There have been a large number of queries from the retiring officers as regards options available towards investment of retirement corpus. Although the investments are planned based on the risk profile, financial goals and the time available to achieve these goals, there is a common belief to park this money in ‘safe’ assets, primarily consisting of small saving schemes in post offices, taxable bonds issued by RBI and bank fixed deposits.

Due to the reduction in the interest rate (repo rate) for last year and half by RBI to stimulate economic growth, RoI on these small saving schemes have been brought down substantially by the Government effective Apr 2020.

Despite low RoI (return on investments) and no tax benefits on these small saving instruments, it still gives us the mental comfort of safety even if the real value of the maturity amount (duly adjusted against taxation and inflation) falls below the initial investment amount. To explain this, let’s take an actual example of investing approx Rs 1.1 crore in different small saving schemes and see how the maturity value and real value works out. Real value of the initial investments has gone down by 12.98% and 24.66% for the investment period of 5 and 10 years respectively.

On the other hand, let’s see if we invest the same amount of Rs 1.1 crore in other investment options, primarily in Equity, Debt and Gold Mutual Funds and see how the maturity amount and the real value works out. Real value of the initial investments has gone up by 1.22% and 5.96% for the investment periods of 5 and 10 years respectively. Better performance can be attributed towards tax incentives and superior return on investments (10% RoI assumed for calculation purposes for equity mutual fund against long term average of 11-12%).

Highlights

  • Real value (actual purchasing power of money adjusted against tax and inflation) of the initial investments in the first case is negative for both the investment periods of 5 and 10 years, primarily due to low RoI and no tax benefits
  • Real value of the initial investments in the second case is positive for both the investment periods of 5 and 10 years, primarily due to superior RoI and tax benefits
  • Net RoI duly adjusted against tax needs to beat the inflation for positive real value

Conclusion

  • Mutual Funds are subject to market risk; read all documents carefully before investing” Let this warning not scare you. Yes, there is a market risk but look at the history and growth. Approx 26 lakh crores (around 10% of GDP) worth of assets are managed by Mutual Fund industry as on June 2020 (Data from AMFI website)
  • Instead of playing it safe, play it smartly by investing through Mutual Funds
  • Choose the right asset class based on risk profile and financial goals
  • It’s important to beat inflation for money to grow in real term
  • Please don’t be shy of taking the professional advice if we do not understand the intricacies of the investments.

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