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.

2015 in review

The WordPress.com stats helper monkeys prepared a 2015 annual report for this blog.

Here’s an excerpt:

The Louvre Museum has 8.5 million visitors per year. This blog was viewed about 75,000 times in 2015. If it were an exhibit at the Louvre Museum, it would take about 3 days for that many people to see it.

Click here to see the complete report.

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 2018 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.

Your 2016 plan – Have a single goal

As the year is coming to an end, I have decided to do a series of posts on how one should be investing in 2016. There are many ways to approach this and I will choose the simplest one. We will try to look at why we are saving ( goal ), how much we need to save ( goal amount ), what should be the investment approach ( asset classes ) and finally how much we should invest in each of the asset classes ( investment plan ). Let me start by talking about the goals in this post.

I am personally a great believer in the minimalist approach and I think the fewer aspects you have to consider, the greater can be your focus. Now many of you will be thinking that you have a whole lot of financial goals, so how is it that I am recommending to deal with a single goal? Relax, I am not trying to suggest that you give up your goals. I am only suggesting a mechanism by which all of your different goals can be consolidated into a single goal. If we are able to achieve this, it will be far easier to track and manage. You will be knowing at any point of time as to how much you really need and how are you doing with respect to the need.

All of us who are working in a job or business are fundamentally trying to achieve Financial independence, which is really a state where you can live your life without depending on a regular active income. There are several posts I have written on this, if you are interested search the archives of my blog and read them up. The single goal you should be having is the FI number. While this can be expressed in absolute money terms, I prefer to view this in terms of multiples of your current annual expenses. 

How do you work out your FI number? Well if your current annual expense is X and you are going to live for another 40 years according to your estimate, then the retirement component will be 40X. For all your other goals you get a value based on the current costs. For example if X is 6 lacs for you and your son needs 12 lacs for college in today’s costs then that goal will be amounting to 2X etc. Do this for all your goals and add them up to get your FI number. As I said before, you may need to read the other posts on this topic, there are a few good case studies too in the blog.

Once you have your FI number, you can compare your current value of investments to it and see how you are doing. Let me give an example of how this will work in a typical case:-

  • Ravi is 40 years old and his current annual expenses amount to 6 lacs. So here we have X = 6 lacs
  • His FI number is calculated to be 60X, assuming he will live till 80 and taking care of all his other goals.
  • In current money terms if Ravi has 3.6 crores today, he can consider himself to be financially independent.
  • At present Ravi’s current value of all investments combined is equal to 1.8 crores.
  • Ravi has therefore reached 50 % of his goal and must continue to work and invest more over the next few years.

What should be your financial resolution for the new year? You must know your FI number and be able to say where have you reached in achieving the same. If you are able to do just this much, you are definitely on the road to financial freedom.

Junk these financial myths in 2016

A new year is just round the corner and this is normally a time for great joy and cheer. Families and friends come together at this time, happiness is shared and life feels good, despite all the problems that we face otherwise. It is also a time when great resolutions are made, some which are followed up through the next year and many which are unfortunately forgotten. I think it will be a good idea to do a series this week on how to invest in 2016, in the different asset classes.

However, prior to this I wanted to list out some investment myths which are injurious to your financial health. Like all myths, these have got created over a period of time due to a variety of reasons. Firstly, there are vested interests which want to promote their products or services. Secondly many bloggers and Facebook posts repeat things without really understanding what the actual implications are. Thirdly, people who invest in these products or services become fiercely loyal to these due to the endowment effect and try to shout down anyone who says anything that is contrary to the accepted belief.

In the last 6 months I have written about many of these myths and I will not explain these here. If you are interested in knowing more about them go through my blog to learn more. I will simply point out the myths here and ask you to junk them in the year 2016. Our conceptual flaws get reflected in our investment actions and that is a bad thing as far as your financial life is concerned. So on to the myths now:-

  • Equity returns compound – sorry, they simply do not no matter how many people tell you that they do.
  • Direct stocks are risky – well, they are as risky as any equity MF as they invest in the same underlying assets.
  • Balanced MF are ideal investment – they are not, you must ideally keep your equity and debt portfolios separate.
  • SIP is the best way to invest in MF – except in a continuously declining market, there are far better ways to invest in MF.
  • PPF is an old and stodgy product – in the debt universe there is no better product and this can be used in many innovative ways.
  • You should have separate portfolios for each goal – this one is a seriously bad idea, it increases clutter and your returns are going to be sub-optimal.
  • Tax free bonds are bad investment – clearly people know better than self proclaimed experts as the NHAI issue got oversubscribed in 3 hours!! For people looking at regular income, these are ideal.
  • Mid cap and small cap funds should be avoided – another bogey and a bad one too. These funds have given and are likely to give higher returns as compared to diversified equity funds, albeit with volatility.
  • Home loan is a good loan – no loans are good as you end up paying huge interest. Take a loan if you must but pay it off as soon as you can, that is the only sensible way of dealing with it.
  • Keep home loan going because of tax savings – silliest idea I have heard in life, just do a cash flow analysis and you will see why.

There are, of course, many more myths but these are the ones you need to junk first. I will be happy to discuss more on these but only after you have read the relevant blog posts and understand my viewpoint. Believe me your financial life will be a whole lot better after you get rid of these myths and decide to do nothing with them in the future.

In my next post I will look at things more positively and start the series I talked about in the beginning of this post.

Retirement spending -use PPF intelligently

In the cyber world feedback is instantaneous. Within hours of writing my post on how the retirement corpus could be much lower than what people normally think, two of my friends called me. One was excited that his current investments were much ahead of the number I had stated, while his expenses were in line with my post. The other expressed doubts whether 40 lacs in PPF would go a long way for retirement usage.

Well the proof of the pudding is in the eating, so I decided to do a basic spreadsheet on it. This is something I normally do not do – after all, if you are clear about something fundamentally then where is the need to prove the obvious? However, the assumptions and results are as follows:-

  • With a starting amount of 40 lacs, deposit of 1.5 lacs for 10 years and withdrawal of 4 lacs every year for 10 years you will still have 50 lacs at the end of 10th year.
  • In the second decade you can withdraw 6 lacs every year without any deposits and still be left with 21 lacs at the end of 20th year.
  • Note that all withdrawals are tax free and you will get 80 C benefits on the deposits for the first 10 years.
  • Interest rate assumed is 8 %, which is probably what it will average out as over the years. Conservative investors can use 7 %.

The bottom line is this – using PPF in an intelligent manner will stretch your money as well as make it tax free which is an ideal combination. The other key idea is to let your equity grow till the third decade of your retirement. You may well need great amounts of money for long term care, should you survive beyond 80 years and equity is the best bet.

So, no matter whether you are just starting out, are in your thirties and do not have a PPF account or have one which is kind of dormant, you must fully fund your PPF account. It will be a hedge in times when you do not want to redeem equity for your goals and it will also serve as a great tool for retirement planning when the time comes.

Many people confuse PPF with equity investments which is comparing apples and oranges. You do need equity in your portfolio but PPF is clearly the best debt instrument available which must be your first choice. Look at debt MF etc only after you exhaust your PPF contribution – preferably for both you and your spouse.

You will be glad in your retirement years that you took this seemingly dull but eminently sensible approach.