- You want stuff
- Stuff is expensive
- You’ll get old and won’t have pension (unlike previous generations)
- Best time to start saving is the day you start earning
- If you leave money in the bank at interest rate lower than inflation, you’ll actually lose purchasing power—what you can buy using Re. 1 keeps going down as inflation goes up.
If you had Rs. 1 Lakh in 1978 and
- Left it as cash - Would be worth Rs. 7k by 2012 in terms of Purchasing Power Parity (PPP).
- Bought gold - Worth 37.17 lakh
- Invested in Sensex index fund - Worth 1.88 crore
Planning for goals
Different people have different priorities and goals. Typical goals could be
- Travelling the world
- Financially independent by 45 See r/FIREIndia
A goal without a plan is just a wish.
Establish your goals
- Identify your life goals so that you can plan towards those goals.
- Calculate what you need to achieve the goal. - if you want to do something 20 years from now, calculate assuming 10% inflation every year for India.
- Determine your risk tolerance - you need to have the stomach to see your portfolio go down 30% and not panic sell.
- Allocate resources to each goal
- Choose instruments aligning with risk appetite
- Invest regularly and systematically
Monitor and maintain your portfolio
- Establish benchmarks
- Compare performance to expectations
- Be vigilant, update expectations/strategies
Ask why someone is giving you financial advice
If a life insurance agent is offering advice, their motivation is usually their commission. Taking advice from a financial advisor who gets a flat fee is probably better.
LIC is not a great investment
LIC combines life insurance and investment. You do need life insurace and you should invest money, but you should keep both of those things separate.
|Insurance Plan||Sum assured||Annual premium|
|HDFC term life (online)||50 lakh assured||Premium 5,000|
|LIC Jeevan Anand||50 lakh assured||Premium 24,000|
LIC takes the surplus premium and invests somewhere, but the rate of returns is pretty terrible compared to other financial instruments.
First home? Yes, usually a good idea if you’re staying in the same place for at least 5 years. 7-10 ideal.
Usually long term appreciation for property is 10-15%. Maybe short term you might get lucky and double or triple, but this is rare.
|Home price||Sold in 7 years for||EMI cost||Gain/Loss||Recurring Deposit|
|40 lakh||80 lakh||35 lakh||45 lakh||47 lakh|
|40 lakh||1.2 crore||35 lakh||85 lakh||47 lakh|
Second home? No, probably a bad idea. Recurring deposit usually makes you more money.
30 year return is 10-11%, Equity is 15%. Having maybe 5-10% of total assets in gold is okay. In India this tends to be much higher as a lot of people like gold. Safety from government.
If you have a full time job, you won’t have the time or knowledge to manage a stock portfolio as well as professional brokers in Dalal street. It’s smarter to buy a managed basket of stocks using mutual funds.
Make a will
Write it and give it to trusted person. Better to get it written up by lawyer and get it registered (2k-5k cost)
Equity = stocks. Equity tends to beat every other asset class long term (even if you started right before something like the 2008 stock market crash). Last 10 year average returns: 16-17%. Next 10 maybe 12% as returns have fallen.
|Large cap||Mid cap||Small cap|
|Least volatile||Moderately volative||Most volatile|
Indian companies are not very well regulated, so small cap is risky. Mid to large cap is a better bet.
Thumb rule: (100 - your age)% in Equity, rest in debt.
Low volatility, expected returns are 7-9%. As you get older, move your assets from equity to debt so you have less volatility - a market crash can be a larger issue for you when you are older.
SIPs ensure that you beat market fluctuation and is a more sensible investment methodology than trying to time the market. “Time in the market is better than timing the market.” You can’t time the market, don’t try.
Direct v/s. Regular
Broker takes a cut in Regular mutual funds. Broker takes ~1% out of 1.25-3% expense ratio in the mutual fund. Direct funds don’t have the broker cut and expense ratio is lower.
Growth v/s. Dividend
Growth mutual funds reinvest your earnings back into the fund. Dividends pay out earnings to your bank account. Dividentds are taxed at a higher rate than capital gains, so unless you are relying on the income growth is preferable.
Company stock options
Some companies will give stocks as part of compensation. If you are holding these, you’re betting that your company’s stock will do better than any other type of investment. Safer idea is to sell and put money into mutual funds. You get an indexation benefit (better tax rate) if you hold foreign stocks for 3 years, so hold for at least that long.
Restricted Stock Unit
- Part of company compensation
- Granted on joining and/or every rewards cycle based on performance
- Vests over 5 years
Employee Stock Purchase Plan
- Option to purchase company stock
- At Microsoft, you can use up to 15% of your salary each month to buy MS Stock at 10% less than market rate. You should do this, it’s a no-brainer.
Mutual Fund Recommendations
From Binu Raj
- Franklin India focused Equity fund - multicap
- Motilal oswal multicap 35 fund - multicap
- PPFAS Long term equity fund - multicap w/30% global equity
- PPFAS Flexicap
- Motilal oswal focused 25 fund - largecap
- Mirae Asset Hybrid Equity fund - balanced fund (equity oriented, with 15-30% debt)
- Mirae asset emerging bluechip fund - midcap
- Franklin Prima fund - midcap
US/Global equity (to protect against Rupee depreciation)
- ICICI Pru US bluechip - US largecaps
- Motilal Oswal Nasdaq 100 - US stocks
Government savings schemes
Public Provident Fund (PPF)
The PPF is a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while also saving on annual taxes. You can put up to 1.5 lakh into your PPF account every year (lump-sum or monthly), and that amount is deducted from your taxable income. The Finance Ministry sets the interest rate every year. The interest rate for the quarter 1 April 2021 to 30 June 2021 was 7.1% p.a.
Employee Provident Fund (EPF)
The Employees’ Provident Fund (EPF) is a savings tool for the workforce. 12% of every employee’s basic salary + dearness allowance is invested directly into their EPF account, and an equal amount is contributed by the employer. The interest rate for 2020-21 was 8.5% p.a. The money can be withdrawn at retirement, if you are unemployed for over two months or certain other conditions.
The employer contribution is exempt from tax, while an employee’s contribution is taxable but eligible for deduction under Section 80C of Income tax Act. The money which you initially invest in EPF, the interest you earn, and the money you withdraw after (as long as it’s after 5 years) are all exempt from income tax.
Universal account number (UAN) is a unique 12 digit number for your EPF account. Stays the same even if you change jobs.
A new PF account number is generated every time an employee joins a new organisation. It is recommended to transfer your EPF account when you join a new company (but you can also choose to withdraw the money).
Voluntary Provident Fund (VPF)
An employee is allowed to contribute more than the mandatory 12% towards PF in the VPF, but this amount is not matched by the employer and is not exempt from tax.
Employees’ Pension Scheme (EPS)
Out of the 12%, some part goes into the pension scheme, which can be withdrawn after the age of 50 (early retirement) or 58 (regular retirement) as a montly pension.