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How does one evaluate a pension plan?

    IndianMoney.com Research Team | Monday, July 27,2009, 09:57 AM
 

If you are looking for a pension plan, there are 100 options available such as PPF, NSC, ULIP, SIP, etc. Most retirement options fall into two categories,-those which promise a fixed assured return (PPF) and those, which offer non-assured returns (ULIP). Choosing a plan is depending on the risk taking capacity of the individual. Most of the people prefer the fund which offers a fixed assured return. Mutual funds are also a great way to invest for your pension. Mutual funds can help you in negotiating life’s important milestones. In one way Mutual Funds are the best way to invest for your retirement. We will take the example of PPF and stocks. PPF will give you steady returns but understand it won’t be enough to compete with the inflation as a result they may not be able to give you an adequate return considering the high cost of living. Stock will give you high returns but it is very complex, it can go to any extreme. High volatility of stock market might risk your entire investment; you might end up with losing all your investments. Mutual Funds are managed by professional fund manager who understands the dynamics of the economy, equity markets and interest rates it will help your investment interests to be best served under the circumstances.

Before an investor goes in for a retirement plan he needs to evaluate its various basic parameters such as;

  • Returns
  • Liquidity
  • Tax Benefits
  • Taxability of Interest/Dividend
  • Minimum Investment Amount
  • Maximum Investment Amount
  • Investment Mix
  • Additional Benefits

Returns

Returns are the most important thing in any investment. Different investment options give you different returns so before choosing one you should think twice. Schemes like PPF, NSC, Post office Savings, etc will give you assured returns but it won’t be sufficient to take care of your future expenditure. Always remember when there is a guarantee for returns, the rate of returns will be less. When it comes to comparing the returns between the two Mutual Fund options the investor must keep in mind, the track record of the scheme as well as his timing of entry. Both these factors will affect his returns. Choosing a high return generating option is very important in pension plan.

Liquidity

In PPF, the liquidity is pretty low. Your money will be locked in for 15 years. A loan can be taken at the end of 3 years but that is only to the extent of 25 per cent of the balance at the end of the preceding financial year. Most of the pension fund will have lock in period. But if the fund has some flexibility in withdrawal, it will help you in times of emergency. In case of ULIPs, infrastructure bonds as well as pension funds there is a 3 years lock in period.

Tax Benefits

ULIP Pension plans are eligible for a tax deduction under Sec. 80CCC. Investments made in NSC and PPF are eligible for Tax deduction under Sec80C. At the same time investments made in Kisan Vikas Patra (KVP) is not eligible for tax deductions. Recently central Govt. has introduced a Pension Plan called New Pension Scheme (NPS). But the withdrawals at the maturity are Taxable, in comes under E-E-T (Exempt - Exempt –Tax) Tax regime. Before choosing a retirement you should understand the tax implications related to the plan/ scheme.

Taxability of Interest/Dividend

Returns from PPF are tax free; Interest received on infrastructure bonds qualifies for tax exemption under Section 80L. This is not the case with dividend received from most of the pension mutual funds

Minimum Investment Amount

In case of PPF a minimum amount of Rs 100 has to be invested every year to keep the account alive. Minimum investment differs from plan to plan. In ULIPs it starts from 5000, again it differs from company to company. Some companies are offering schemes with less investment and some with more. Choose a scheme that suits your income and other needs.

Maximum Investment Amount

The maximum amount that can be invested under PPF in a particular financial year is Rs 70,000 whereas there is no such restriction on the maximum amount that can be invested in any ULIPs or Mutual Funds. Choose a scheme that satisfies your investment needs. If your future needs are relatively superior, then PPF won’t suit for you because the maximum investment that can be made in PPF is 70000/ annum.

Investment Mix

A comparison on this feature is important when choosing between any pension plans offered by a mutual fund. Usually balanced schemes are offered. However, over a period of time the portfolio may vary. For instance ULIP has essentially become a growth scheme whereas some other Funds focus on debt though relatively less equity component. Identify your need and choose the investment mix.

Additional Benefits

While choosing a retirement plan you need to have a look at the additional feature that offers such as tax advantage, Life cover, etc. For Example; ULIP gives an insurance cover and an accident cover along with Tax benefit whereas, the other instruments do not offer this.

After evaluating all these parameters, if you are finding the scheme is good enough to fulfill your needs you can go with that. Always make sure that you are analysing all these features of a plan. Indianmoney.com can advise you better plans to fulfill your future needs. For further details contact IndianMoney.com.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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