High Yield Retirement Plan - NSC or Mutual Fund Investment

A few days back one of my office colleagues came up with the below mentioned proposal for retirement corpus plan:

Investing in NSC every month Rs. 5000. (There is no AMC involved) and once the amount doubles, then again put that with an addition of Rs. 5000. He asked “will this be a good step to have a stable income after retirement?

Here is a simple calculation he did.

1-oct-2009 to 1-sep-2015 – Buy Policies worth 5000*72 = 3,60,000

1-oct-2015 to 1-sep-2021 – Buy Policies worth 15000*72 = 10,80,000

1-oct-2021 to 1-sep-2027 – Buy policies worth 35000*72 = 25,20,000

1-oct-2027 to 1-sep-2033 – buy policies worth 75000*72 = 54,00,000

1-oct-2033 to 1-sep-2039 - buy policies worth 155000*72 = 1,11,60,000

The actual amount you invest in the NSC will be 5000*360 = 18,00,000

From 1 October 2039, you will get 3,10,000 every month as the NSC matures. You can decide on your needs and continue or reinvest in NSC. He asked, “Isn’t a 3 lakh income per month for 6 years a more than decent amount?” Is this not a high yield retirement plan?

PS: He was not willing to invest into stocks for his own personal reasons.

My answer to him was:

It is not a wrong calculation as far as I can understand but here I need to state that inflation will eat away the value of money over time. What looks like a huge amount 10+ years from now, may not really hold that much value on that day if we try to buy items/goods. If not equities, you can consider those conservatively managed MIP type of mutual fund schemes. They can potentially generate one or two percentage points extra return compared to these NSC or whatever. Over longer time periods, such extra gains can translate into a huge difference.

Let me quantify with a real example.

Say someone invests Rs. 1 lakh today for 15 years.

At a CAGR of 8.5%, the maturity amount happens to be: Rs. 3,39,975/-

At a CAGR of 9.5%, the maturity amount happens to be: Rs. 3,90,130/-

At a CAGR of 10.5%, the maturity amount happens to be: Rs. 4,47,130/-

A mere 1% extra gain over 15 years on 1 lakh rupees can make a miraculous difference of approximately 55,000.

That's compounding at work. Given that, it is always preferred that we take a long term view of investment and perhaps take on a miniscule amount of risk to gain that extra edge. It pays harmoniously over long runs. Well, apart from what the options are there for a person who is nearing his/her retirement if anyone is planning to save or plan for a retirement, then rather than putting your money in the safest instruments from a 15 years perspective (that’s when I plan to retire), I would probably go big on equity funds. May be to an extent of 60-65%. My argument is given a timeframe of 10 years or more equity funds will give you more returns than any other instruments, even with all the ups and downs of the markets taken into consideration.

A few things to be considered for high yield returns on retirement investment are:

• You have to be extremely disciplined, so SIPs are the way to invest.
• Go with a very dependable AMC, like HDFC.
• Take stock of your investments every once or twice a year just to see if your funds are doing well and it is not difficult.

Last but not the least, fix a certain amount to be invested every month and don’t give in to the temptation of using that amount somewhere else or taking out the investments you have already done.