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Is VPF a good way to save for your retirement?

The primary limitation is that the investor will not end up with a very sizeable corpus at retirement, having invested all his money in a fixed-interest paying instrument.

Last Updated: Mar 21, 2016, 09.02 AM IST
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The primary limitation is that the investor will not end up with a very sizeable corpus at retirement, having invested all his money in a fixed-interest paying instrument.
The primary limitation is that the investor will not end up with a very sizeable corpus at retirement, having invested all his money in a fixed-interest paying instrument.
Madan Menon is a middle-aged government employee who is not too aware about investment products available today. However, he saves diligently, contributing as much as possible to his provident fund. He wants to invest the proceeds in post office saving schemes when he retires. He has been systematically increasing his contribution to the Voluntary Provident Fund (VPF) every year. Is he doing the right thing?

VPF is a contribution made by an employee towards the provident fund corpus, with no matching contribution from the employer. Since the amount is automatically deducted from the salary, it cultivates disciplined investing. The investment earns a fixed interest each year, as declared by the government, and the contributions are eligible for deduction under Section 80C of the Income Tax Act, up to a maximum of Rs 1.5 lakh each year.

The primary limitation here is Menon will not end up with a very sizeable corpus at retirement, having invested all his money in a fixed-interest paying instrument. To deal with inflation after he retires, he will need a large corpus, and the best way to build it is to use his earning years well. Over time, investments in assets such as equity mutual funds can grow much larger. Given his preference for safe investments, it is all the more important that he gives his corpus a chance to grow.

By starting an SIP in a diversified equity fund, and mandating his bank to deduct the amount on a specific date each month, he not only gets into the saving habit, but also give his money the chance to grow faster. Together with his PF contribution, this is a good way for Menon to invest in both a safe fixed income product and a long-term growth oriented product. Menon should keep in mind that the rules for withdrawal, loans and taxation for PF also apply to his VPF contributions. These may be modified by the government, as proposed in Budget 2016-17 (and then rolled back), which would put him at the risk of ending up with all his investment eggs in one basket. Some diversification would therefore serve him well over the long term.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
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