When it comes to making investments, people often feel confused while selecting the right investment option, especially if they are new to it. The most important factor that determines the kind of investment suitable for you is your risk appetite. The basic idea behind an investment in most cases is to achieve your long-term goals and lead a financially secure life post-retirement.
So, the big question here is whether you should invest in an investment plan like mutual funds, debt-based funds, stocks, and equity funds, or something that is as safe and simple as a pension plan?
A. Factors to consider while choosing between an investment plan and a pension plan:
- Risk Appetite - Pension plans are associated with lower risks, making them appropriate for those with a low-risk appetite.
- Frequency of returns - Depending on the plan you choose, investment plans can offer monthly returns over the course of the policy. On the other hand, pension plans only offer the pay-out after retirement. However, you can choose between monthly income or receiving a lump sum payment.
- A number of active investments - The number of investments you already have may play a role in helping you decide which option to choose. Ideally, you should pick the option that helps you diversify your portfolio. If you do not have a retirement plan in place, then the pension plan may be more suitable.
- Tenure - Investment plans can vary between short-term and long-term plans, while pension plans are typically long-term investments. Based on when you need your funds, you can choose between the two accordingly.
- Possible tax exemptions - Most investment options offer tax rebates under Section 80C. However, do read the fine print to know whether your chosen policy helps you save on tax.
- Investment goals - Your investment goals should be clearly defined before you choose any policy, be it an investment plan or a pension plan. Knowing what you need the funds for can help you decide which option is more suitable.
To give you a better understanding of which one is better, we have created a table with some of the key highlights of investment plans and pension plans.
It has flexible maturity terms with no restrictions on when you can exit the policy.
Pension plans are easy to understand and invest in – they are also easily accessible for people from all walks of life, as long as they have a bank account and other basic documents.
You have a certain amount of control over your investments.
It helps you create the habit of investing, thanks to the scheduled contributions.
ELSS equity mutual funds let you enjoy tax rebates.
You can enjoy tax benefits under Section 80C.
There are no higher pay-outs that come into play when you surrender mutual funds.
You can claim death benefits.
B. Top benefits of investing in an investment plan:
- Higher returns: The biggest advantage of investing in equity and hybrid funds is the possibility of getting higher returns when compared to a pension plan.
- The ability to track the past performances of an investment option: You can easily track the previous records and performances of a certain investment option that you are exploring. This should help you make the right decision and can reduce the chances of encountering a major risk. A point of reference is always nice to have while making investments.
- Easy Availability of returns: Thanks to the easy invest-and-exit rules used in investment plans, you can halt the policy at any time and enjoy your returns.
- Good for retirement: If your risk appetite is moderate to high, then mutual funds can turn out to be a good option. Since they are slightly riskier than your regular pension plans, they provide higher returns over a long period of time, helping you ensure a comfortable retirement.
- Shorter tenure of investments: There are no long lock-in periods in this, which is usually the case with the NPS (National Pension Scheme) and PPFs (Public Provident Fund). You can easily exit a plan when you deem it appropriate. This enables you to switch between investment plans easily.
C. Top benefits of investing in pension plans:
- Secured retirement life: Since most pension plans only get activated post your retirement, you will have a good amount accumulated since you would not have spent any of it. As a result, you should be able to lead a comfortable retirement with a good financial cover.
- Contribution from the employer: In many government schemes and company-based pension plans, the employers also contribute towards the investments. This adds to the overall amount that you will get at the end of the term.
- Helps with Better budgeting: Since you have to keep a certain amount away every month for investing in the pension plan, you automatically learn how to live within a limited budget. This can help you later in life when you decide to increase your investments.
- Flexible returns option at the end of the term: You can either get the returns on a monthly basis or as a lump sum amount at the end of the policy term. Thanks to this, you can either go for the option of enjoying a steady flow of income or take the whole amount and invest it somewhere else, once you retire.
FAQs related to this investment battle
1. Are income funds a good investment?
Yes, they can be a good investment when you consider things like risk, returns, and cost amongst others before making the move. These are some of the very few funds that not only provide high returns but also bring stability to the table.
2. How can I invest money to grow?
It is very important to have a diversified portfolio with your investments spread out across options like real estate, gold, mutual funds, pension plans, and more.
3. Are pensions paid for life?
Yes and no, both! It depends on the kind of pension plan you have chosen. It could be an investment plan with a single annuity, joint annuity, or lump sum payment. The pay-outs vary with each and it’s important to compare all the policy types before choosing one.
4. How does a pension plan work?
A pension plan has two pillars on which it works – regular premiums and the right distribution of the same. You pay a premium every year, which is then used in the funds or assets that you have chosen. At the end of the term or at the time of retirement, you can either ask to get a lump sum amount or sign up for an annuity plan.
5. What is the best investment for monthly income?
Mutual funds that generate monthly income, real estate, or investments in the money market are options that can offer monthly returns. If you are looking for funds associated with lower risks, then you can invest in schemes such as the Monthly Income Scheme, Pradhan Mantri Vaya Vandana Yojana, Post Office MIS, or even bank FDs.
Now that you know the merits and demerits of both investment plans and pension plans, you should be able to identify the ideal one for you. If you are looking for a more flexible option and are ready to take a few risks, then investing in any of the investment plans like mutual funds or equities is the right way to go. To find the ones that best suit your risk appetite and needs, make sure you compare different investment plans online.