Financial Cocktail Samosas: Bitesized Money Morsels For You, 11/01/2023

Exploring NPS Tier-2 as an Investment Option

National Pension Scheme is a social security initiative by the Central Government. This market-linked scheme (investing in equity/stocks, corporate bonds and Govt bonds) encourages people to invest in a pension account at regular intervals during the course of their employment as an investment avenue for accumulating retirement corpus. In fact, Income tax deductions of Rs 1.5 lakhs under section 80C, an additional deduction of Rs. 50,000 under section 80 CCD 1(b), and an additional deduction of up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by the employer under Section 80 CCD(2) become the main temptation for the salaried individuals to invest into NPS.

Please note that these tax deductions are applicable only for the Tier 1 option of NPS and it has its own limitations:

  1. Annual contributions of at least Rs 1,000 is a must to keep the account active.
  2. Accumulated amount gets locked up to the age of 60.
  3. Only one fund manager can be chosen for all investments at any time.
  4. Only 60% of the accumulated amount can be withdrawn. Purchasing the annuity plan from a balance of 40% is a must.

Here comes the Tier 2 option in the picture. It does not provide tax deductions but has much fewer restrictions than Tier 1. It is a pure investment product and is not focused on an individual’s retirement.

Characteristics of NPS Tier-2 Investing

  • Professionally and actively managed with very low charges: The Pension Fund Manager (PFM) charges just 0.01% on the assets managed. However, you have to choose your PFM, prepare your portfolio and monitor it like Direct Funds.
  • Decent Returns: As per historical data, it has provided average annualized returns within a range of 9%-12% over 3 years/5 years.
  • Option to change the scheme or fund manager: You have the provision to change the pension scheme or the fund manager if you are not happy with their performance. However, you can only have one fund manager at a time for your entire corpus.
  • Controlled Risk Exposure: An investor cannot increase the equity allocation beyond 75% which makes it a good hybrid investment product.
  • Our Recommendation: NPS Tier 2 option provides a cheaper option to invest vis-à-vis direct funds provided you’re comfortable with its limitations of single PFM, cap of maximum equity allocation and doing all the groundwork and monitoring yourself.

(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)

How to Avoid Falling for Fake Loan Apps

With the rapidly growing number of internet and smartphone users in India, scams and fraudulent activities targeting them have also grown.

Fraudsters create unscrupulous loan apps which offer instant and short-term loans. The modus operandi of such apps is to lure vulnerable customers by providing instant loans through an easy process and with minimum paperwork. It might be tempting, but it could come with various risks. People generally fall for such apps to avoid the hassles of a bank loan where they might need a lot of paperwork.

Before using any loan app, watch out for obvious Red Flags to not become a victim of any financial fraud:

  • The most common way that people are targeted is by false representation. If you are doubtful about the authenticity of any loan app, always go to a known bank or financial company to secure a loan. The RBI maintains a list of all the Non-Banking Financial Companies (NBFCs) from which you can safely seek a loan.
  • Don’t download any loan app from the unverified app store. Avoid loan apps with low user reviews and ratings or not affiliated with an RBI-registered bank or NBFC, since these are unregulated and illegal.
  • It has been seen that once you install these illegal applications, they request access to your personal data such as your contact list, photo gallery, and camera. So, always avoid applications that you feel can compromise the safety and privacy of your personal data.
  • Avoid clicking suspicious links attached to emails and messages that promise instant loans with lucrative offers. Such links are often malicious and can infect your system with viruses or spyware that, in turn, steal personal information. The data can then be used by fraudsters to threaten or blackmail you.
  • Don’t opt for a lender that requires no documentation or background checks to provide loans, does not have clear-cut terms and conditions and fees listed, and simply promises ‘very fast’ loans.
(Contributed by Manish Kumar, Relationship Manager, Team Vikrant, Hum Fauji Initiatives)

Factors to Consider Before Investing in 2023

A Very Happy New Year to Everyone. Hope your seatbelts are still fastened from the last year’s market volatility. In 2022, returns were on the lower side on equity investments but 2023 beckons for fresh new perspectives.

Buy the Downs – Since present valuations in India are high, the market is prone to corrections in the event of a major global decline. But then, such corrections will provide long-term investors with excellent purchasing opportunities. Beyond 2023, equity investments are likely to provide much better returns. As a result, the investment horizon should be extended, ideally by four years or more.

Look for Multi-Asset Strategy – We are experiencing rising interest and bond rates. As a result, fixed-income investments are becoming more interesting. Investing in fixed-income securities has a lot of merits right now – do not delay it any further. In this space, investment in debt funds is the most appealing because they provide indexation benefits apart from their inherent flexibility of investing and withdrawal. The post-tax return would be significantly larger than that of bank deposits if the time horizon is three years or more.

Gold – Gold is also expected to produce positive returns in 2023 and 2024. The fluctuation of gold prices is tied to the movement of the dollar. The Fed’s continuous rate hikes attracted capital to the US. The dollar appears to have peaked and should now head downward. A continuous downtrend in the dollar will cause the gold to rise.

Patient investing in 2023 will be richly rewarded beyond 2023.

(Contributed by Aman Goyal, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)

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