years, you can consider allocating a large percentage of your portfolio in risky assets, such as equities. Being young gives you ample amount of time and opportunities to recover from any possible setbacks in the value of the portfolio. If you belong to the middle age group (30-55 years), you must aim to create a moderately risky portfolio and should not invest your entire savings in equities. On the other hand, aged investors, nearing their retirements (55 years & above), should follow a highly conservative approach when planning their asset allocation and prefer debt or fixed income instruments so as to preserve the principal amount.

• Your Income:

The amount you invest is a function of the amount of income you earn. Any appraisal in earnings, will impact your discretionary income and hence the amount of investment. If you are into service or employment, drawing a fixed salary every month, you can allocate your savings systematically to both risk and safe instruments depending on your age. However if you are in the business industry, your profits and losses are not fixed in nature. While higher profits will lead you to expand your business or invest in various financial instruments, a year of losses will have a direct bearing on your ability and capability to invest. Hence, it is imperative for you to allocate your assets keeping in mind your future income growth potential.

• Your Expenses:

In order to keep your financial health in pink in the long-term, it is important that you live within means and curtail your unnecessary expenses. It is this strategy which will enable you save a large portion of your monthly earnings, which can be deployed in suitable asset classes (depending upon your age, income, risk appetite and nearness to goal). We recognize that while certain expenses such as loan repayments, rent, grocery bills etc. cannot be avoided; you can always stream line few of your unnecessary and extravagant expenses. This will enable you to increase the net free cash available for asset allocation, which in turn if invested wisely can enable you to create more ‘wealth’ and fulfil your financial goals.

• Nearness to your financial goals:

Your nearness to your financial goal is also relevant while doing financial planning. If you are many years away from the financial goal, you should ideally allocate maximum allocation to the equity asset class and less towards fixed income instruments. So, say you have a financial goal of getting your daughter married well after 20 years from now; it would be prudent to invest in equities (either through the direct route or through equity mutual funds). It is noteworthy that the concept of allocating funds to different asset classes based on your nearness to goals helps not only to diversify risks across different asset classes but also in rebalancing your portfolio when you are closer (in terms of number of years) to the achievement of your financial goals. When you are drawing nearer (3 years) to your financial goal(s), you must shift your corpus to fixed income instruments to safeguard and avoid risk asset classes to preclude wealth erosion.

• Your Risk Appetite:

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan. So, if your willingness to take risk is high (aggressive), you can skew your portfolio more towards the equity asset class. Similarly, if your willingness to take risk is relatively low (conservative), your portfolio can be skewed towards fixed income instruments, and if you are a moderate risk taker you can take a mix of equity and debt respectively.

• Your Liabilities:

If you as an investor have high liabilities, then even though you may be willing to take high risk, your financial condition would not allow you to take high risk. You would be a risk-averse investor. Irrespective of age, willingness to invest, nearness to his goals, risk tolerance or any other factor, you will be forced to only make safe investments as you cannot afford to let your investments suffer any setbacks due to market swings. Also, you must avoid investing borrowed money in risk assets such as equities as any losses endured here might worsen your financials.

• Your Assets:

As an investor, it is imperative to first analyse your existing portfolio before allocating funds further. For instance, if a huge chunk of your portfolio is dominated by real estate, then you must diversify your assets in a manner that reduces your allocation to risk assets such as real estate or equities and increase investments in safe instruments such as debt, fixed deposits and cash.

Diversification of assets gives you a lee way to counter market uncertainties and acts as a stabiliser for your portfolio when a particular asset class crashes. Broadly an effective asset allocation offers the following 4 benefits which are:

1. Lowers your investment risk
2. Reduces your dependency on single asset class
3. Protects your investments during turbulent times
4. Makes timing the markets irrelevant for you

What should be your Ideal asset allocation?

Under ideal circumstances…

Investors whose objective is to achieve long term capital appreciation and have an aggressive risk appetite can invest upto 70% in risk assets such as equities and related instruments, and the remaining 30% in safer asset classes such as debt, fixed deposits and cash instruments.

Moderate Investors, who aim at providing some stability to their portfolio along with capital growth, must invest upto 60% in equities and balance (40%) in debt, fixed deposits and cash.

Conservative Investors’, who prioritize the protection of their capital must upto 70% in debt, fixed deposits and cash, while the rest can be diversified by investing in quality equity instruments.

However, before you follow this ideal asset allocation, be cognisant about the aforementioned facets which we discussed. Asset allocation safeguards the overall value of your portfolio from the misfortune of any particular asset class. It is not a one-time process and you must keep reviewing your asset allocation from time to time to ensure it is in line to achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

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Importance Of A Financial Advisor

 

Creating a financial plan is not everyone’s cup of tea. Sometimes you may not have the time; sometimes you may not have the required skill set and most often, you may not have the inclination to undertake such an exercise. So, how can you go about acquiring a suitable plan? Simple; delegate the job to an expert!

At present times, the financial markets are flooded with a variety of financial instruments with varied characteristics and maturity periods. Previously you had to be content with bank fixed deposits and investments in gold, real estate, insurance products and equities. But at present times, you also have the choice of mutual funds, ULIPs, insurance products with riders, gold ETFs and SIPs. Even though these instruments are easily available, it is difficult to choose appropriate instruments and construct a portfolio which matches and meets your unique needs.

Enter financial advisor

Keeping this in mind, you need the services of a professional financial advisor who is qualified to suggest investments in suitable financial instruments. Financial advisors construct your financial portfolio by considering your income, age and other parameters. Moreover, they also give you valuable advice on how to revisit your portfolio when there is a change in market conditions, your income levels or responsibilities. They help you invest the spare/excess cash available with you in a productive manner so as to reduce your tax liability and maximize gains. The advice given by a financial advisor also helps you to negotiate salary components with your employer which will indirectly help in reducing your tax burden. In case you are earning in foreign exchange, the services of financial advisors will help you deploy those funds into the most suitable investment avenues.

Lastly, the services of professional financial advisors become imperative because one size does not fit all; your income levels, expenditure and tax liabilities are likely to be different from those of your friends and acquaintances.As a result, what has worked for them may not work for you as well.

Conclusion

While choosing a financial advisor, be sure to go by good references and not the lowest price tag. Then, once you have chosen a financial advisor and are convinced that his or her advice is based on scientific principles and sound experience, you must trust his or her advice. Most importantly, remember that for your financial planning exercise to be successful, even if it constructed with the help of the best financial advisor, you must have patience and perseverance. Some financial goals take relatively long to materialize.

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How To Create A Personal Financial Plan

 

Today, it is imperative to supplement your savings with a sound Investment Strategy which is why financial planning is a must! For many of us, creating a financial plan may seem like a daunting task and leaves us unwilling to even start. However, the truth is – it’s simple as well as beneficial! Its All About Money throws light on 8 easy steps – starting from goal planning, investment planning, risk management, retirement planning, and so on; that will help you create your financial plan from start to finish.

FOLLOW THE STEPS BELOW TO CREATE YOUR OWN PERSONAL FINACIAL PLAN

STEP 1. GOAL PLANNING

• Identify your goals & prioritize them
• Assign a value to each goal
• Save for emergencies

STEP 2. INVESTMENT PLANNING

Make a monthly budget where you divide your income into three parts
• Savings
• Expenditure
• Investment
Your investment plan depends on below factors:
How much risk you can take depending on your demographics such as Age, Income, Number of dependants, etc.
• How much risk you are willing to take
• How much time you can spend on monitoring the investment
• Your purpose for investing

STEP 3. RISK MANAGEMENT (INSURANCE)

There are many allied benefits of getting insured if you plan carefully, such as below:
• Your dependants are secured in case of your sudden demise or in case of an accident that leaves you unable to earn
• You can insure an asset that you have purchased (Your Home) using loan
• In case of hospitalization or critical illness, the cost will be taken care of through insurance
Note: It is advisable to start Insurance planning early, as the premium rates are higher when you are older

STEP 4. RETIREMENT PLANNING

One must start laying foundations for one’s retirement from the start of one’s career. Long term investment options are best suited
Equity Investment helps you build serious wealth over the long term. Besides, the risk in equity investing considerably reduce if one stays invested over a long term.
Other retirement investment options are –
• Pension Plans
• Provident/Gratuity/Superannuation
• Public Provident Fund
• National Pension Scheme

STEP 5. CREATING THE FINANCIAL PLAN

Planning your cash flow: Keeping an account of your current and future cash flow will help you plan your investments, stay liquid and deal with emergencies comfortably
An Organised Budget: The numerous, one-time, small expenses add up to land a giant blow to our financial health.
A budget serves three purposes:
• Gives a detailed itinerary of your expenses
• Shows where you can cut down expenses
• Helps you spend and save wisely
• Regulates your expenses
Loan Management: Managing your loan involves –
• Allocating funds for EMI
• Planning large repayments

STEP 6. TAX PLANNING

• Invest in tax-saving investment options
• Make the investment early to enjoy the interest for the entire year
• Compute your taxable income for planning your cash flows
• Use all possible tax deductions that you are eligible for, in order to minimise your tax burden

STEP 7. REVIEWING YOUR PLAN

Financial Planning is an ongoing process and you must review your plan regularly, because the circumstances in your life change. Any major changes in your life such as marriage, children, education & job change must be accounted for to consider altered circumstances.
This is because as per your life situation:
• Your risk capacity changes
• Your asset allocation gets altered
• Insurance needs will arise or get altered
Review your plan every six months or annually and monitor your investments regularly to protect yourself against sudden shocks.

STEP 8. ESTATE PLANNING

• Create a list of all your assets
• Get familiarised with the estate devolution rules to avoid disputes later
• Create a Will after discussing it with your family and friends
• Place your Will with someone or somewhere that can be accessed easily by your family
In the end, it is your wealth that you will be giving away, so plan for it wisely and generously.

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Different Types Of Investment Opportunities

 

Every day brings a new twist to the sentiment of Indian investors. If one day the stock market is up 500 points, the next day, it is down by nearly the same amount or even more! Doesn’t this confuse you? Not only this, there are a number of aspects that would be on your mind.

Some of these are –

• The equity market has gone nowhere in the last 5 or 6 years. Even long term investors are losing patience and starting to question the usefulness of equities.
• Gold prices have had wild swings much to the dismay of the average Indian investor who always believed in gold as the “safest” investment.
• Debt mutual funds’ performance took a sudden nasty turn just when investors had loaded up on long term funds in anticipation of the interest rates sliding. This has shaken investor confidence.
• On top of all these woes, investors had to contend with Ponzi schemes and blatant frauds in the commodities spot market.
• Real estate prices have remained unaffordable and even unbelievable in some cases putting them out of the average investors’ reach.

Well, investors are having it tough no doubt. It’s a storm out there with literally no place to hide.

Sticking to investment fundamentals

As with everything else in life, investments too will have their ups and downs. It is the reality after all. There will be good periods and also the bad ones. In this scenario, using a sensible approach is the only way out. Disciplined savings habit, wise investments with adequate diversification and a clearly defined asset allocation pattern based on a financial plan aren’t just bookish gyan to be brushed aside. Just as sound technique is essential for success in cricket, a strong commitment to fundamentals is the secret of investment success.

Investment opportunities

Here are some attractive investment opportunities that you can consider at this point in time.

1. Fixed Maturity Plans (FMP):

   When everyone expected interest rates to fall, it surprisingly rose! This has given an unexpected but excellent investment opportunity. Since interest rates are considered to be at or near the peak now, this is a good opportunity to lock into these attractive rates through FMP. As FMPs have a fixed maturity date, invest for the full tenure of the FMP; this will help you get the prevailing high interest rate for the term of the fund. Depending on your investment horizon, you may choose FMPs with tenure of up to 5 years.

2. Short term funds:

   Bond funds come in a variety of investment terms. There are long term and short term funds depending on the tenure of the bonds that they hold. As short term interest rates spiked recently in response to the RBI measures to stabilize the rupee value, short term mutual funds have been offering attractive returns. Since low tenure bonds and funds experience lower volatility due to interest rate movements, these are good options for a 12 to 18 month investment period.

3. Long term funds:

   Bond funds that invest in relatively longer term bonds would benefit tremendously when interest rates fall. The current high interest rates are expected to fall in the near to medium term. By investing in these long term funds, you not only get higher interest but also an attractive capital gain when interest rates start falling (market prices of bonds rise when interest rates fall). If you can remain invested for more than 3 years and are comfortable with short term price falls and rises, you can consider these funds

4. Equity SIP:

   Most successful equity investors invested when everybody preferred to stay away from equity. There is very little enthusiasm for equity shares among investors now and hence their prices are at an attractive low. By investing regularly in equity funds now, you have the potential to earn attractive returns when the market does turn around eventually in the near future. Systematic Investment Plans are an automated way of investing a fixed sum at fixed time intervals. All it takes is a standing instruction to your bank through the mutual funds scheme and your money would start flowing into the scheme without any further effort. Investing bit by bit through this period of gloom, you not only reduce your investment risk but also enhance your return potential. You may start and more importantly, continue an SIP in a good equity fund.

To conclude, don’t despair! There will always be some investment avenues that would make sense in a given situation. Happy investing!

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Gold Investment In India & Its Benefits

 

Gold prices have been moving southward; should you consider this as an opportunity to invest in gold?

Everyone appears to believe that the bull market for gold has come to an end. Further, they believe that gold prices will ‘keep falling’. The reasons forwarded are primarily that after a tumultuous period where European sovereign defaults were anticipated and sputtering of the US economic recovery, after several initiatives by respective governments both seem to have stabilized and a calmer future is now foreseen. A calmer economic environment is supposed to bode well for financial investments leading to lower dependency on traditional forms of hedging viz. gold. Gold has hence lost value and continues to be in a downward trend.

For that to be true, certain things have to fall in place. The last bull market in gold ended when the US Federal Reserve (Fed) changed its policies in 1979. Monetary policy was significantly tightened. Interest rates, which trailed inflation rates, were hiked up significantly allowing investors to have very decent real rates of return (interest rate minus inflation rate). Not only this, inflation was also kept in check to maintain real returns.

 In this situation, bonds became more attractive than gold (due to high interest rates and falling inflation). By contrast, gold prices fell nearly 70% during the period 1980 to 1999 reaching US$ 250 per oz.

In order to address slowing GDP growth in late 1990’s, US monetary policies were loosened leading to lowering of interest rates. This was coupled with the attack on World Trade Centre in New York in 2001 which led to questioning the US status quo on global military dominance. Both these events hastened the weakening of the US dollar and strengthening of gold prices.

This lasted till 2012 and since then, gold prices have started falling again. What is the reason? Is the US planning to enact similar monetary policies it had during the 1980s? No!

In fact, the truth is that governments across the world are printing more and more currency notes resulting in inflation only moving one way – up. In fact, nearly every major country in the Western world is running a big deficit. Central banks and central governments are committed to a particular course of action. Does it lead to more valuable paper money? Does it lead to price stability? Does it lead to sustainable growth?

Or does it lead to bubbles, crises, booms, busts, and possibly an eventual blow up? Clearly, the value of paper money looks to be increasingly precarious. In this situation, the only real value will reside in GOLD!

Key Gold FactAccording to the US Geological Society, gold mine supply would exhaust in 12 years.

30-year gold price history in INR per gram.

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National Pension Scheme vs. Employee Provident Fund

 

It is important to first understand that NPS (National Pension Scheme) and EPS (Employee Provident Fund) are as different as chalk and cheese. Although both cater to the post retirement needs of a person, the tax benefits, rate on investment, etc. are very different.

In order to understand what exactly makes NPS different from EPS, it is important to get a clear and broader understanding of the benefits and shortfalls of both and which one supersedes the other.

What is NPS?

Just like the commonly known Employee Provident Fund, the National Pension Scheme too is a retirement plan, which is open to all the Indian citizens. It caters not only to employees of organizations but also to the wage workers and is available in 3 forms:

1) Tier I – wherein premature withdrawal is not allowed. The holding is up to retirement.
2) Tier II – Premature withdrawal is permitted in case of genuine reasons.
3) Swavalamban account – Here the government shall pay Rs. 1,000 for 4 years into the account as its contribution. The main objective of this account is to encourage savings among the wage earning category.

What is EPF?

An Employee Provident Fund is specifically for the salaried. It is a dear scheme that covers majority of the working class. Here the employee and employer both contribute 12% + Dearness Allowance each into the EPF account.

Thus, while an NPS account can be opened by any Indian, an EPF account is available only to a salaried person.

Return on Investment

As mentioned before both are retirement plans, however the return on investment which can be earned by the two differs greatly. The EPF interest rate for the year 2014-15 was 8.75%.

However, in case of NPS there is no specific interest rate as NPS is a market-linked product. The money is not with the government but with designated fund managers, which you can choose between. You can also choose between different funds as investment options, some of which invest in fixed income but others invest in equities. Up to 50% of your assets can be in equities. Equity investments are the great advantage that the NPS has. While equity investments can be volatile over the long horizons of a typical NPS investment, they are likely to generate much higher returns than fixed income securities.

Can you take a loan of any of these?

In case of EPF, an application for loan to a maximum extent is allowed thus making EPF nearly liquid. However NPS offers no such option so it is literally a long term holding with no exit route.

Perks of planning for retirement

For EPS your employer is obligated to match up to your 12% + DA contribution and this gets added to your retirement savings. So you save twice by saving once. Unfortunately for NPS there is no such obligation on the employer to contribute.

What about Tax?

EPF – Tax deduction is available Up to Rs.1 lakh under section 80C and taxable as per applicable tax slab if withdrawn before 5 years of service.

NPS – Section 80CCD of income tax act provides deduction under the section 80CCD(1) in respect of contribution made by the employee, and a deduction under the section 80CCD(2) in respect of contribution made by the employer to the New Pension System (NPS).

Contribution made to the pension scheme under section 80CCD (2) (employer’s contribution) shall be excluded from the limit of one lakh rupees provided under section 80CCE.

So, if you’re genuinely looking for retirement saving, then keeping the tax dimension aside, NPS is far better structured and should deliver more satisfying returns because it is designed as a very methodical retirement savings plan, whereas EPF is something to channelize long-term savings into safe fixed income.

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