Job hopping for better pay and career growth is bold yet strategic. Especially amongst Genz and Millenials, according to a recent survey. In addition to switching careers and jobs, the new generation knows where to invest.
If you find yourself belonging to this dynamic generation, then this blog is your saving grace.
Whether you’ve recently made a career switch or have been steadily climbing the ladder in one place for more than five years, it’s time to leverage your gratuity fund and make it work harder for you.
This blog can be your ultimate savior,, providing valuable insights on how to invest your gratuity amount wisely. We have uncovered simple yet unique ways to invest your gratuity amount. Let’s dive in and unlock the potential of your hard-earned money!
What Is Gratuity? And When Are You Eligible to Receive It?
Gratuity is a lump-sum token of appreciation given by an employer to an employee as gratitude for their long-term service. Employees become eligible for gratuity after completing a minimum period of continuous employment, typically five or precisely four years and 240 days.
Where to Invest Your Gratuity Funds?
When the gratuity amount lands in your hands, your mind starts spinning with thoughts on where and how to invest the gratuity amount and build a substantial corpus. Don’t worry! This is your gratuity fund investment 101 guide, providing a no-nonsense approach.
Investing your gratuity funds is a wise decision to grow your wealth and secure your financial future. The best investment options for your gratuity funds depend on various factors such as your financial goals, risk tolerance, and investment horizon.
Decision on where to invest gratuity fund requires carefully analyzing your financial goals, risk tolerance, and time horizon. Let’s uncover the nuances of how to invest gratuity amount step by step.
Step-1 Evaluate Financial Goal
Before rushing into investment decisions about how to invest gratuity amount, take a moment to evaluate your financial goals. Consider what you aim to achieve at this stage of life:
- Building a retirement fund: Determine if your priority is establishing a solid financial foundation for your retirement years.
- Generating fixed/passive income: Assess if you seek a reliable income source from your investments.
- Financing your child’s education: Consider whether supporting your child’s education expenses is your key objective.
By understanding your financial goals, you can tailor your investment approach to align with your specific aspirations and create a plan that suits your needs.
Prioritize building an emergency fund equivalent to six months’ worth of expenses and paying off any outstanding debts, such as car loans or home loans, before deciding how to invest gratuity amount.
Step-2 Measure Risk Appetite
Assessing your risk appetite is essential before diving into how to invest gratuity amounts. One easy way to determine your risk tolerance is based on your age.
Generally, when you are younger, you have a longer time horizon and more opportunities to earn over a longer span. And to recover losses too. Which allows you to take more aggressive risks.
However, as you enter your mid-40s, your risk appetite tends to shift towards being moderate to conservative as you have fewer years left to earn than in your 30s.
Since gratuity is received after completing five or more years of service and leaving the organization, your risk appetite naturally becomes moderate to low. Let’s move on to an action plan based on low to moderate risk tolerance.
Step-3 Action Plan : Selecting the Investing Instruments
Once you have identified your financial goals, prioritize them accordingly. Allocate a larger portion of your gratuity fund to high-priority goals, such as building a retirement corpus.
When deciding how to invest your gratuity amount, remember to hold these investments for longer and ensure you have a solid financial backup for emergencies.
Since You will require a retirement corpus after age 60, you have 20 years to let that fund grow. Although these options offer lower interest rates than high-risk investments, the longer time horizon allows for the potential to build a decent-sized corpus.
How to Invest Gratuity Amount Option 1 – Public Provident Fund
Consider investing a portion of your gratuity amount in the Public Provident Fund (PPF), a popular and reliable government-backed scheme. Here are some key features
- Maximum investment limit: You can park a maximum of Rs 1,50,000 per year in the PPF, starting from as low as Rs 500 per month.
- Tax-free interest returns: The PPF offers tax-free interest returns ranging from 7% to 9%.
- Premature withdrawal: In case of emergencies or to fund your child’s foreign education after 5 years, you can make a premature withdrawal with a 1% penalty.
- Accessibility: PPF accounts can be easily accessed through national or private banks and post offices.
How to Invest Gratuity Amount Option 2 – National Saving Scheme
If you are looking for ways to invest your gratuity amount,NPS comes with annuity features. National Pension Scheme (NPS), a market-linked scheme that provides a monthly pension after you turn 60. The scheme presents the following notable features.
- Investment limits: Maximum investment of Rs 200,000 per year or a minimum of Rs 500 per month.
- Investment portfolio: NPS invests in government equities, bonds, and corporate bonds. You can choose between active or auto mode for investment allocation.
- Maturity benefits: Upon maturity, you receive 60% as a tax-free lump sum and use the remaining 40% to purchase a taxable annuity plan.
How to Invest Gratuity Amount Option 3 – Fixed Deposit
If you’re also wondering how to invest your gratuity amount, consider exploring the most common and traditional investment instrument – FD.
- Interest rates: FDs typically offer fixed interest rates, ranging up to 6.5%, depending on the bank and tenure.
- Taxation: The entire corpus is taxable as per the applicable tax rates.
- Accessible through banks: FDs can be opened with public and private banks, offering convenience and accessibility.
How to Invest Gratuity Amount Option 4 – Mutual Fund
Mutual funds have been around for over 25 years and have proven to offer better returns when chosen carefully, considering your risk appetite. While traditionally not considered a conservative option, investing in mutual fund schemes such as blue chip, flexicap, and large-cap funds can be a safer yet intelligent choice.
Evaluating Your Option for Retirement Fund: PPF, FD , NPS and Mutual Fund
To build an enormous financial corpus, and to understand the depth of this important investment decision, let’s consider a hypothetical scenario. Imagine you are a 40-year-old bank manager who has received a gratuity amount of ₹12,19,231 after 12 years of service. Assuming you are allocating 600,000 to your retirement fund for 20 years.
|PPF (7.1%)||NPS (10%)||FD(6.5%)||Mutual Fund (12%)|
|Investment Patterm||₹30,000 for 20 years||30,000 for 20 years||₹600,000 one time||600,000 one time|
|Interest after 20 years||₹7,32,000||₹12,90,000||₹15,14,000||₹51,88,000|
|Maturity Amount||₹13,32,000 (Tax free & guaranteed)||₹18,90,000 (60% lumpsum, 40% annuity)||₹21,14,000(Taxable)||₹57,88,000(Taxable)|
While all these options answer how to invest gratuity amount most securely, there are various combinations within these three options as per requirement.
- If you want tax savings, you may prefer PPF.
- FD could be a suitable choice if you don’t require premature withdrawals.
- Mutual funds can be an intelligent way to multiply your investment if you are disciplined and willing to take higher risks for higher returns.
It’s important to note that returns on mutual funds and NPS are market-linked, whereas PPF and FD offer guaranteed returns to some extent as banks and the RBI regulate them. The wise choice would be to choose multiple options and distribute the gratuity fund in your desired proportions.
Financial Goal-2 : Passive Stream of Income
Creating source of passive income at an early stage can contribute to achieving early financial freedom and ticking off important financial goals like buying a house, or car, funding education, or going on a vacation with substantial savings.
How to Invest Gratuity Amount Option – 5 Renewable Energy – Sustvest
Earlier, investing in renewable energy projects was limited to institutional and angel investors with huge capital. However, retail investors like you can subtly invest in this highly futuristic impact investment avenue.
The rooftop solar projects generate upto 15% IRR as returns for their investors. Who can also hold digital ownership of those assets at the same time they are leasing them to consumers for a monthly rent.
For instance, If you had invested Rs. 200,000 in SustVest’s project – Rooftop Solar Project – Unnathi Woods Co-Operative Housing Society, your investment would have generated a return of Rs. 59,000 over three years at an IRR of 11.06%.
How to Invest Gratuity Amount Option-6 : Monthly Income Plan
Investing in a lump sum to generate passive income can efficiently utilize your gratuity fund. Many prefer monthly income schemes from post offices, banks, and insurance companies.
For example, the post office’s monthly saving scheme offers a 7.1% interest rate for a five-year tenure. At the same time, banks and insurance companies may provide options with lower interest rates and extended tenures.
By investing a lump sum, you can earn a regular income to cover expenses, makes EMI payments, and boost savings. These schemes offer a reliable way to generate passive income and use your gratuity fund effectively.
Financial Goal-3 Child’s Education
Planning for a child’s education involves creating a healthy mix of short-term goals with moderate to high risk and long-term goals with moderate to low risk.
Short-term goals include recurring expenses such as daycare, tuition, and extracurricular activities. These expenses can be effectively managed through a well-structured passive income plan, such as generating regular income from rental properties.
A strategy similar to retirement planning can be employed for higher studies or foreign education. It involves a combination of mutual funds, fixed deposits (FDs), the Public Provident Fund (PPF), and the National Pension Scheme (NPS).
Furthermore, the Indian government has introduced initiatives like Sukanya Samriddhi Yojana, among others, to benefit girl children.
By combining these various investment options and government schemes, parents can ensure a comprehensive plan to meet their child’s education expenses by using their gratuity funds effectively.
How Do I Calculate Gratuity?
To calculate gratuity, multiply your last drawn salary by the number of years of service and a factor of 15/26.
Am I Eligible To Receive Multiple Gratuity Payments Over The Span Of My Long Career?
Yes, you can receive multiple gratuity payments if you change jobs and meet the eligibility criteria for each employment period.
Should I Invest The Entire Gratuity Corpus In A Single Investment Instrument?
It is advisable to diversify your gratuity corpus by investing in a mix of investment instruments based on your financial goals, tax implication and risk tolerance.
Will The Tax Implications Of These Investment Instruments Remain The Same 20 Years Down The Line?
Tax implications of investment instruments may change over time, so it is important to stay updated with the prevailing tax laws and consult a financial advisor for guidance.
When evaluating investment options for how to invest gratuity amount, it’s important to consider factors beyond just returns. Instruments like mutual funds may offer higher returns, but expenses and taxes should be taken into account. PPF provides tax-free returns and guarantees, but may not outpace inflation.
Sustvest will not only give you financial return, but also leaves you with satisfaction of doing your bit toward the environment.FDs offer stability but have withdrawal restrictions, and NPS requires the purchase of annuities from a third party. Additionally, investing in renewable energy can enhance your portfolio with stable passive income. It’s essential to create a combination of these instruments, considering various factors rather than solely focusing on returns.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.