Maximizing Employee's Contribution to PF
To do or Not to do?
- The monthly income is just about sufficient for maintaining the chosen life-style of the concerned individual and / or,
- The individual concerned is likely to yield to the temptation of blowing up all his/her money as soon as it lands up in the bank!
- “You’re earning quite a bit considering your life-style – Obviously you will be able to save this sum without even noticing it”
- “The power of compounding works like magic – Before you realize, this contribution would have grown immensely”
- “If you don’t save this money, you will spend it or lend it or give it or otherwise fritter it away”
- Being self-disciplined and financially thrifty, he will in any case save enough of his money on his own – He doesn’t HAVE TO maximize his contribution to PF.
- In any case, the Provident Fund fetches a ridiculous sub-10% returns on the savings. This doesn’t in any way cover the real inflation rate that will be applicable to an upper middle class individual.
- More importantly, considering the long-term horizon for this individual’s savings, he ought to look at maximizing returns, rather than safety. In fact, the past track record of the past 10, 20, 30, 40 and 50 years would confirm that returns of systematic monthly recurring investments equity shares / equity mutual funds have consistently and significantly outperformed any fixed income products like Bank deposits, Provident fund, NSC, etc. Hence, risk becomes almost a non-issue.
- The same logic would perhaps hold true for investments in real estate as well.
- “If you’re a disciplined individual, thrifty by nature, you must MINIMISE your contribution to the Provident Fund”.
- Shift any surplus funds over and above your typical monthly expenditure into a highly rated liquid mutual fund.
- From the balance in this liquid fund, build a corpus of perhaps 3-6 months of monthly expenses (not monthly income) and park it in a carefully chosen short term debt fund.
- Identify your real insurance requirements (Typically you will require a Term Insurance Plan to cover your life, a health insurance plan and perhaps an Accident Insurance plan) – Explore the possibility of taking adequate insurance cover for all these requirements.
- Once this “Emergency Fund” corpus as well as your Insurance needs are both “ready and done”, identify 3-5 high quality equity oriented mutual funds and start a Systematic Investment Plan to invest your routine monthly surplus to these equity oriented mutual funds.
- Stay on the look out to buy your own home For Living – As and when you identify a suitable property, you may wish to consider taking a suitable housing loan and buying that property.
- Watch out for the launch of high quality Real Estate Investment Trust products (REITS). SEBI and the FM have just approved the concept. I’m sure that reliable and trustworthy players like HDFC, Tatas, Birlas, TVS Group, SBI, L & T, etc. will very soon come up with their own REITS. Considering the fact that under the proposal, long term capital gains from REITs (units which are held for over 12 months) are likely to be completely exempt from Income Tax, REITs are bound to be hugely popular investment avenues for those who wish to park their funds in Real Estate for investment purposes. (To put things in perspective, if you sell a house that you have been living in for the past few years, your capital gains will be completely taxable, whereas, a corresponding investment in REITs would be tax-free).