Personal finance has not seen such tough times before in India

These are very tough times for the whole world and especially for India. Over the last 5 weeks or so, I have been putting off writing any blog posts as I was waiting for the market to stabilize. However, the way things have been going on, that does not look to be anywhere in sight. I have also got several requests from people wanting me to write a few posts and have therefore decided to honor those requests.

To begin with it is important to understand that the situation we see today is unprecedented in the personal finance space. I have been investing for myself over 3 decades now, having started in 1988 when I joined my first job after having finished my MBA from IIM Calcutta. In this long journey there have been several ups and downs that have taken place including years such as 1990, 2001, 2008 – 2010 where the stock markets have gone through a roller coaster ride. In most of the cases the markets have bounced back over a period of time and the maxim that over a medium or long term the markets will mitigate the risks have always worked out well. Even this time many financial planners and MF houses are trying to assure investors with these same words. I am sorry to say otherwise, but the current situation will not see any quick turnaround and people thinking it will be business as usual soon, are clearly not understanding the impact.

Let me try and explain in a few points why I think so :-

  • The Covid-19 impact is worldwide and it is long term. Given the current context of losses of lives throughout the globe, the last thing countries are thinking of is business. Any return to normalcy cannot be expected unless the infections cease to occur and that seems to be 3-6 months away even as per the optimistic estimates.
  • The current problem in India is on all fronts – with MSME companies, with larger units, with migrant laborers, with exports, with manufacturing, with services etc. In short all aspects of demand and supply are affected adversely in the current situation. Also remember that we were hardly doing very well prior to the lockdown.
  • The deep cuts suffered by the indices and all kinds of stocks are actually just the tip of the iceberg. I am convinced there is more pain left in the markets yet and, what is more, I see no real possibility of the markets coming back to February 2020 levels in the next 2 years or so. It will be nice if it happens but chances are remote.
  • India will need to spend significantly to counter the effects of the virus, in supporting the jobless people through cash and kind, in providing incentives and support to the industry to be back on its feet. Our production capacity as well as demand has been seriously compromised and even if the virus goes away in the next month, it will take us more than a year to get back where we were. So in effect, the whole financial year is kind of lost to the virus if we are lucky. If we are not lucky then it can well be one more year or even worse.
  • I will specifically write about personal finance investments in terms of equity and debt asset classes, but I hope the above has given you an idea about why I feel the situation will not improve in the short run.

A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at rajshekhar_roy@yahoo.co.uk

Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.

My cash flows and investment plans for 2020

The start of a new year is always full of excitement and hope. There are new opportunities to explore and you hope for a lot of significant events to take place in the year, irrespective of what may have happened in the earlier one. In my previous posts I had outlined how 2019 was a fairly poor one both for my own active income generation as well as for the markets. In this post let me talk about my plans for 2020.

One must always start with the cash flow outlook for the year. Fortunately, with both my children becoming financially independent of me now, courtesy their careers, my major head of cash outflow is gone now. Currently their college education fees are all done and even though Ronju may get into a B school sometime in the future, we can always look at it through Education loans. On the flip side our expenses on travel are ever increasing due to the number of trips as well as the way we travel. Last year we had 3 vacations outside India, 2 full vacations in India as well as several shorter trips for leisure or family issues. 2020 looks similar as we already have a planned to visit somewhere out of India in March. Our daughter is fortunately staying with us now and our son is closeby in Bangalore. Based on all these I am looking at cash outflow in these terms :-

  • Regular household expenditure likely to be in the range of 6 lacs
  • Travel expenses can be estimated at 6 lacs to be on the safe side.
  • Family support will be in the region of 2 lacs.
  • Rent for our Hyderabad apartment is around 3.5 lacs.
  • So overall cash flows required will be in the range of 17.5 lacs

Against these the cash inflows I am expecting in 2019 are as follows :-

  • Interest from Tax free bonds, InvIT funds and POMIS will be about 4 lacs
  • Dividends from Stocks and Equity MF schemes will be about 3 lacs
  • Capital gains from FMP redemption will be about 2 lacs
  • Rental income from our Chennai apartment  will be about 4 lacs
  • Income from Debt funds and stock trading will be about 1 lac
  • Repayment of an earlier loan will be about 3.5 lacs

The above looks good but what if the markets continue to do badly and the dividends dry up? The first line of defense will of course be my active income generation through my Consulting practice and Mentoring services. Additionally, as a backup plan I have the PPF accounts of both me and my wife. At present it earns about 5 lacs in interest per year and I can dip into it if needed. Another way could be to redeem some of my Debt MF schemes, to the extent I need the money. A final option will be to sell some stock that is doing really well but I do not feel this will be needed.

What about investments then? Well, in my present stage of life I am not looking at too much investment obviously. Even then, I had started a secondary stock portfolio in 2018 and have invested about 11 lacs in it so far. My idea is to let this portfolio grow and also do selective trading in it, something I have wanted to do for a long time. I do not want to do this on my primary stock portfolio where the plan is to have it for the really long term. Based on all of these the new investments I plan to do in 2020 are as follows :-

  • 3 lacs in the two PPF accounts that we have.
  • Put all FMP redemption money in Hybrid funds – this will be about 10 lacs in the year 2019. Part of this may also be used in my secondary stock portfolio.
  • Build the Secondary stock portfolio to at least 14 lacs by putting in a minimum of 3 lacs in this year.
  • Look at any interesting NFO themes as they become available.
  • Keep adding to my Primary stock portfolio based on available money.

Where will the money for this come from? Well, what ever income I have from my Consultancy practice and Mentoring services will all be invested in above avenues as my passive income is adequate to take care of my cash flow needs.

So things look rather good right now, hoping that the markets will recover this year !!

Where should you be putting your money in 2020?

To begin with let me wish all my readers a very happy and prosperous 2020. I wish this year is a good one for you in your life as well as the financial space. Though I have not written much lately, I saw that yesterday’s post was my 500th one in the blog and that gave me a lot of satisfaction, especially as many readers have told me from time to time that they have found several of my posts quite helpful in their financial journey.

So what does 2020 have in store for us? At a fundamental level one has to realize that the situation in India is a study in contrasts right now. We have a government seemingly under siege but yet acting as though they are in a hurry to get contentious issues pushed through, an opposition that was in disarray but have now got a fresh lease of life due to the controversial decisions of the government, stock markets at a lifetime high yet several stocks are languishing rather badly, big plans on investments in infrastructure and other areas but employment situation and IIP/GDP numbers are poor. In very simple terms we are poised for great growth as a country but the risks that are associated with such growth possibilities are also substantial. The good thing is 2020 will give us a very clear direction as to which way we are going and that will set th tone for the decade.

Where should you be putting your money in 2020? This can be answered depending on whether you are an optimist or a pessimist about the India story. For a long time now the stock markets have been pining to see earning growth for companies and this year will be a make or break year in that regard. Corporate governance and banking regulations have been in the news for all the wrong reasons and the current steps taken for getting these corrected will also come to fruition this year. At the present point in time both debt and equity markets do not inspire a great deal of confidence, real estate is good only in pockets and that is not a good idea for most investors, commodities have their own risk and though Gold has shown good performance it is not a mainline investment choice. So this is the situation you must navigate through to bring your financial ship ashore. Let us see what are the basic strategies you can have in the year, depending on which stage of life you are. I am only discussing strategies here, will do a separate post on product types that you can invest in soon.

  • For people in their twenties who have just joined the workforce and are yet to have responsibilities of family etc, this is the time to take risks. You need to understand the long term benefits of equity investing and put a fair bit of your money there. Do not get into direct stocks unless you are interested in the markets and have time for it. There are several MF schemes that have good performance and portfolio, choose a set of them and invest through SIP. At the same time you should open a PPF account or an NPS account, depending on your inclination. The PF account of the workplace is there by default and you need to keep it going at full contribution. You can look at the idea of buying a house if you are likely to stay in a place for 5 years or so, do not do it otherwise.
  • For people in their thirties who have been working for 8-10 years, family responsibilities would have kicked in, they are likely to be married with 1 or 2 children. Much of the investment choices will be as above with two important differences. Firstly, with the MF SIPs having run for some time now, you need to institute an annual review in order to weed out the non-performers. Secondly, based on the goals coming up in the next decade, plan your debt portfolio in such a way that it acts as a hedge against equity doing badly for a few years. This will also be a good time to buy a house if you will get to stay there for some years.
  • For people in their forties, the chldren would have grown up and either in high school or getting ready for college. While the investment pattern remains the same, redeeming the correct investments for the goals is critical. Normally these will be from your MF SIPs but if the markets have done poorly 2-3 years prior to your goal year then you must look at alternatives. Try to use your Debt portfolio or look at other options such as educational loan etc.
  • For people in their fifties, the children are in college or have graduated from there. Given that you are now in an FI state and may be retiring soon, it is important to create a passive income stream that takes care of your regular expenses. Keep your equity MF portfolio going you need it for beating inflation over the long retirement years.However, you must have easy access to the next 5 years expenditure at all times without having to do a distress sell in equity.
  • For people in their sixties and above continue with the above strategy and keep the equity portfolio going for as long as you can.

People wanting to contact me with any questions or for HELP can write to me at rajshekhar_roy@yahoo.co.uk

My personal finance audit of 2019

First things first – I got a number of messages yesterday on my post and all of them expressed happiness that I had started wiriting posts for the blog once more. Even though I am normally not someone to worry about either boquets or brickbats, it was nice to read such messages. As I said, I wanted to do a post on my personal finance audit for the year 2019. The year may have been listless in terms of the investment scenario in the country but on a personal level it was enriching in many ways.

For those who have read my posts earlier in the blog, my current life situation is broadly known so I am not repeating it here, only talking about the changes in 2019. For new readers, you will have to make an effort and read some of my older posts. Let me start with how life was for our family in 2019 and then I will come to the personal finance part. Through the year, I was engaged with mentoring of B school aspirants and found it to be a very worthwhile calling. I mentored 57 people for last year admissions, 25 people for CAT 2019 and am currently mentoring another 25 for next year admission season. It is something that lets me have some active income and , more importantly, lets me do things at my own pace and engage in things I love. I have a lot of time to watch movies, sports, attend cultural performances, travel in India and outside etc.While I am not dependent on this income, it is nice to have and allows me to travel with less worries. Travel is something my wife is also fond of and this year we had a fair bit of it – we went to Phuket in March, Turkey in May and Eastern Europe in July. Apart from this we also visited Corbett National Park in October and Baroda ( Champaner, Statue of Unity) in December. Our daughter Rinki is currently in Hyderabad and this is a great source of Joy to both me and my wife. Our son Ronju is working in Bangalore and the good thing is we are able to meet up every 2 months or so.

With the children being on their own, as far as financial issues go, a lot of our expenses in 2019 centred around travel. Overall expenses were in the range of 15 lacs, out of which more than 7 lacs was travel related. We also bought some consumer durables such as a Washing machine and Android TV in the year. From this perspective, 2019 may not be a very representative year as we are unlikely to have 3 trips outside India every year. On the other hand, we are probably going to be active travellers for the next 5 years or so, therefore it will make sense to budget for a fair bit of travel till 2025 or so. The true worth of financial independence is the ability to indulge a bit on the things you love to do, without having to worry about the financial repurcussions constantly. The cash outflow of 15 lacs, while quite high from the budget and unexpected for me, was also fortunately possible to meet from my cash inflows of the year.

Let us look at the inflows for the year then :-

  • Rental income from my Chennai apartment was 4 lacs
  • Loan repayment by someone for the year was 3 lacs
  • Interest from tax free bonds and InvIt were to the tune of 3.25 lacs
  • Dividends from my stock portfolio and MF portfolio amounted to 2.75 lacs
  • Capital gains from FMP redemption and share buy back was 2 lacs

As you will see from the above I was able to deal with my cash inflow needs quite well in 2019, despite the overall expenses being rather on the higher end. Thankfully, this is also with some amount to spare as I have not considered the following:-

  • Interest from the PPF account of both me and my wife.
  • Return from my Debt fund portfolio
  • My active income through B school mentoring

So from a cash flow perspective, I did rather well in 2019. The situation completely changes though when we come to investments. Through the year, debt returns were rather muted, even some FMP redemptions suffered from this. Equity as an asset class had a very turbulent year and I am more down than up in this, all things considered. As such I need to revise my expectations of return from both these asset classes going forward. Fortunately, I do not have any big financial goal coming up, save travel and as a result, can take a few years of lower return. What should be the return expectations from the two asset classes now? I am reasonably confident that good quality Debt fund returns will still be in the range of 7 % and it will be safe to take equity as 10 %. 

How does 2020 look then? I am hoping that the markets will do better and thankful that I do not have to liquidate my equity portfolio at times like these. Other than that, it will be more of the same as in 2019. In summary 2019 was a rather poor year as far as investments go but we were able to do quite well, thanks to the way our finances are arranged currently. There are however, some changes we will need to do in these, I will be writing another post on this soon.

2019 has been a listless year for personal finance

From time to time I get a lot of requests from my faithful readers on writing more posts and unfortunately in this year i could not really bring myself to do so. One part of the reason was that a lot of things were keeping me busy but the more important reason was the listless nature of the markets and the general situation in the personal finance space, where conventional wisdom was turned on its head.

To be fair 2019 begun rather promisingly as it was felt the Indian economy was close to turning the corner and there were great visions of the markets really taking off should the BJP led NDA won the general elections. As we now know, the first of these happened but not the second one. The markets welcomed the emphatic BJP/NDA win but were very soon shocked with what the new Finance minister Nirmala Sitharaman brought to the table in her first budget. It belied all expectations and started a free fall of the markets that was completely unexpected. This was aided by other bad news on the NPA and Banking front, defaults in the Debt fund space, international headwinds in the form of US China trade issues and, most importantly, the quarter by quarter poor IIP and GDP data. Towards the end of the year, even political and social stability had taken a real hit with BJP unable to form the government in Maharashtra despite a win and losing Jharkhand badly, along with the nationwide CAA protests.

Some of you might be asking as to if I am being unduly critical of the situation given that Sensex and Nifty are at their lifetime highs now. In order to understand the situation fully, look at the following :-

  • How have your SIP investments in Equity MF been performing over the last few years? The growth in the markets have been muted over the past few years and this has put serious strain on the financial plans of most people, for the long term goals. Most people and planners assume an overall annual return of 12 % over 15 years or so and that is nowhere near happening.
  • Due to defaults by companies on loans etc, Debt products have also come under serious strain. In several cases the FMP payouts were not done properly and reduced rates have not been expectedly beneficial to Debt funds too. 
  • Though the headline NIFTY numbers look good but that is due to a few companies doing well in terms of their prices. Look at a stock like Yes Bank and you will get a far truer reflection of the market risks involved today in investing. 
  • The real problem is of course in the mid cap and small cap space where many stocks have been beaten out of shape and will take a long time to recover, some will not recover at all. Most investors who had bet on these categories of MF for their long term goals will really need to rejig their plans now and look at other options.
  • In summary, both equity and debt asset classes are in a not so promising space, the economic indicators are hardly buzzing, the interim measures taken by the government such as corporate tax cuts also have not worked exactly as the investors had hoped they would.

So as 2019 draws to a close, what are the lessons investors can draw from it? It will, of course, depend on which stage of life you are, but some generic conclusions for such stages can be arrived it. A snapshot of possible strategies is given below :-

  • If you are in your twenties and starting off then do not worry too much about the present context, you have time on your side. However, keep your debt portfolio going with PF and possibly PPF or SSY.
  • For people in their thirties a clear action will be to look at their SIP portfolios and do a thorough review. Weed out the medium term non performers and focus more on large cap and diversified funds. Pure mid cap and small cap funds are best avoided unless they have high pedigree and are showing good trends in NAV. If your goals are due in the next 5-7 years you must create an alternate source for it.
  • For people in their forties look at increasing your SIP allocation in order to align with your retirement goals. The SIP returns have been far lower than planned for, so you need to invest more to make up for it. Some of your goals will be on you soon so you must have alternate plans, not redeem your SIPs especially those of mid cap and small cap funds. Have a solid debt allocation so that you can fall back on it as needed.
  • For people in their fifties, do not increase your SIP allocation even if your returns are lower than expected. You need to invest in Debt so as to give more time to your equity investments. Create a fund that will take care of your expenses 5 years after retirement and hopefully help your equity based SIPs to recover.
  • For people in their sixties, return from Debt investments is a major issue. Put as much money you can in SCSS and VVY schemes, use your PPF intelligently and once again let your equity grow as much as you can let it.

As an individual who has attained Financial independence, I am not immune to the market performance, if anything I am more affected by it. In the next post, which I plan to write tomorrow, I will explain my personal situation as envisaged by a recent audit that I carried out.

Wishing all my readers and their families a very happy and prosperous 2020.

HELP- Holistic Engagement in Life Planning

I have been writing this blog for over 3 years now and one of the most common queries that I get from readers is whether I provide any Financial Planning services. Let me be upfront about this at the start – I do not provide such services in the way they are normally understood, nor am I a SEBI registered Financial Planner. In fact, I have absolutely no intention of being one too as I do not see this as my profession.

However, I do provide a service to select people who approach me directly. I have given the acronym of HELP to it. The expanded form is Holistic Engagement in Life Planning. In this post I will explain about this service and explain as to how interested people can avail of my services for this. As I have explained in several posts of my blog, life planning must precede financial planning. As an individual or as someone responsible for your family well being, you will need to plan the important life events as well as the lifestyle choices you want to maintain. Note that the typical financial planning process assumes that people will by and large plan for typical goals such as children’s education, marriage, own retirement etc. I find this a completely unsuitable way of doing things as the life of each individual is unique and needs to be catered as such.

So what is HELP then? As I said, the starting point is to take stock of your life in terms of where you are today and what are your dreams as a family – individually and collectively. So if you are a family of 4 with two teenaged son and daughter, your dreams could look like this when you are 42 years old :-

  • Son wants to take up a career in Bio technology, daughter wants to be a film maker.
  • Your wife is 38 and gave up her career for her kids 10 years back – she now wants to open up a boutique of her own in the next 3 years.
  • You are interested in starting your Consultancy practice by the time you are 50 and for that you need to be financially independent.
  • All of you like travelling and want to take a domestic vacation every year apart from short trips and also an international vacation every alternate year.

The idea of HELP is to bring out these life goals and lifestyle choices clearly, so that it can be determined what kind of financial support these would require and how can that be organized. Yes, the last part will involve financial planning but it will be in a very different way than just how to buy MF through SIP etc. 

As I said, I have provided HELP to several people and all these were people who have approached me after reading my blog. Some examples will make interesting reading:-

  • Advised a Colonel in Indian army as to how he could fulfill his dream of migrating to Canada in a teaching role.
  • A software professional in Kolkata was worried about longevity of job and worked out an alternate plan should such an event occur.
  • Got several people started on building a stock portfolio from scratch.

Note that in all of these cases, the people already had a financial plan made through a SEBI accredited Financial planner but they were not happy with their life and lifestyle.

The question that will definitely be asked is why am I the right person to do this? Let me start by giving some background of myself :-

  • BE in Computer Science & Engg from Jadavpur university, Kolkata in 1986.
  • PGDM from IIM Calcutta in 1988, with major in Marketing and Systems.
  • Overall experience of 30 years plus, 27 years in regular corporate roles and nearly 3 years now in my Consultancy practice.
  • I have worked almost entirely in the software services and BPO space.
  • Have worked as a CXO for 15 years plus, nearly half of this in 2 publicly listed companies.
  • Lived in Kolkata, Delhi, Chennai and Hyderabad besides having travelled widely all through the world for my work.
  • Have been financially independent since 2014 and writing a blog since 2015 June. The blog has had views in excess of 3.5 lacs till date.
  • My daughter is BE from BITS, PGDBM from XLRI and working in a Consultancy firm now. My son is in his final year at BITS, doing a dual degree – Msc Maths + BE in Computer Science.
  • I am associated with helping students in career counselling for Engineering / MBA.
  • Am in the Hyderabad panel for IIMC admissions.

I believe in the Indian context, I am one of the few people who are able to deliver a service such as HELP. This has been proven by the 10 situations where this is done.

So if you are interested in knowing more about this, how do you get started? Well, the first step will be to write to me at rajshekhar_roy@yahoo.co.uk expressing your interest to avail of this. I will then ask a few questions over mail to assess your current situation and then we can have an introductory call. After this I will let you know if I can do this for you and what will it cost.

Typical duration for the complete exercise is 1 month, with 2 interactions over phone per week and costs can range between 20000 and 30000 for the first year. Yearly reviews after first year will be 25 % of the year 1 costs.

If you reach out to me, do not get offended on my inability to take you up ( if that happens ). I am doing this to add real value to the lives of the people and therefore cannot spread myself too thin.

Look forward to hearing from some of you – believe me, your life will undergo a serious transformation once you go through this exercise.

Arranging for passive income in my changed life context

Life is dynamic in nature and ever changing, no matter how much you try to plan for it in advance. When your life circumstances change, there is a need for you to revisit your financial plans and related investments. In my case, I am already in an FI state, though with some active income and had to look into rearranging some of my finances, in the light of several life changes which took place this year.

Before getting to the passive income bit, let me outline the changes that have taken place this year, for me as an individual and for our family as an unit :-

  • Though I am still doing my Consulting practice, I am more keen to do Workshops now as opposed to regular engagements that are more time consuming. As such my active income will be potentially good but it will also be erratic.
  • My daughter Rinki has started her corporate career and is financially independent of me now. My son Ronju is doing two internships in his final year and gets paid for the same. So, for all practical purposes he too financially independent of me. He may do an MBA and I will fund it to some extent but that is a future issue.
  • Fortunately for us they are both staying in Hyderabad now, which has meant that my plans for shifting from here are currently on hold at least till July 2019.
  • The tenant of our Chennai apartment moved out in July and we were lucky to get a new one quickly. The rent from there continues to cover the costs of our flat here.
  • Though I had budgeted for travel in a liberal manner, in reality we spent more than our budget in the first few months of the year. This was due to a couple of family vacations within India to Bengal and Goa, and an international vacation to Bali.
  • The year is also our silver wedding anniversary and we plan to go to Mauritius for a week this month.
  • The overall impact of all of these have pushed up my expenses significantly.

If you have seen some of my previous posts, you will know that I was estimating an expenditure of 8 lacs per year apart from housing and children related expenditure. In the current context I think the figure of 8 lacs is an underestimation and we will need 10 lacs per year to fund the lifestyle we are aspiring for.

From the viewpoint of generating passive income of 10 lacs, this is my plan overall :-

  • 2.1 lacs from interest of Tax Free Bonds that I purchased in 2013-2014.
  • 1.1 lac from interest + dividend of InvIT fund.
  • 1.5 lac from dividends of MF schemes.
  • 1.5 lac from dividends of my stocks.
  • 3.5 lacs from capital gains of FMP / Debt fund redemption
  • 1 lac from capital gains from Stocks / MF

Note that I have not taken any PPF withdrawal into account as I plan to grow it till 2024 before I start that. I have also not taken into account any active income as I normally invest it into stocks.

I keep getting a lot of queries about my asset allocation and the instruments I have invested in now. Let me share that in my next post.

A real life financial planning case study

It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.

To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-

  • He has 1.2 crores in FD and another 30 lacs in equity etc
  • Can invest 20000 per month for next 6 years
  • Has a child in class 7, who should be going to college in 6 years
  • Has his own house and loans will be paid for by the time he is 50.
  • Current costs are 1 lac per month, 15000 for child and includes loan repayments.

Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.

  • His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
  • For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
  • For child higher education we can take 20 lacs
  • For asset replacement etc we can take 20 lacs
  • Total FIN therefore comes to 4 crores.

Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-

  • As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
  • I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
  • His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
  • 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
  • So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity

Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-

  • Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
  • As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
  • At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
  • Assuming a 12 % return on equity his equity corpus will be 2.51 crores.

In the next decade his deployment can be as follows:-

  • Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
  • Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
  • Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.

So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.

Will be happy to receive comments, feedback and criticism on the post.

Cash flow planning is key to a good financial plan

Many of my readers keep asking me as to why I do not have different portfolios allocated to different goals of mine. I have explained this in other posts so will not repeat the basic arguments here. Suffice it to say, multiple portfolios will most likely lead to sub-optimal returns and I do not look upon it as smart financial planning at all. In fact if you really look at how you go about your life and the finances you need ta take care of your plans, the most important aspect is really cash flows.

While cash flows are kind of implicit in goal based planning – we are asked to redeem our financial investments to cater for the expenses linked to a goal – it is important to understand the true nature of it. In a recent discussion with a friend it struck me that most people do not have a clear idea about it at all and do not understand how to go about it. When I was thinking of how to explain this to my readers, I thought of how we use water in our daily lives. This is an analogy I have used in one of my earlier posts and can be used well here.

Let us assume a normal middle class household in India where we have different types of expenses such as listed below:-

  • Regular monthly expenses such as food, groceries, utility bills, transportation etc.
  • Quarterly or biannual expenses such as school or college fees.
  • Annual expenses such as Insurance premiums, TV subscription etc.
  • Irregular expenses such as clothing, purchases of personal discretion.
  • Large expenses such as White goods, Vacations abroad etc
  • Goals such as College admission, marriages etc.

To personalise this example let me relate it to you as a reader. For the next 12 months, list out all possible cash needs you have out of these categories. For example you may have something looking like this:-

  • Monthly household expenses @ 40000, Annual costs = 4.8 lacs
  • School fees @ 10000, Annual costs = 1.2 lacs
  • Insurance premiums, TV service etc, Annual costs = 1 lac
  • Vacations, White goods, Annual costs = 1 lac
  • No large goals in next 12 months.

What does this really mean? In cash flow terms, your outflow will be to the tune of 8 lacs. So if you have got 8 lacs and more from your salary or business you are fine, right? This is unfortunately not true at all – understand that your outflows on large goals are not there now but they will occur at some point in time. When it does you have to spend and that amount may not be possible from your normal cash inflow. Let us say your son will go to a college that costs 5 lacs a year for 4 years. If this amount can be catered for through your active income, you are home and dry. If not then you must invest in the years before he gets to college so that when the time comes you have access to the money. Similarly you need to plan for your retirement – at that time you have no active income but your household expenses remain there. So, you must have some alternate source of cash inflow so that you are able to sustain your expenses.

Where does cash inflow come from? Well, there can be several sources, but some of the more common ones are as follows:-

  • Salary from your job
  • Income from business or profession
  • Income from hobbies or other interests ( blogging etc)
  • Interest income, dividends
  • Rental income
  • Capital gains from selling an asset
  • Redeeming financial instruments

Where does the water analogy come in? Well, you can think of regular cash flows as the water that is supplied to your house every day by the City corporation. Most of your needs are met by that. However, you also store some water for an emergency that may occur. In case you are planning to clean your house thoroughly, you will plan to arrange for availability of water etc. What happens if you are having a big function at your house and you need to have a lot of water? Well, in case you have stored it in a tank etc you can use that. Alternately you can get some water tankers to get water for you. This is similar to redeeming financial instruments for a large goal. You can also stretch the thought process to look at these tankers as a loan – in that case you have to pay back the water just as you pay back through EMI for the loans.

The bottom line is this – your cash inflows either in term of current income or income from past investments or loans must match your cash outflow needs at all points in time. With the water analogy we have to look at running water, water stored earlier or water obtained from external sources such as tankers to take care of our needed consumption.

Pretty simple really, if you think of it a little and then the entire financial planning just becomes an exercise in cash flow management. How do we factor in investments into this? Well, I will cover that in another post as this one has already got quite long.

A contrarian case study on retirement

I have been writing this blog for more than a month now and have come across many individuals, with different and unique financial situations. I also get pulled in for advice on how to deal with several financial issues. I think it will be a good idea to share some real life situations with my readers so that it helps them in their financial journey.

The first one that comes to mind is of a recently retired person who was introduced to me by a friend. For the purposes of this discussion we will call him Aloke. Some background of Aloke will be in order before we get to the case itself.

  • Aloke is an Engineer by profession and has worked in different manufacturing companies for about 35 years before retiring last year.
  • His wife is a homemaker and he has one son who is a CA, working now in a reputed audit firm in Mumbai.
  • Aloke has a 3 BHK apartment in West Hyderabad and wants to settle there.
  • He has never been in equity, most of his investments were in PF and PPF. All expenses except the apartment was always from his active income or from FD / RD which he had set up for larger expenses.
  • His current expenses are 5 lacs a year and he thinks if that is adjusted for inflation he will be pretty ok with it.
  • He got his PF in 2013 which amounted to about 1 crore. He had put all of it into Tax free bonds that were giving an interest of 9 % then.
  • His PPF is presently having 45 lacs.

Aloke came to me as he was confused with all kinds of strategies that were being told to him by financial planners. Many wanted him to sell his funds in the secondary market and put the money into different buckets etc. This is an amazingly bad idea as he is getting a tax free income of 9 lacs and will be getting it for the next 17 years !!

Here is what I suggested to him.

  • Continue with the current situation till the tenure of the tax free bonds run out. By that time he will be 80 years old.
  • For the surplus each year, put 1.5 lacs into PPF and the rest in a multi cap mutual fund such as ICICI Value Discovery or SBI Emerging Blue Chip.
  • Assuming 6 % annual inflation, Aloke will be able to carry on the MF investment till year 6 by which his investment will be about 9 lacs.
  • PPF can be carried out till year 9 when his expenses will get to 9 lacs a year.
  • From the years 10 through 17 he will need to withdraw from his MF fully and PPF partially to fund extra 32 lacs of expenses.
  • At the end of 17 years, when Aloke is 80, he  will have 1.5 crores in PPF and 1 crore from redemption of tax free bonds.
  • Even with annual expenses of 20 lacs then, this will definitely last him comfortably till the rest of his lifetime.

Understand that the plan is specific to Aloke who does not really want any risks, does not want to worry about taxes and is comfortable with his present lifestyle. It is not always important to have 5 crores or chase equity returns. There is a financial plan present for each person and situation, you just need to use some knowledge to get there.