Provident Fund is one of the safest and most tax efficient investment option while you are working. However, once you retire, you get a large amount of money from your Provident Fund and other retirement benefits. These could be Gratuity, Superannuation, Voluntary Retirement Fund etc.
Where and how to invest such a large amount from Provident Fund? For a retired person, often this becomes a very difficult question to answer. Suddenly, life takes a turn after retirement. Other than changes to the way one lives, his investment behaviour and risk profile also undergoes a drastic change. In our experience, we have seen that even people with aggressive risk profile prior to retirement become a bit risk averse. And rightly so!!
This article is our attempt to help you understand what are the best possible avenues to invest your provident fund and other retirement proceeds.
How to structure your Provident Fund and other retirement proceeds?
This depends on your age and risk profile. Following are the broad thumb rules for different risk profiles:
If you have a Moderate (Medium) Risk Profile
Thumb rule would be to invest (100% - Your age) of your Provident Fund into equity. Remaining amount should be invested in debt / fixed income instruments. For example, if you are 60 years of age, you can invest 40% in equity and 60% in debt. It would generally not be recommended to invest fresh capital into real estate. This is because it is not easy to withdraw money from real estate in a short span of time. Besides there are other issues like maintenance, upkeep of property, finding a tenant etc. Exception would be if you have much larger funds than what is needed for your post retirement needs (Check FinAtoZ Retirement Calculator to find out).
If you have a Conservative (Low) Risk Profile
Thumb rule would be to invest (100% - Your age - 15%) of your Provident Fund into equity. Remaining amount should be invested in debt / fixed income instruments. For example, if you are 60 years of age, you can invest 25% in equity and 75% in debt.
If you have an Aggressive (High) Risk Profile
Thumb rule would be to invest (100% - Your age + 10%) of your Provident Fund into equity. Remaining amount should be invested in debt / fixed income instruments. For example, if you are 60 years of age, you can invest 50% in equity and 50% in debt.
Details on how to further structure your Provident Fund in each Asset Class!
Where to invest in Debt / Fixed Instrument?
Debt portion can be further divided into the following instruments:
- Senior citizen saving scheme (SCSS): Upto 15 Lacs can be invested for a period of 5 years (extendable by 3 years) to earn 8.6% interest income (payable quarterly). You will also be eligible to save tax under section 80C. This option is available only if you are above 60 years of age. There is, however, an exception if you have taken a Voluntary Retirement Scheme (VRS) and above 55 years of age. Read more about this scheme.
- PMVVY pension scheme: Upto 7.5 Lacs can be invested in Pradhan Mantri Vaya Vandana Yojana. This will fetch you 5000 rupee per month pension for 10 years (8% interest rate). Again this scheme is applicable only if you are above 60 years of age. Read more about this scheme.
- Ultra Short Term Debt Mutual Fund: Of the remaining amount, 50% can be invested in ultra short term debt funds. This category of funds can potentially give better returns than FDs with slightly higher risk.
- Credit Risk or Fixed Income Debt Mutual funds: Remaining money can be invested in a combination of credit risk funds and fixed income debt mutual funds. It needs an understanding of the market conditions and some expertise to select this category of funds. If you don't have that expertise, kindly take help of a SEBI Registered Investment Adviser like FinAtoZ.
Where to invest in Equity?
Equity investment can be further divided into the following:
- Large cap mutual funds : Large cap mutual funds invest in stocks of large and known companies like HDFC Bank, TCS, Maruti Suzuki etc. These are high quality companies. They provide safety as well as reasonable growth potential to your equity portfolio. You can plan to invest around 35% of the portion earmarked for equity into large cap funds.
- Multi cap mutual funds : Multi cap mutual funds offer much needed diversification to one's portfolio. They invest into companies that are large as well as smaller in size. While large companies provide cushion, mid and small companies can provide higher returns since they can grow faster than larger companies. You can invest another 35% in multi cap diversified funds.
- Balanced advantage funds : This category of funds invest into a combination of equity and debt. It increases exposure to equity when markets are undervalued. Like-wise it decreases exposure to equity in overvalued markets. This category is relatively safer and very suitable to invest a portion of your retirement corpus into it. You can invest the remaining amount of your Provident Fund into balanced advantage hybrid funds.
Where to invest in Real Estate?
Real Estate will be a suitable investment choice in case your provident fund / retirement proceeds are higher than what you need for your remaining life (Check FinAtoZ Retirement Calculator to find out). In such a scenario, Real Estate can be ideally invested in a commercial property to earn around 6% rental income. You can look at some structured products in consultation with your SEBI Registered Investment Adviser. Your certified financial advisor will guide you to invest in a commercial property and save all the hassles of managing a real estate property for you.
To summarise, there are multiple investment options that you can choose to invest your Provident Fund and retirement proceeds. However, it is very important to diversify your portfolio in multiple asset classes like Debt, Equity and Real Estate. A SEBI Registered investment advisor can help you to take right decision for your hard earned money.