Friday, 29 August 2014

All About NPS/ National Pension System

Government backed retirement solution has always been debt based in India. PPF, PF, EPF all are debt based savings scheme. Yes they give security, but the return do not beat inflation. So Govt. of India launched market based, contributory retirement solution, NPS in 2004. It is linked with market so one can expect better return over the years.Here is all you need to know about NPS/National Pension System.

                                                  First of all, download the application form for opening NPS account  from HERE 

  • It works very similar to mutual funds with added flexibility.
  • Your money is invested in three asset class, equity(E), corporate diposit (C) and government bond(G).
  • In active choice mode, you can choose how much to invest in which asset class. The maximum percentage you can invest in equity is 50%.
  • If you are not confident in choosing where to invest in what percentage, then you can choose auto choice. It will adjust your portfolio automatically with your age.
  • Tier- I and Tier- II account:  If you want to open NPS, Tier-I account is mandatory. Tier-II account is optional.You can not withdraw any money from Tier-I account before retirement. Tier-II is voluntary, you can withdraw money any time.
  • There are professional fund managers to manage your money. You are free to choose any one of them.They are
    • DSP Blackrock Pension Fund Managers Private Limited
    • HDFC Pension Management Company Limited
    • ICICI Prudential Pension Funds Management Company Limited
    • Kotak Mahindra Pension Fund Limited
    • LIC Pension Fund Limited
    • Reliance Capital Pension Fund Limited
    • SBI Pension Funds Private Limited
    • UTI Retirement Solutions Limited
You can change your fund manager once a year, if you are not satisfied with your fund manager.

Who Can Open:
                            Anybody between 18-60 years of age. If you are some psu/govt employee, probably you are already under NPS .This article is not for you.

How To Open NPS Account:
                                                                          Fill up the form(link given above). Take it to any pop(point of presence) near your home. To find a pop near your home click HERE .Take with you, the usual documents like id proof, address proof, PAN card, photograph, blank cheque( needed to link with your bank account).
word of caution: Nobody will welcome you happily. Almost all pop have their own retirement products and  they will try to sell them to you. Do not listen to them. Chances are their product is not better than NPS.

              I am not writing the various cost involved here. It is ridiculously low. National Pension System is probably worlds cheapest financial product. It is one of the main reasons that distributors do not show any interest in selling/distributing NPS. The investment management fee is only 0.25% which is unmatched in industry. Cost details can be found HERE

  • Min investment : 6000 per year and 500 each time. You can put money as many times as you want in a year.
  • There is no maximum limit of investment.In Tier-II account, you have to invest min 250 a year.
  • Withdrawal:  This is where it becomes tricky
  • Age, less than 60 years: You can withdraw 20% as lump sum amount, with the rest 80% you have to buy annuity from any IRDA regulated insurance company.
  • Age between 60 to 70 years: You have to buy annuity from IRDA regulated insurance company with minimum 40% of your accumulated saving. You can buy with more than 40% though. Rest of the money can be withdrawn as lump sum in phased manner.

  • Your investment is eligible for tax deduction under 80c. 
  • The returns at maturity is taxable. Actually it is still unclear. However, chances are that the maturity amount will also be tax free in future. 

Comparison with other products:
  • It scores over ppf/epf for its equity exposure which significantly increases the chance of better return.
  • Compared to other products it is highly illiquid, thus it instills a discipline in you. You can not withdraw money before 60 years of age.So it serves as a ultimate retirement solution.

Final Words:
                                   Though there is some lack of clarity about the taxes after maturity, still, with its extremely low cost, flexibility to choose various options and strong backing by regularity bodies, NPS is one of the best retirement solutions available in the market today. 
Are you investing in NPS? What do you think about it? Please share your views.




Saturday, 16 August 2014

Things you must do after getting your first JOB

Getting a good job is pretty difficult these days. Luckily, when we get one, our joy knows no bound and the salary just evaporates. Friend's demand for treat never ends. The poor you suddenly realize that only branded clothes fits good on you, and you are spending half of your salary on clothes. The old cell phone suddenly becomes useless and you need to buy the latest phone with highest configuration possible. The list goes on without you realizing where your salary is actually going.
After a year or more you see your bank balance is not in any better shape than it was when you had no job. You are freaked out and try to curtail on spending. It is difficult doing so because by then you have completely spoiled yourself. So if you have come to your senses and really want things to change, then here are a few things you must do after getting your first job.

                                     The first thing that you do is open a ppf account. PPF stands for public provident fund, You can open it in banks or post office. Highest contribution allowed per year is 1.5 Lac and the minimum is 500.If  The interest rate is comparable to bank FD but the good part is that ppf return is tax free and you can claim tax exemption under 80C.The term of ppf is 15 years and after that you can withdraw it or continue it in a slab of 5 years. Investing Rs.1.5 Lac per year will give you a huge Rs.4635164.90. Remember that ppf is highly liquid and you cannot withdraw the full amount before 15 years. You can only withdraw in parts in some exigencies like critical illness after a few years.For more info PPF IN DETAIL

                                                                NPS stands for National Pension System. Now don't give me that look. You are never early to save for retirement. Make this the first thing after getting a job. On an average you will be working for 35 years and live a retired life for 20 years. So a very simple math tells us that per year you should save 20/35 part your current  expenses. NPS is a direct answer to Americas  popular 401 (k) retirement plan.The minimum contribution is Rs 6000 per year and there is no maximum limit.Your money will be invested in E,C and G asset classes
E-equity market instruments,j high risk high return
C- fixed income bearing instruments, medium return, medium risk
G-Purley fixed income instruments, low return low risk
You will have the choice to decide what percentage to invest in, which asset class, capping equity exposure to maximum 50%. If you don't feel confident about deciding that by yourself, then you can select auto choice. Auto choice adjusts your exposure to different asset class according to your age.The return will not be fixed as it will depend on the market fluctuation. In the long run it should give a decent inflation beating return.Keep in mind that it is a retirement solution so you can not withdraw money before that. This is an excellent retirement solution, but it is not popular due to lack of advertisement. For details, see NPS IN DEPTH
                                                   This is very very very important.Term insurance is pure form of insurance where you pay money for a certain period and if something happens to you during that period your nominee will get money which is named as life cover. If luckily you survive the entire period, you do not get anything. How much life cover you should have? No generic answer is possible, however it should be in line of 10 times of your yearly expenses. With the advent of online term plans, it has become very cheap. You can get 1 crore of life cover for 8k per year.I can't stress enough how much you need a term insurance. And don't tell your friends about buying this as probably they will think you are a fool (you are not, trust me). Not convinced? Google a little. I am giving you two links
Why people are wrong in not buying term plan
Why term plan is necessary

                                                                                  You should set aside your 5-6 months monthly expenses as an emergency fund and will not touch it. It will be for exigencies like loss of job, sudden illness or any other unforeseen event when you need money.Don't keep this in any savings account. You will end up spending it. You can keep it in some liquid mf/ bank FD.
N.B Emergency does not include buying gifts for your girlfriend/boyfriend/spouse.

                                                                                                                                               If are working, then probably you have already been chased by your friendly neighborhood like agent. Nowadays they call themselves investment advisors and sells crappy endowment plans.Listen boy you can not mix chalk and cheese. Insurance is  an expense and investment is well, investment. You can't couple them together. If you do that you will get product like endowment plans , Jeevan Anand. They give meager life cover and shi**y return. They will present the products in such a way that you will think you are getting a hell lot of money. Actually, you do not get return more than 6%. You want that! After taking inflation into account, you will actually lose money in these plans.

Read Financial Blogs: 
                                                               You are now equipped with knowledge to set the ball rolling. While ppf will give you safe return and nps a little more, if you really want to let your money work for you, you have to invest in mutual funds and stocks. These are not really for the absolute uninitiated, so study about them, understand them and take the plunge. If you fail to do that you will only burn your finger and join the 95% people who have lost money in mf and stocks.
N.B I do not want to  scare you. Take an informed decision and you will surely be rewarded.Here is 
A great place to start learning about stocks

Follow these and you will have a nice start. If you like this article, please share it among people who you think can benefit from it. If you have any question, feel free to ask.