Where to invest 7th Pay Commission bonanza?

The Union Cabinet has considered the recommendations of the seventh Pay Commission and has announced 23.55% increase in pay and allowances of serving central government employees and 24% increase in pension of retired officers.

The increase in pay would be Rs 39,100 crore (16 per cent increase), increase in allowances would be Rs 29,300 crore (63 per cent increase) and increase in pension would be Rs 33,700 crore (24 per cent increase), thus settling down to an overall increase of 23.55 per cent.

Interestingly, the expenditure on account of HRA is likely to go up from Rs 12,400 crore to Rs 29,600 crore, an increase of Rs 17, 200 (138.71 per cent). The benefits will be effective from 1st January, 2016 and the total financial impact in 2016-17 itself is likely to be Rs 1, 02,100 crore. Cabinet will decide if the six months arrears will be paid at once or in the form of installments.

Government employees should make use of the opportunity to bring their finances on track, just in case if there are not. The funds need to be judiciously used between creating an asset for the long term and also getting rid of the debt at the same time.

The actual allocation towards investment will depend on how much of arrears one receives as lump sum and how much increase in salary has taken place. However, the approach for all those receiving the benefit of 7th pay commission remains more or less the same. Firstly, get rid of debt and thereafter make your money work harder.

Shake-off that debt: Any credit card outstanding should be immediately paid-off in total so as to save 40 per cent or even higher of interest charges in them. Personal loans and credit debt represent destructive debt and should be paid off at the earliest. If there is a home loan, allocate a portion of the lump sum arrear towards repaying the principal portion of the loan. Home loan represent constructive debt, however, paying it off early reduces interest burden thus increasing the home equity.

Bolster emergency fund: Consider bolstering one’s emergency fund to meet at least those big expense heads for which investments need not be dipped into. The risk of job-loss for government employees is low hence park an amount equal to about 3 month’s expenses ( 6 months ideally suggested for non-government and businessmen) in savings or liquid funds for immediate liquidity.

Taking guard: Group insurance provided by government if not sufficient, one may enhance through pure term insurance plan. As a thumb rule, one should have life cover of at least ten times of annual income. Consider buying online term plan that comes at premium nearly 25 percent lower than offline term insurance plans. Don’t go merely for lowest cost plan but choose an insurer with whom you are confident of. If health insurance group cover is not sufficient, consider buying adequate cover for self and family members including children. Family Floater health insurance plans may suit young families with children up to age 25. Having bought a health cover, add a critical illness plan especially at age around 40.

Spending: Only once the debt is taken care of and adequate protection of life and health is put in place, consider making investment decisions. Many big-ticket purchases could have been postponed till now. From upgrading to new car, to buying a diamond necklace for spouse, there could be other consumer goods waiting in the wings. Remember, income minus savings should meet the expense.

Caution ahead: Expect a lot of offers and deals for government employees. Choose among them carefully. Spend on items that probably you had waited for and not which looks enticing now. Avoid life insurance plans especially where commitment to pay is long or if asked to buy for investment purpose.

Investing right: It’s time to re-look at one’s financial plan. See, if your goals especially the long term ones are well identified, estimated and funds earmarked towards them. If not, start the process and initiate SIP in 3-5 consistently performing equity mutual funds for long term goals.

If you have a lump sum to invest and worried about the valuation levels and uncertainty in the market, make use of the systematic transfer plan (STP) in mutual funds. STP works like systematic investment plans (SIPs). Just that, in a STP, an investor typically puts in a lump sum amount into a liquid fund and then systematically transfers it into an equity fund. In an SIP, the instalments are transferred directly from the investor’s bank account to the fund. So, if you have Rs 1 lakh to invest, it first goes into a liquid fund. From the liquid fund, every week or month, a fixed sum (say Rs 4,000 per week or Rs 16,000 per month) is invested into an equity fund. The residual amount in the liquid fund continues to earn interest, while the investment into equities is staggered over a period of time.

The interest rate appears to be on the downward slide. For investors looking at fixed deposits, this could be the time to take advantage. But, there are minuses too.

The real estate prices have stagnated across cities in the country and the picture appears grim considering the demand-supply equation. Avoid buying property for investment purpose with aim of capital appreciation unless it is entirely self-financed and has a locational advantage. The current situation however can be good for buying for self-use. Search and identify properties and thereafter negotiate with builder for price-cut or discounts. Home loans are currently linked to bank’s MCLR and are supposed to reflect the changes more frequently than in the base rate era.

On the other hand, government is reportedly looking at a scheme for encouraging its employees to invest part of their 7th Pay Commission salary hike in a fund which would be used for recapitalisation of state-owned banks. High income government official, according to sources, could be roped in to invest in the fund by offering lucrative incentives like tax break or higher return.


Source : ET

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