PPF – can you start at any age?

As many of you know by now, PPF is one of the favorite financial instruments that I encourage others to go for. There is also a lot of curiosity about the product, as is evidenced by the views, comments and questions on the posts that I have written about PPF. Many people have asked me if there is a correct age to invest in PPF or is there an age after which we should not look at PPF as an investment. Let me try to address these issues in this post.

In order to gain the maximum possible advantage out of compounding, one should be invested in PPF for as long as possible. Therefore, any investor who is just starting his/her work life should open an account and try to maximize the contribution every year. The term of the PPF account need not be seen as 15 years, you can continue it in blocks of 5 years for as long as you want. You can withdraw from it only if you need the money for a goal that has come up and for which you do not want to redeem your equity portfolio. The best situation for your PPF will be if it is able to grow uninterrupted, you can create serious wealth if you can do so. Remember PPF is important even if you have PF as you can withdraw from your PPF in a far easier manner than you can from your PF. In case you are not having a PF account then consider opening a PPF account for your spouse too.

What happens if you are in the age group of 30 – 40 and have not got a PPF account so far? Well, you should still go ahead and open one. Your children will probably need money for college when you are between 47 – 53 and the PPF account completing around that time will serve as a nice hedge. I know many of you are saying – “but I am doing SIP for some years now and that will take care of it”. Maybe it will, but it is quite possible to have a string of poor years in the markets just when you need the money. Having a PPF account with all the cash sitting there is a perfect antidote. And, if it so happens, in case you do not need to withdraw again just let it grow.

What about people older than 40? Well, I think they should also have a PPF account. You can time it such that the 15 or 20 years are up when you are just retiring. In the first decade of your retirement use the PPF and PF money to take care of your expenses. This will help your MF and stocks portfolio to grow and hopefully there will be enough for long term care too, should you need it.

If you are beyond 50, you can still have use of PPF account for tax saving purposes and to use the tax free withdrawal feature. This can be a very useful way of ensuring that you do not pay much taxes on the income that you will need for taking care of your regular annual expenses. Finally for even older people you can operate a PPF account for your grand children. They will get a pretty handy sum to start off in life when the pass out of college.

So there you are – the stodgy debt product that does not seem worth investing in can be used in so many different ways. If you still do not have a PPF account, I hope this post has now encouraged you enough to make opening it as one of your 2016 resolutions.

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The 10 commandants of investment

I was quite happy to see the response to my earlier post, The 10 Commandants of your financial life. This has encouraged me to write the current post. Note that, some of the ideas will be overlapping as your financial life is really a super set of your investing life.

Without further ado, here are my 10 commandants of investment life:-

  1. Insurance is not an investment and it is best to steer clear of products that combine the two in some manner such as ULIP. You definitely need insurance, treat it as an expense incurred annually.
  2. Use goal based investing only to have an idea of the overall amounts needed in different times. Once you know this, invest in the 3 portfolios of Debt, MF and stocks. There is absolutely no need to map separate portfolios for each goal, it is a waste and also harmful.
  3. Your endeavor should be to invest as much as possible, after you have taken care of the lifestyle that you desire and can afford. Do not be constrained by your goal amounts, more money is never a problem as you can use it for a variety of good purposes.
  4. You can afford to invest in asset classes such as Real Estate, Commodities, Forex only if you have the requisite knowledge and can handle the required transaction logistics smoothly.
  5. In normal circumstances, PF and PPF should be adequate for Debt, MF portfolio should cater to all goals except retirement ( which it does partly ) and all other surplus amount should go into direct stocks. In case you are uncomfortable about stocks then you can put the money into MF.
  6. Buy your own home to stay in, if you are in a stable job and are likely to be in the same location. If not then renting may be a better option. When you near retirement, it is important to have your own home.
  7. Redemption for a goal – use stocks if you are having windfall gains in them, use MF if your XIRR from them are reasonably good and use Debt if both of these are not true and the market is going through a bad patch when you want to redeem.
  8. Withdrawal in retirement – make sure you use debt first unless equity markets are really on steroids for the year in question. In general, let the equity investments grow as long as possible.
  9. Ideally in retirement, you should have an arrangement for tax free passive income in the first 10 years. This can be achieved through PPF withdrawals, Tax free bonds, Dividend income etc. For next 10 years look at MF redemption or selling stocks depending on the market situation. For the third decade stocks are the best option.
  10. Longevity of life that you plan for depends on several factors and only you can decide for yourself. However, whatever your figure is, your plan should not see your corpus come to zero value at that time. For example, if you plan for 85 years, make sure you still have a reasonable corpus for another 5 years or so, just to be on the safe side.

I have not explained my rationale for some of these investment commandants, if you are interested in understanding that go through my blog for posts relating to all of these points.

Wishing all readers a very happy and successful 2016 where you will make considerable progress in your goal of achieving financial independence.

The 10 commandants of Financial life

It is Christmas season and my thoughts invariably turn to the Bible at this time. I have always found it to be a treasure trove of wisdom and the ten commandants are a perfect example. They are all great principles for human beings to lead a good life, it is a pity that they are not understood well and followed even less.

Over the many years of my financial journey, I have learnt a lot from many persons and situations that have helped me to frame my own set of 10 commandants that can be a definite guide in our financial life. I cannot claim that I have always been able to follow these meticulously but when I have, their value has been very clearly demonstrated to me.

I thought it will be a good idea to share my set of 10 commandants with the readers in this festive season, so here they are:-

  1. You must always strive to build up your capability / skills, so that you are able to maximize your earning capacity.
  2. Have a clear understanding of how you are earning, spending and investing money in terms of the present and future.
  3. While trying to maximize your current active income through your skills and expertise, you will look to set up a passive income stream.
  4. Your only real financial goal should be to achieve financial freedom, irrespective of whether you seek early retirement or not.
  5. Your first priority must always be to live your present life well, the next to protect your future through insurance and the third to invest wisely for the future.
  6. While procuring assets you must be clear that you can afford the same. In general, try to avoid loans as much as practicable. Even in cases where you need to take loans, pay it back as soon as you can.
  7. Do not get obsessed about investments from an early stage in life. You will find it is much simpler to invest increasingly larger amounts as you progress through life. Enjoy your present, it will not come back.
  8. If faced with conflicting choices on usage of money, follow the Suze Orman dictum: People first, then money, then things.
  9. Never put constraints on what you really want to do because of money issues. If you like traveling or have some other hobby then indulge yourself, within your financial bounds. It is only one life that you have to lead.
  10. If there is a serious mismatch between money availability and the kind of life you want to lead, you must make attempts to rectify things. Do not be scared to take up new challenges, there are many examples of people succeeding in their second or third careers.

I also wanted to share with all my readers that the current post is the 200th one in my blog. When I started 6 months back I did have the goal of building a repository of financial knowledge that will help people who are in need of such information. It has been a wonderful experience so far and I hope to continue in the new year,

Would love to hear from all my readers about their thoughts on my blog.

Your 2016 MF investment plan

In the 3 portfolio strategy that I advocate, Mutual Funds have a special place. They are an investment vehicle that lets you participate in equity as an asset class, without the necessity of any great understanding of the markets or business. For a person who is stepping into equity investments for the first time, MF offers good learning potential. Being with MF for some time can be an ideal platform to transition into direct stocks.

Unlike debt where your investment strategy and choice of instruments will depend on your stage in life, the MF investment strategy is roughly the same for all kinds of investors albeit with some nuances in approach. I have written about it extensively in the blog on various aspects of MF investing and will therefore not repeat it here. Let me instead outline the key aspects of MF portfolio building that you must follow.

  • Number of funds:  Several people may tell you that you can do all your MF investments with 1-2 funds. Nothing can be further from the truth. Different categories of funds have very differing mandates and in order to get adequate market coverage you need multiple funds in your portfolio.
  • Portfolio composition: My suggested composition will be as follows:-
    • 1 large cap oriented fund
    • 1 multi-cap or diversified equity fund
    • 1 mid cap fund
    • 1 small cap fund
    • 1 international fund with US bias ( optional )
  • Buying mechanism: While SIP is the most common mode of buying there are serious conceptual flaws in this mode. I prefer buying MF based on the relevant indices movement. Read my posts in the blog if you want to invest intelligently. If you do not have the inclination or time then just do SIP, even with the flaws it will work.
  • Relative weights: I personally prefer allocating equal weights to all funds in my portfolio. However, this is an area where your investment attitude should take over. Do what you are most comfortable with and, if needed, change over a period of time. It is ok to allocate 50 % of your money to large caps if you are not a person who can deal with volatility very well. On the other hand if you are comfortable with taking risks allocate more to mid and small caps.
  • Portfolio rejig: Ideally review your portfolio once a year and compare it with your targets and the benchmark indices. If the fund seems to be doing ok, do not change it. Normally I prefer a change only after 2 years even though you may need to act sooner if performance is poor.
  • Choice of funds: I have deliberately kept it till the last as it is one area where investors are most confused about. You do not need calculators or any deep kind of analysis with all kinds of ratios in order to choose MF. There are fairly good ratings done by companies and people who are professionals in handling these. Just go with them, it is not rocket science. Most fund managers invest in the universe of 250 companies or so with most investments going into the top 100 One good fund is really similar to any other.

So that is really all you need to do in building up a good MF portfolio and investing in it. Read my other posts in the blog for details if you want.

Your 2016 Debt investment plan

Now that we have established as to how we can have 1 goal of a FI number and invest in 2 asset classes with 3 portfolios, we need to get down to the strategy of investment in the 3 portfolios. Let me start with debt.

For the purpose of coverall all sections of readers, let me divide the investing populace into 3 categories. The first will be people who are below 40 years in age and are likely to continue work for at least another 15 years or so. For this category of people the only thing they need to do is to keep contributing to their PF / NPS and PPF accounts. Remember that it is important too maximize your PPF account contribution, you will see the real benefits of compounding in the years to come. For people who do not have a PF or NPS account, I recommend you open another PPF  account in the name of your spouse.

For the next category of people who are in the age group of 40 to 60, my recommendation is the same. Keep extending your PPF accounts, make sure you contribute the maximum amount and ideally never withdraw from it unless it is to meet a goal at a time when redemption of equity is inopportune. In addition to this you can invest in Tax free bonds if you are looking at a regular income in a few years time. Avoid FD as they are clearly tax inefficient, you may want to look at POMIS and also at different types of debt funds if you have surplus money to invest after all the above.

Finally, we come to the category who are retired, even though they may still have some secondary profession. For these people Tax free bonds are a must and they should put in as much as they can. In terms of FD, Senior citizen’s saving scheme is the only worthwhile investment. POMIS along with Debt funds can be looked at. The PPF accounts need to be continued and you can withdraw from these now. If you have the financial means, keep contributing the maximum to it. Assuming you have contributed to PF and PPF diligently over your working life, these alone will go a long way in taking care of your post retirement needs.

In my opinion, dent investments should be kept simple. Unless you have serious amount of surplus money, do not go for Gilt funds and the like. The best part of debt instruments is predictable returns, there is no need to go for instruments that are likely to have volatile returns. Equity is volatile in any case – I will deal with this in the next post.

Your 2016 Financial plan – As simple as 1-2-3

Most things in life are simple, till we decide to make them complicated. This is true of financial planning as well. In the last post I wrote about how you can crystallize all your goals into a single FI number and track it easily, which is so much better than juggling with 6-7 goals.

So now that you have that personal FI number what do you do next? Well you need to decide about which asset classes you should invest in. The most common asset classes are Debt, Equity, Commodities, Real estate, Gold etc. While an investor can definitely invest in all of these and more my feeling has always been that for most investors, debt and equity are sufficient for creation of an effective financial plan. Real estate is important to the extent that you must own your own house, at least by the time you retire or preferably much earlier. You may at best stretch it to a second home if you are comfortable in dealing with the logistics. However transactions in the Real estate are time consuming and cumbersome so it is best avoided unless you have specialized knowledge. In the same manner commodities are not for the average investor and gold should be looked at more for consumption than for investment.

I often get asked the question as to why we should not deal with only equity or only debt. Equity is a great asset class for the long term but you cannot depend on it at any particular point in time, be it long or short. The biggest risk in equity is that you may be forced to redeem it at the wrong time due to your need for meeting a goal and this can be grievously injurious to your financial health. A solid grounding in debt ensures that such risks are mitigated. Why not debt alone? For starters debt returns will never beat inflation on a consistent basis. This means that you will need to have a really large asset base in debt to take care of your future goals. For people who have it, this may be a possibility but that is really not true for most of us. I will go on to say that you should not go with a debt only approach even if you have a large asset base as growth in your portfolio can be best achieved through equity.

Now that we have got the asset classes sorted out, how many portfolios should you have. Many people decide to have a very sub-optimal strategy of mapping each goal to a specific portfolio. Now that we have only one main goal there is no need to do so. I think all investors should have 3 portfolios namely Debt, Mutual funds and stocks. As I have explained this in earlier posts I am not repeating my rationale here. You may want to search the blog and read the relevant posts.

So there you have it – your financial life from 2016 onward can be as simple as 1-2-3. One goal, two asset classes and three portfolios are all that you need to take care of your finances. In the next few posts I will write about how you should invest in the 3 portfolios for 2016 and beyond.