Invest early in PPF to save more
Twenty five-year-old Vinesh Acharya has just completed his Mtech and is currently working as a lecturer at an engineering college. He is unmarried and the only other member of the household is his mother.
Financial Goals
Mr Acharya is at the beginning of his career and retirement planning, home purchase are well expected in the future. Since he isn’t married yet, there isn’t also any question of saving for kids education. However, he needs to create a strong financial foundation for the future — which ensures that finances are not amongst his worries. In the next few years, one personal milestone that Mr Acharya is likely to reach is marriage, so some saving for that will be in order.
Where is he now?
Mr Acharya has just started working so he has no savings or investments of any kind. His annual income is Rs 3 lakh of which Rs 1 lakh is available for savings after other expenses have been deducted. The only saving so far is via provident fund.
Recommendations
As of now, Mr Acharya is able to save on his taxes because of the Rs 20,000 per year that’s going into provident fund. This leaves him free to invest the remainder. He can start a PPF account and start putting in up to Rs 70,000 annually. This will bring in tax free returns of 80 per cent per annum and is eligible for tax breaks under section 80C.
He should also go in for a life insurance endowment plan and invest up to Rs 30,000 per year in this plan for the longest possible period — 35 years. This will allow him to get retirement benefit proceeds at 60 years. This can be hiked over the next 10 years based on increased responsibility and family commitments.
In addition to these, he can invest Rs 2,000 per month in a well diversified equity fund, which will add up to Rs 24,000 per month. Another Rs 1,000 per month can be invested in a gold ETF. No tax benefits are available on these products. Some other avenues that are available to Mr Acharya include the new pension scheme (NPS) and section 80IIF. NPS allows individuals to save amounts as little as Rs 6,000 per year with an eye on retirement. Under section 80IIF, Rs 20,000 per year may be invested in infrastructure bonds.
In addition to these, he should also go for a health insurance cover of `1 lakh per annum — covering himself and his mother. This will cost Rs 1,200 per year. As a precaution, Mr Acharya also needs to maintain three months of salary in the bank to meet emergency expenses.
If Mr Acharya follows a methodical plan, he should be successful in giving a solid financial foundation to his future.
(L. Ravindran, PhD, is a financial advisor and managing director of Wealthmax Enterprises Management Private Ltd.)
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