You already know that the markets don’t go up or down in straight lines. What this means is that if an investor gets an average return of 12% in 10 years, it doesn’t mean that he will get:
12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%
It instead means that he will get something like this:
-5%, 22%, 4%, 13%, -17%, 57%, 10%, 19%, -12%, 29%
Or let’s put it this way:
Related to the actual sequence of return an investor gets in real life, I came across an interesting post that talks about how the end-portfolio size differs depending on whether the investor gets strong early returns vs strong late returns.
What is the difference you may ask…
This simply means that in one case, you get good returns in early years while in other, you get good returns in later years.
Does it matter?
Yes indeed… as you will see soon in the remainder of this post.
You have decided to invest Rs 20,000 per month or let’s say Rs 2.4 lakh every year for the next 30 years.
Now consider 2 different cases:
Good Later Years – You earn 7% every year in the first 15 years and 14% every year during the next 15 years, on your investments.
Good Early Years – You earn 14% every year in the first 15 years and 7% every year during the next 15 years, on your investments.
What will be the value of your portfolio after 30 years in either case?
Rs 5.81 crore after 30 years (for sequence 7% followed by 14%)
Rs 3.95 crore after 30 years (for sequence 14% followed by 7%)
That’s a large difference of about Rs 1.86 crore!
And that too for the same ‘average return’ during the 30 year period. Isn’t it?
Many of you may have guessed the reason.
It is because of the Sequence of Returns you get. That is, the order of annual returns that your portfolio is subjected to.
In the first case (where portfolio grows to a larger Rs 5.81 crore), you get strong late returns – due to which, a bigger corpus earns better returns (14%) in the later years. Whereas in the second case (where portfolio grows to a comparatively smaller Rs 3.95 crore), you get strong early returns – due to which, a smaller corpus earns better returns (14%) early on while the bigger corpus earns lower returns (7%) in later years.
And how do these two cases compare with the actual average return (10.5%)?
Here is how different the 3 scenarios end up looking, even though all have the same exact average returns:
And this is exactly what I wanted to highlight.
The sequence of returns that investor gets has a big impact on the final overall portfolio size.
You may be hoping to get a portfolio size based on your average return assumption. But the actual size may vary even though average returns are same, due to a different sequence of returns your portfolio undergoes. Averages and Actual differ (River Depth example).
And let’s take this a step further.
Let’s see how the actual investment in Sensex in the last 20 years fared when compared to the reverse sequence of returns.
In this scenario analysis, Rs 2.4 lakh (or Rs 20,000 per month) is invested in Sensex every year during the last 20 years. The sequence of returns that are given in the second column in the image below are the actual Sensex returns in the last 20 years. The value of portfolio changes as depicted by the green line in graph below. Also, a portfolio that runs on the basis of the reverse Sensex returns (the returns have been reversed in the third column) is shown as the blue line in the graph.
As you can see, depending on the different sequence of returns considered (one real other reversed), the portfolio value varies every year and also, the final values are different.
So the sequence of returns does matter a lot.
All said and done, can anything be done for this?
To be honest, it’s difficult.
You don’t get to decide what sequence of market returns you get in future.
I repeat.
You don’t get to decide what sequence of market returns you get in future.
This simply but unfortunately means that we have no control over the sequence of returns in the markets.
It is possible that some of you may get better markets early in your investing career and worse ones later. Or if powers above favour you, then you may have not-so-great market returns during initial years but super returns in later ones. This is the very reason why young investors should pray for bad markets in initial years. It may be painful and may not be for everyone, but it’s a wonderful thing for real long-term investors.
But even though we cannot control the sequence of returns, we can manage the risk to some extent.
At times, using market valuations as an indicator can help you estimate the possibility of a weak or a strong market in the coming years and rebalance your portfolio accordingly. By doing this, only a part of the portfolio may be exposed to market returns when required tactically.
So to more practically manage the Sequence of Return Risk, you should be slightly conservative in your return expectations. It’s better to have lower return expectations and save more than having higher return expectations and saving less but getting shocked later on when it is already late to do anything.
Health insurance is like an umbrella – something that you don’t need every day; but once in a while when it rains, it really saves the day for you. On all other days, you won’t miss it. But when it rains and if you don’t have it, you will feel its need.
And besides the obvious medical coverage, health insurance plans also provide tax benefits to you.
Luckily, under Section 80D of the Income Tax Act, you get tax benefits for expenses towards health insurance premiums, preventive health checkup and other medical expenses.
Since most of you will not be hospitalized ever (I hope so!), you would be more interested in the tax benefits on the medical insurance premiums. And yes, indeed the premium paid towards health insurance is tax deductible under section 80D of the Income Tax Act, 1961.
Let’s move on and understand the tax benefits on health insurance in a bit more detail.
What is Section 80D that gives Tax Benefits on Health & Medical Insurance?
Even if tax benefits weren’t there, even then buying health insurance is a sensible decision.
Why would you want to pay big hospital bills when you can buy medical insurance by paying a small premium to cover that risk.
Imagine not buying health insurance and saving Rs 10,000 for 3-4 years and then getting hospitalized with a big bill of Rs 5 lakh. All small savings you made by ‘not buying’ health insurance is screwed up with a medical bill several times larger.
Unfortunately, most Indians still don’t see it like that.
They feel its an unnecessary expense and waste of money. Luckily, our governments have offered additional freebies in form of tax benefits to push people to buy health insurance.
And this benefit is offered via the Section 80D of the Income Tax Act, 1961 which relates to the tax deductions on medical insurance.
Section 80D specifically provides deduction in taxable income to the extent of the premiums paid on the purchase of health insurance or medical insurance or mediclaim products.
It even includes the premiums paid for the health insurance of your parents, children and spouse (wife/ husband).
And it doesn’t matter whether you purchase health insurance through a person or go for an online health insurance cover which are gaining popularity these days. You will get tax benefits in either case.
Also, the tax benefits under Section 80D are over and above the benefits under other sections like Section 80C.
Who is eligible for Tax Benefits under Section 80D?
If you are paying premiums for health or medical insurance purchased for the following, you will get tax benefits under section 80D:
Yourself
Your spouse
Dependent children
Parents
What about other family members?
Like, let’s say your brothers, sisters, father-in-law, mother-in-law, uncles, aunts, cousins, etc.?
Health insurance premium paid for any other person is not eligible for tax deduction. But you can ofcourse include other family members in the health insurance coverage if you wish to. It is just that the premium paid for them cannot be considered for tax benefits.
Maximum Deduction Limit under Section 80D for FY 2018-19 (AY 2019-20)
There are several different types of deductions that you can be claimed for tax benefits under Section 80D:
Tax deduction on health insurance premiums paid for yourself, spouse & children
Tax deduction on health insurance premiums paid for parents
Tax deduction on medical expenses of super senior citizens
Tax deduction on preventive health check-up expenses
Let’s have a look at each of these in detail:
Tax Deduction on Health Insurance Premiums Paid for Self, Spouse & Children (Family):
If you pay the premium for health insurance taken for you, spouse and children, then you can claim a total deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20).
If you or spouse is a senior citizen, then you can claim a higher total deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised upwards in the past years. Earlier (in FY 2017-18 AY 2018-19), if you or spouse were a senior citizen, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.
In addition to the above deduction, you can also get tax deductions for premiums paid for parents.
Tax Deduction on Health Insurance Premium Paid for Parents:
If you pay the premium for medical or health insurance of your parents’, then you can claim deductions as follows:
If both parents are not senior citizens (< 60 years), then you can claim a deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20)
If even one parent is a senior citizen (>=60 years), then you can claim a deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised in the past year. Earlier (in FY 2017-18 AY 2018-19), if your parents were senior citizens, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.
It is worth noting that while claiming deductions under Section 80D, you cannot include premiums paid for children who are earning. But you can still claim the benefit for earning spouse and parents.
Tax Deduction on Preventive Health Checkup Expenses:
If you spend money on getting health checkups done during the financial year, then you can also claim a deduction of up to Rs 5000 for preventive health checkup for self, spouse and children under Section 80D.
But this is not an additional benefit but is inclusive within the overall limits discussed above. That is, the total tax benefit for health insurance premium and preventive health checkup is limited to Rs 25,000 (or Rs 50,000), as the case may be. Remember that the limit of Rs 5000 is the maximum total deduction allowed for preventive health check-ups.
Also, this deduction cannot be claimed on a per person basis but as an aggregate option available – so the total deduction allowed cannot be more than Rs 5000.
For example – Suppose you pay a health insurance premium of Rs 21,000 for self, wife and children. In addition, you also get yourself a preventive health checkup that costs Rs 6000. Now, how much tax deduction are you eligible for? You are allowed a maximum deduction of Rs 25,000 under Section 80D. So you get a deduction of Rs 21,000 towards insurance premiums paid; and Rs 4000 for expenses towards preventive health check-up. The deduction towards preventive health check-up has been restricted to Rs 4000 (against your actual expense of Rs 6000) as the overall deduction cannot exceed Rs 25,000 in this case (i.e. Rs 21,000 + Rs 4000).
Side Note – As you cross 35-40, it actually makes sense to get yourself evaluated medically atleast once a year so that any condition/disease in its early stages can be better handled and addressed appropriately. So this tax deduction on preventive health check-up expenses under section 80D also has positive health side effects!
Tax Deduction on Medical Expenses for Uninsured Senior Citizens (>= 60 years) (Section 80D) – You or Parents
If you or any of your parents are a senior citizen, i.e. above 60 years, and have not purchased any health or medical insurance, then you can avail a deduction for any medical expenditure incurred up to Rs 50,000 in FY 2018-19 (AY 2019-20).
Remember, to claim this deduction for actual medical expense, the concerned person must be a senior citizen (you, spouse or parents) and also uninsured (i.e. no premium should have been paid for any health insurance).
Before FY2018-19 and till FY2017-18, this rule was applicable for uninsured ‘very senior’ citizen (above 80 years) and the limit was set at Rs 30,000 per financial year. Now, this benefit is available to younger(!) senior citizens (who are above 60 years) too.
So let me summarize the Income Tax deduction of Health Insurance Premiums in India.
Tax Deductions under Section 80D for Health Insurance (Financial Year 2018-19 or Assessment Year 2019-20)
The table below lists the tax deduction limits applicable to health insurance premiums (for the financial year 2018-2019 or assessment year 2019-2020):
So what will be combined limits on tax deductions for a family with self, spouse, children and parents?
If you, spouse, children and parents are all below 60 years of age, then the total limit is Rs 25,000 + Rs 25,000 = Rs 50,000 under Section 80D
If you, spouse, children are below 60 years; and if even one of your parents is above 60 years of age, then the total limit is Rs 25,000 + Rs 50,000 = Rs 75,000 under Section 80D
If any of you or spouse is above age 60; and if even one of your parents is also above 60 years of age, then the total limit is Rs 50,000 + Rs 50,000 = Rs 1,00,000 Rs 1 lakh under Section 80D
But please do remember that these are maximum limits specified under Section 80D. If the actual premium paid is less than the limits, then the benefit will be limited to the actual premiums paid only.
To further aid the understanding, allow me to share a few examples.
Examples of Medical Insurance Premiums & Section 80D Tax Benefits
Case 1: You (28), Spouse (27), Child (2), Father (58), Mother (56)
You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 25,000 towards health insurance premium and checkup for parents. Since no one in the family has attained 60 years of age, the total deduction eligible under Section 80D is Rs 50,000 for the financial year.
Case 2: You (31), Spouse (29), Child (4), Father (63), Mother (58)
You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one of the parent is above 60). Since one of the parents has attained the age of 60, the total deduction eligible under Section 80D is Rs 75,000 for the financial year.
Case 3: You (61), Spouse (55), Father (82), Mother (79)
You are eligible for Rs 50,000 towards health insurance premium and checkup for self and spouse as you are in senior citizen category yourself. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one or both the parent are above 60). Since both you and your parents have crossed the age of 60, the total deduction eligible under Section 80D is Rs 1,00,000 or Rs 1 lakh for the financial year.
Sample Calculation of Tax Deductions under Section 80D
Suppose you are aged 38, your wife is 35, son is 8 and daughter is 5 years old.
You have taken a health insurance plan for all for of you that has an annual premium of Rs 23,000. In addition, you had to pay Rs 8000 for preventive health checkup during the financial year.
In addition, your parents aged 66 and 59 are also dependent on you. For insuring their health, you have taken a health cover for them separately for which the premium is Rs 57,000.
So what all tax deductions can be claimed by you for the financial year under Section 80D?
For Self (+ spouse + children) – All of you are under the age of 60. You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. Since the premium + health checkup costs exceed the limit (Rs 23,000 + Rs 8000 = Rs 31,000), the benefit available will be limited to Rs 25,000 only.
For Parents – One of the parents is above 60 and hence, senior citizen. Since you are paying medical insurance premium for them, you are eligible for Rs 50,000 towards health insurance premium. Since the premium exceeds the limit (Rs 57,000), the benefit available will be limited to Rs 50,000 only.
Therefore, the total deduction available in this case will be Rs 25,000 + Rs 50,000 = Rs 75,000 only.
I hope this fully explains everything there is about the tax savings that you can do with your health insurance under Section 80D.
So let’s move on…
Tax benefit on Multi-year Health Insurance policy under Section 80D
Many people pay health insurance premiums for several years in one go as there are discounts on offer for multi-year health insurance policies.
If that’s the case, then the tax deduction is allowed proportionately over the years for which the benefit of health insurance is available, subject obviously to the overall limit for each financial year).
So let’s say you are 35 years old (i.e. less than 60 years) and your health insurance policy for 1 year has a premium of Rs 15,000 and that for 2 years us Rs 27,000.
So if you go for the 2-year health insurance plan and pay the premium for two years in one financial year itself, then what will be the tax deductions eligible?
Since current rules state that an individual is allowed to claim a deduction of up to Rs 25,000 in a financial year, you will be allowed to claim the total premium paid, but proportionately, over the 2-year period. This means that you will get a tax deduction of Rs 13,500 each (Rs 27,000 divided by 2) in both the financial years.
More things to know about Section 80D tax benefits
It is not necessary to claim deduction using just one policy. You can claim deductions under multiple policies subject to overall limits of Rs 25,000 or Rs 50,000 as explained earlier.
The group health insurance premium paid by your employer is not eligible for deduction under Section 80D. However, if you pay an additional premium to increase the coverage of the existing group cover, then you can claim the deduction against this additional contribution.
The premiums paid for Critical Illness policies are also eligible for tax benefits under Section 80D.
The premiums paid for Top-Up or Super Top-Up health insurance plans are also eligible for tax benefits under Section 80D.
The premiums of term life insurance plans are not included in Section 80D. But in any case, term insurance premiums are eligible for tax benefits under Section 80C instead. (Related: How much life insurance to buy?)
If you have taken a Critical Illness rider as part of the life insurance policy, then the premium paid for the specific rider is eligible for tax deduction under Section 80D.
Whether you are paying a health insurance premium for the first time or you are paying the renewal premium for continuing your existing health insurance, you can claim deductions in either case.
As mentioned earlier, you cannot get benefits on health premiums paid for your brother or sister. You can also not claim benefits for premiums of your father-in-law and mother-in-law. But your spouse, if paying the premiums from her own taxable income, then the benefits can be claimed by your spouse.
A lot of people get confused between Section 80D and very popular Section 80C of the Income Tax Act. Let’s briefly see what is the major difference between the two.
On the other hand, Section 80D is, in addition, to limit of Section 80C and is meant exclusively for health insurance premiums paid and preventive health checkup, etc. The tax benefit available under Section 80D varies from Rs 25,000 to Rs 1 lakh subject to certain conditions.
I am sure that by now, you would have a clear idea about how to save taxes using health insurance in India.
But let me remind you that whether you get tax benefits or not, health insurance is extremely important.
It’s a must-have for everyone!
Why would anyone want to be penny-wise-pound-foolish and try their lucks? The medical costs are rising and just one visit to a hospital and hospital bill can set you back by a lot of money which will be much higher than the money you can save by avoiding health insurance.
If you are unlucky and end up in a hospital without health insurance, it can erode your hard-earned savings and plunge you in a financial crisis. So do not test your luck for saving just a few thousands.
Luckily in India, you are getting tax benefits on the health insurance premiums you pay.
So you have an added incentive there. You can maximize your tax savings by using health insurance for yourself, family and parents by paying the premiums.
The Section 80D of the Income Tax Act offers one of the best tax-saving benefits in India of up to Rs 1 lakh deduction specifically for premiums paid on the purchase of health insurance or medical insurance or mediclaim products. Do not ignore this tax benefit for your own good.
This is the February 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.
Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).
Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
P/E Ratio (on the last day of February 2019): 26.32P/E Ratio (on the last day of January 2019): 26.26
The 12-month trend of P/E has been as follows:
And here are the average figures of Nifty50’s PE for some recent periods:
Historical P/BV Ratios – Nifty 50
P/BV Ratio (on the last day of February 2019): 3.41P/BV Ratio (on the last day of January 2019): 3.37
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of February 2019): 1.25% Dividend Yield (on the last day of January 2019): 1.25%
Now, to the historical analysis of Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).
Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).
So obviously, Nifty500 is comparatively a much broader index than Nifty50.
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of February 2019): 29.23P/E Ratio (on the last day of January 2019): 29.13
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of February 2019): 3.17P/BV Ratio (on the last day of January 2019): 3.15
Historical Dividend Yield – Nifty 500
Dividend Yield (on last day of February 2019): 1.17%Dividend Yield (on last day of January 2019): 1.16%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:
Most Indians believe that financial advice should either be free or in most cases, is not needed at all!
In fact, it’s quite common to come across people who will tell you (if asked) that:
Why should I take financial advice from anyone? I already know it and isn’t that difficult.
My father (or other relatives) does this and that. They can’t be wrong.
And even if I do have to take advice from someone else, why should I pay for it? It is available freely.
Sometime back, I wrote an article for MoneyControl on this topic. If you wish to understand why Free Advice can be dangerous (and so can be not taking financial advice), then please do read the article by clicking the link below:
Is it better to invest lump sum or
monthly SIP in mutual funds?
A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP?
Why I don’t
like these questions (are SIPs better
than lumpsum investments?) is because as usual, there is no one right
answer here.
There are
shades of grey and it isn’t exactly an ideal comparison.
People want
to simply compare SIP vs one time investment in mutual funds or just want to find
out which are top mutual funds for SIP in 2019 or best mutual funds for lump
sum investment in 2019 and what not. But there are no perfect answers or ready
lists that predict anything.
And let’s
look at it from a common-sense perspective.
Before even
getting into lump sum vs monthly investment debate, the decision to invest in
lump sum or SIP depends on whether one actually has enough investible surplus
that can be called as lumpsum!
Right?
If one doesn’t
even have this ‘lump sum’ then this question of SIP or lump sum in itself is
meaningless. It’s only when this ‘lumpsum’ is actually available that the
question holds any relevance.
And once
the lump sum is there, the next question should be whether investing in one go
is better or whether it’s wiser to spread that lump sum over a short period of
time, as there can be several best ways to invest a large sum of money in
mutual funds. Just because the lump sum is available doesn’t mean that the
money should be invested in one go. There are can various other tactics to
deploy it more efficiently.
But nevertheless, there are those who prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing.
And to be
honest, both methods work in different set of circumstances.
Let’s try
to do this comparison as objectively as possible.
SIP vs Lumpsum in Rising
(Bull) Markets
In a rising
market, your lumpsum investments in mutual funds will produce higher returns
than SIPs. That’s because the cost of purchase in a lumpsum investment in a
rising market would always be lower than the average cost of purchase in SIP, which
is spread out across higher and higher purchase prices for each SIP
installment.
Let’s take a
very simple hypothetical example to show this.
Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months:
As can be
seen above, the average cost (average NAV) for the SIP investor in a rising
market is higher. And hence, the future hypothetical profit when sold later,
will be lower for the SIP than that of the lumpsum investor.
Now let’s
look at a falling market scenario.
SIP vs Lumpsum in Falling
(Bear) Markets
In a
falling market, the SIP investing would result in comparatively lower losses
than that in lump sum. And that is because the cost of purchase in a lumpsum
investment in a falling market would always be higher than the average cost of
purchase in SIP.
Here is how
it looks:
As can be
seen, the average cost for the SIP investor in a falling market is lower. And
hence, the future hypothetical profit when sold later, will be higher for the SIP
investor than it is for the lumpsum investor.
So
basically what is happening is that if the market grows continuously, then lump
sum investing gives higher returns whereas if it falls continuously, then SIP
investing is better (lesser losses than that of lumpsum investing in such
scenario).
Ofcourse in practice, the markets neither go up nor go down continuously for very long. So the actual reality may be somewhere in between the two above discussed scenarios of sip vs one time investment in mutual funds.
In some cases, SIP may give better
returns than lumpsum investing. While in other cases, lumpsum will give better
return than SIP investing. And in many other cases, the result of both will be
pretty similar.
It all depends on the future sequence of returns that the investor gets. If you want to know how much wealth your SIP will create, try using this SIP maturity value calculator.
But let me
circle back to the original point I made – whether
you invest lumpsum or otherwise first depends on whether you have a lumpsum or
not.
Right?
And if you
have, then obviously it would be wiser to just invest lumpsum when the market
is low. Remember Buy-low-sell-high?
But problem
is that you will never know when the market is really low. You can be wrong
about your assessment and enter at precisely wrong times.
And that
said, what about our ‘real’ nature and how we behave?
Most
investors are unable to use common sense when their portfolios are down.
But very
few people have the guts to go out and invest more money (assuming they have
more). Fear plays a major role in investing and unfortunately, you can neither back-test
emotions nor fear. And you will only know in hindsight whether is it best time
to invest in mutual funds or not.
Imagine
investing lumpsum in December 2007 when markets were peaking and then
helplessly witnessing the fall down till March 2009. On the other hand, if you
invested a lump sum in March 2009 instead (at the bottom), you would have been called
the next Warren Buffett!
Both are
extreme examples but show how lumpsum investors potentially expose their portfolios
to the vagaries of the market. There is always the risk of being completely
wrong and mistiming. And that is the problem. To be fair, one can also get the
timing right and if willing to spend sleepless nights in the short term, can go
on to make much higher returns than usual in medium to longer term. But that’s
how the dynamics of lumpsum investments are.
Due to their
structural nature, SIPs reduce this risk of being completely wrong as the
investments are spread out. So asking whether is this the right time to invest
in SIP is immaterial as SIP spreads out your investments. Ofcourse your returns
will depend on how the markets play out during the spreading-out period. But
that is how it is.
For small
investors, SIP is also suitable from their cashflow perspective. They rarely have
access to large lumpsum that is ‘surplus enough’ to be available for long term
investing.
By putting away small amounts periodically, there isn’t a large pressure on their resources and no doubt is convenient. This is the reason that for small investors, SIP is their best bet even if not a perfect strategy.
Remember
that SIP is a tool to optimize returns and match your investment needs to your
cashflows. It is not a magician’s magic to generate superior returns to lumpsum
investing. Read that again.
One can use the SIP investing to slowly build up a large corpus over the years without straining the finances in present or worrying about timing the markets perfectly. You can try to use this sort of yearly SIP calculator to understand how much money you need to save for various financial goals.
I know that
many of you are more focused on saving taxes.
And one popular way to save taxes these days is to go for best tax saving ELSS funds vs PPF. But there also, people tend to get confused whether to go for SIP or lump sum for ELSS when investing in top ELSS mutual funds. Nevertheless, the logic that we have been discussing till now remains the same irrespective of whether it’s an ELSS fund or a normal mutual fund.
Now let’s take
a step further…
What if you
have a lump sum that can be invested. Should you go ahead and invest it in one
go or do something else?
Should you Invest Lump Sum
In One Shot Or Systematically & Gradually?
A smart
investor would recognize the market bottoming out and invest in one go. But we
all aren’t smart. So if you aren’t sure if it’s the right time to invest in one
go, you can even deploy your lump sum gradually.
There is no
one single answer to which is the best
method to invest a lump sum in mutual funds?
So
depending on the market conditions, investor’s investment horizon and risk (and
volatility) appetite, a deployment strategy may have to be worked out. This
strategy may either aim for lowering risk or maximizing returns or a
combination of the two.
One way is
to put lump sum investment in debt mutual fund and gradually deploy the money using
STP or Systematic Transfer Plan into an equity fund.
Different
investor needs would demand different lumpsum deployment strategies.
Being a small investor, it can be daunting to find out which are the best SIP plans that can be considered for long term investments. Or for that matter to find out which are the best mutual funds for lumpsum investment or the best tax saving mutual funds in India or whether to do ELSS SIP or lump sum.
If you don’t know how to find good funds or need help with planning your investments, do get in touch with a capable advisor to help you. It is worth it.
Finally…
I am sorry
if you did not find the one specific answer to your question of SIP
or Lumpsum which is better for investing.
A direct
comparison between SIP and lumpsum investing is neither fair nor accurately
possible. And unless we know everything about the investor in question, one
cannot say confidently which is better suited for whom.
You may feel that there is a secret to find the best time to invest in mutual funds India but there is no secret. Different investors need to follow different investment strategies for SIP and lump sum investing. And ofcourse an awareness of market conditions and how market history plays out is absolutely necessary. You can’t be blind to that.
All said
and done, SIP is a comparatively safer option but we cannot deny that at times,
lump sum investing will provide better returns if done correctly.
Which is better SIP or lump sum investment in top best mutual funds in 2019?
This may
sound repetitive but the truth is the superiority of SIP over lump sum or of
lumpsum investments over SIP varies under different conditions.
Is SIP better
than one time investment? Or lump sum is better than SIP? Systematic Investment
Plan vs Lump sum Investment? It is all a matter of probability and what is the sequence
of returns that comes in future and how investor behaves during the period in
consideration. That’s all there is to it.
You already
know why life insurance is important. Atleast for common people like us who
still aren’t rich enough to ignore it. After all, being underinsured and dying can be tragic for the dependents.
But one of
the major problems that many insurance buyers face is finding out how much life insurance to buy.
There is a
simple and methodical way to easily calculate how much life insurance to buy. But most people aren’t interested
in putting in the required effort. They want easier answers. They just want
someone to come and tell them what to do.
If that
wasn’t enough, there are tons of insurance products ranging from term plans,
endowment plans, moneyback plans, Ulips and what not. So people don’t know how
to actually choose the right insurance product. Among the various options to
save taxes, life insurance is also one of the most popular tax
saving investments options in India. But still people don’t see
insurance in the right perspective.
So let’s
try to change the perspective a bit – let’s see how people’s life insurance
requirements change with age.
This approach
will hopefully provide a different and more relatable perspective on how to
decide what the right life insurance cover is.
And no,
picking a random figure like Rs 1 crore life insurance is not the right way to buy life insurance. J
So let’s
move on… and begin when our hypothetical insurance buyer is a young man
beginning his career.
Aged 20 to 25 – Unmarried
Assuming
parents aren’t financially dependent on him, there aren’t any financial
liabilities or responsibilities as such on the person. It’s possible that there
might be an education loan. Insurance is needed only if there is a loan or
possibility of parents becoming financially dependent in near future.
How much life insurance
is needed?
Buying a small insurance plan (even
if it isn’t needed immediately) can be a good idea as the premiums at a young
age are very low. If the income is good enough, taking a larger cover is fine
too as sooner or later (after marriage), responsibilities will increase and
there would be a need to increase the cover anyhow.
Aged 25 to 30 – Married
Since the
person is now married, there is a need to protect spouse’s financial interests.
And if still not bought, this is the right and urgent time to take life
insurance. The dependency logic of parents discussed above still stands. If a car
or a home loan
are also there, then that should also be accounted for when purchasing
insurance.
How much life insurance
is needed?
A term plan of up to atleast 10-15 times of annual income + outstanding loans might be a good idea if spouse working too. Being somewhat over-insured at this stage is fine too.
Aged 30 to mid 40s – Married with Kids
Life moves
on and now with spouse and kids, there is a real need to protect their
financial futures. An insurance cover should be such that it takes care of
outstanding loans, regular expenses of the family for atleast 15-20 years,
children’s higher education costs, etc. If there is an existing life cover,
then it should be topped up or additional life insurance policy should be purchased.
How much life insurance
is needed?
No shortcuts here. To correctly find
out how much life cover is needed now, best to do it methodically using the
method discussed here.
Aged late 40s to mid 50s: Earning
Well + Kids in college
By now, the
asset base would have grown substantially. Children would also be more or less
on their way to become independent in a few years. Depending on how much existing
savings are, it’s possible that there may not even be a need for insurance
coverage as the existing assets will be more than sufficient to take care of
just one risk – regular expenses of spouse in case of death of the insured
person.
But since
the insurance premiums won’t be too large when compared to the then income, it
might make sense to continue with the existing cover for some more time. If
there are any loans, then atleast that amount should be covered. It might also
be a good idea to include a buffer amount for future medical expenses (for
spouse) in insurance calculations too.
Aged 60 & Beyond
Mostly, the
insurance need would not be there as the savings corpus would be much larger
than what might be required to fund regular family (spouse’s) expenses in
remaining years. Children it is assumed will be independent and not require any
financial security.
So ideally,
life insurance won’t be required anymore unless there is a need to leave a
legacy behind.
As you can see, the life
insurance needs of a person vary across different life stages.
Initially, it increases
with increase in responsibilities and liabilities. But then eventually, it goes
down and reaches a stage where it is not required at all.
To summarize, the
insurance amount should be big enough, at any given moment, to take care of the
present and future financial needs of the dependents. That ways, a big
insurance claim would help sort out the financial life of the dependents.
And since it’s possible
to purchase a large life insurance cover at a very low premium using term
plans, it also
makes sense to purchase a large cover (even if it doesn’t seem to be required)
early on as premiums would be low. Ofcourse there is the angle of insurance
premium affordability. But if income is decent, taking a slightly larger cover
is fine too.
Now there are several
types of insurance products – or let’s say financial products that provide
various levels of insurances. For example – term plans, endowment plans,
moneyback plans, Ulips, etc.
And once you have
decided the right life insurance cover amount, you have to choose a product
that provides insurance. When it comes to high coverage and low premium, nothing beats a term plan. But still, a lot of people feel that they are better served
by traditional insurance plans like moneyback, endowment plans, etc.
I have already written about
how these products are structured and provide a mix of insurance and investment. You cannot expect to get a very big life cover at a
very low premium.
Nevertheless, for a
section of the savers’ community, who are conservative and aren’t too clear about
the idea of ‘not mixing insurance and
investments’, these products have been extremely popular.
Apart from these traditional
insurance plans, the unit-linked insurance plans or Ulips are also available.
Here again, one single product provides insurance with investments. So
naturally, getting a very big cover without paying a large premium is next to
impossible.
In Ulips, the sum
assured is generally a multiple of annual premium paid and more importantly,
you pay much more for the same life cover as compared to a Term plan. For
example, a term plan of Rs 1 crore would cost you a few thousands every year,
whereas a Ulip providing a cover of Rs 1 crore would cost you several lakhs!
Yes…several lakhs!
So if you wish to go
with the Ulips but cannot afford very high premiums, chances are that you will
end up being under-insured. Which is extremely risky and can be disastrous for
the family if you die in between.
Unfortunately, most
Indians still buy life insurance to save taxes!
They are normally not
concerned about ‘how much sum assured is actually needed’ and instead focus on
premiums and taxes they can save.
How much income tax benefit can I get on life insurance
premiums? – is the
main question for many insurance buyers! J
The premiums that are
paid for life insurance policy qualify for a tax deduction of up
to Rs 1.5 lakh under Section 80C of the Income tax Act.
But if the sum assured of
the policy is less than 10 times the annual premium, then the buyer will get a
deduction on the premium of only up to 10% of the sum assured.
So if let’s say you buy
an insurance policy of sum assured Rs 5 lakh at an annual premium of Rs 63,000,
then only the 10% of the sum assured, i.e. Rs 50,000 will be tax deductible and
not full Rs 63,000. So any premium that is in excess of the limit of 10% of Sum
Assured) won’t qualify for the tax deduction under section 80C.
This is important
because a lot of traditional plans like endowment, moneyback policies or Ulips
have high premiums in comparison to sum assured. So one must be careful in this
regard.
This was about tax
saving while paying the premiums. But what about taxes on maturity or amount
paid on death?
This is an important
aspect that people forget about as they are blinded by their short-term
thinking and the need to immediately gratify their urge to save some quick taxes.
Most people feel that
the money they (or nominees) get in later years, on maturity or death from
insurance policies is tax-free. This is true to an extent. But there is a small
possibility that it might not be tax-free. Yes. It’s possible.
The death benefit, i.e. money paid to the nominee on death of policyholder
is exempt from taxes.
But in case of survival of the policy holder, the maturity amount may not
necessarily be tax-free. As per Section 10(10D) of the Income tax Act, if the
premium paid is greater than 10% of the Sum Assured, then the maturity amount
is taxable. So if the premium you pay is not more than 10% of the sum
assured, then you are safe. Else the amount will be taxed on maturity.
This is why when you are buying life insurance, make sure you understand
and more importantly, don’t ignore the taxation of the policy on maturity (as
per exemption condition stated in Section 10(10D) of the IT Act.
The actual income tax benefit available to you under Section 80C or
Section 10(10D) will vary for different policies. So it makes sense to spend
some time to understand the income tax benefits on insurance plans, income tax
benefits on term plans, income tax benefits on endowment plans, income tax
benefits on single premium plans, income tax benefits on money back policies
before you sign on the dotted line.
If you wish to really know how to buy the right life insurance policy,
then first you need to clear your head about what life insurance’s real purpose
is.
It is not there for tax saving. It is there to provide sufficient money
to dependents to live their life comfortably and achieve their real life goals
in your absence.
And there are several varieties of life insurance products that people
can choose from ranging from simple term plans to endowment policies to Ulips. The
ideal life insurance strategy for a person will depend on what stage they are
in life, their financial goals, outstanding liabilities and responsibilities.
So make sure that you don’t pick random numbers to find the life
insurance amount you need and chose the right insurance policy as soon as
possible.
Remember, planning your insurance portfolio (both
life and health) properly is very important if you don’t want to be at the
mercy of luck in your life.
This is the January 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.
Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).
Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
P/E Ratio (on the last day of January 2019): 26.28 P/E Ratio (on the last day of December 2018): 26.26
The 12-month trend of P/E has been as follows:
And here are the average figures of Nifty50’s PE for some recent periods:
Historical P/BV Ratios – Nifty 50
P/BV Ratio (on the last day of January 2019): 3.37 P/BV Ratio (on the last day of December 2018): 3.40
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of January 2019): 1.25% Dividend Yield (on the last day of December 2018): 1.24%
Now, to the historical analysis of Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).
Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).
So obviously, Nifty500 is comparatively a much broader index than Nifty50.
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of January 2019): 29.13 P/E Ratio (on the last day of December 2018): 29.61
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of January 2019): 3.15 P/BV Ratio (on the last day of December 2018): 3.20
Historical Dividend Yield – Nifty 500
Dividend Yield (on last day of January 2019): 1.16% Dividend Yield (on last day of December 2018): 1.14%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:
This is a common question that I am asked quite often, more
so during the tax saving season.
Choosing between the ever so popular Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS).
To be fair, comparing one to the other isn’t exactly
correct. But I will get to that in a bit.
If you think about it, the main motive behind such PPF vs ELSS questions is fairly obvious – the more tax you pay, the less money remains in your hands. So you will naturally try to find ways to save more taxes. And if these tax saving efforts can help you earn good returns, then nothing like it. Isn’t it?
Unfortunately, people want a clear-cut, crisp,
one-word answer to such ELSS vs PPF questions.
But that’s easier said than done. Things aren’t
always black and white. There are hundreds of shades of greys in between.
Another question derived from the earlier one is whether doing SIP in ELSS funds is better
than investing in PPF every month?
Those who are risk averse obviously feel PPF is a better savings option. While those who have got good returns from ELSS funds in the past (or know that equity is the best asset to create long-term wealth) advocate going for SIP in ELSS funds.
And here is an interesting fact: the number of such PPF vs tax saving ELSS debates
rises during the tax saving season. JPeople are in a mad rush to do some glamorous,
last-minute tax savings and portray themselves as financial superheroes!
But last-minute tax saving efforts near the end of the
financial year is a recipe for disaster.
But let’s not digress and instead focus on the main questions
at hand:
Is ELSS mutual fund better tax-saving investment option than PPF (Public Provident Fund)? Or
Is PPF better tax-saving option than ELSS funds (Equity Linked Saving Schemes)?
No doubt both are very popular.
And when you ask people about the best tax saving
investment options, chances are high that you will get either ELSS or PPF as
the answer.
But as I said earlier, there is no perfect or one clearly
defined right or wrong answer to this debate.
Ofcourse if you pick just one of the several parameters,
you are bound to find one clear winner. But that is not the right approach.
But let’s begin the comparison anyway…
Most people prefer to compare returns.
Unfortunately, that is neither wise nor a fair
comparison.
PPF
as a product is extremely safe and gives assured returns whereas returns
from ELSS depend on the performance of the stock markets. So the returns of
ELSS can be very high or very low and fluctuate somewhere in between.
Both are completely different products and target
different needs of a portfolio. So we shouldn’t even be comparing them!
But people do and will continue to compare.
And one very big reason why people compare them is that both have a good and instant side-effect of providing tax-saving… that too under the same Section 80C of the Income Tax Act. Hence people tend to compare.
I know what you are thinking.
Firstly, we are concerned about tax-saving. Right? That’s
common between ELSS and PPF. So nothing much to compare.
Next obvious choice is to compare returns. What else
could it have been?
You are right to an extent.
But I am of this view that all investments should be linked to financial goals. Tax saving should not be the prime motive for most investors (Talking of goals, if you still aren’t sure which goals you are or should be targeting, I strongly suggest you use this FREE Excel-based Financial Goal Planner to find out what your real personal financial goals are.)
Your goals and investment horizon play a major role
in defining how you invest. If investing for long-term goals, the investment
portfolio should ideally have a larger equity component. Whereas when saving
for short-term goals, it should be a less volatile and debt-heavy portfolio. The
asset allocation differs for different financial goals. That’s how it should
be.
I will not delve into the full details of what PPF
is or what tax-saving ELSS funds are. I am sure you already know most things
about them. But just to recap a bit:
PPF (or Public Provident Fund) is a government-backed debt product that assures returns that are declared from time to time. How much to invest in PPF to save tax? A maximum of Rs 1.5 lakh can be invested in lump sum or installments in one financial year. The lock-in period is 15 years and the account can be extended in blocks of 5 years multiple times after the original 15-year maturity period is over. Tax benefits for investment in PPF under Section 80C are limited to upto Rs 1.5 lakh.
ELSS (or Equity Linked Savings Scheme) is a diversified mutual fund that invests in stocks and also offers benefits under Section 80C. There is no limit on maximum investment but tax benefit is available only on Rs 1.5 lakh. The lock-in period is 3 years. Returns are neither guaranteed nor assured. They are market linked and (average returns) tend to beat inflation in the long term.
Comparison of Returns – ELSS vs PPF
As I have already said, comparing returns of PPF
with ELSS isn’t 100% correct.
Both have very different investment objectives.
PPF is a debt product whose returns are fixed but
limited due to its very nature. There is no potential for positive or negative
surprises. You get what you are promised by the authorities. ELSS, on the other
hand, is an equity product that aims to maximize returns. To achieve this aim,
it takes risks which can turn out well at times and not turn out well at other
times.
To give you some idea about how returns in ELSS
funds and PPF differ every year, I have tabulated the annual returns of some of
the popular tax-saving ELSS mutual funds in the table below:
The data has been sourced from Value Research. This is not a perfect comparison but is still good
enough to give you a comparative snapshot. You can compare the year-wise
returns and average category-return of these ELSS funds with PPF annual
interest rates. This table will give you some idea about how the returns vary
in reality, so I suggest you spend some time on it.
And the funds above are one of the best ELSS funds
that have been in existence for last several years now. But do not think of
this as an advice of best-ELSS-funds-to-invest kind of list. The data is just
for illustration purposes.
But nevertheless, read the observations below:
PPF returns have mostly ranged from 8.0% to 8.7% in the recent past. To know more about PPF account interest rate in different banks, check the updated latest PPF interest rates.
The years with green colored PPF-return grids indicate that the PPF was the better performing when compared with other ELSS funds in that year. Like in 2008, PPF delivered 8% whereas the chosen set of ELSS funds gave average returns of -54% with individual funds delivering anything between -48% to -63%. Similarly in 2011, PPF did better than ELSS schemes.
The years with red PPF return grids show that ELSS gave higher returns than PPF in those years. For example: in 2017, ELSS returns ranged from 26% to 46%. Obviously PPF couldn’t match that with its 8%.
The smaller grids (max/min) show the maximum and minimum annual return for different ELSS funds for that given year.
It’s clear from above that depending on the market conditions,
the ELSS returns can have wild fluctuations. PPF returns on the other hand are
more or less constant due to government’s blessings.
So where PPF returns average around 8%, tax saving
ELSS mutual funds have the potential to deliver a much superior return – a 12%
to 15% average returns is possible, but not guaranteed. And the top best ELSS
funds have given much better returns than these average returns.
So does it mean that you should simply dump PPF and
start investing everything in ELSS funds?
Ofcourse not! The average return comparison of ELSS and PPF does seem to show that ELSS offers superior returns in the long run. But basing your investment decisions only on one factor is very risky. Here’s why.
Let’s check another aspect before we get judgmental.
I have simulated Rs 10,000 monthly investment in Franklin India Tax Shield Fund* starting
from January 2008 to December 2018. This is to be compared with Rs 10,000 per
month savings in PPF for the same period.
*Chosen randomly
from several ELSS funds. Don’t consider it as a recommendation.
The value of investment in Franklin’s ELSS fund at the end of 2018 would be about Rs 29-30
lakhs. On the other hand, the value of PPF corpus is 20-21 lakh.
Once again and maybe not surprisingly, it seems ELSS
is the way to go.
You can also say that in the above case, the
PPF-investor has actually lost out on more than 50% extra returns. (Rs 30 lakh
– Rs 20 lakh)
I have compared Rs 10,000 monthly SIP in Franklin Tax Shield vs monthly 10,000
savings in PPF starting from April 2007 (when the bull run was about to peak in
coming months).
I chose that starting point because due to high
returns from equity in recent past (2004-early-2007), many people would be
attracted to stock markets and would be interested in ELSS – as it combined tax
savings with much higher returns than PPF.
So here is a 2-year story – starting from April 2007
to March 2009:
In 2 years, the total contribution would have been
Rs 2.4 lac in each.
And the value of ELSS investment would be Rs 1.6 lac
and that of PPF would have been about Rs 2.6 lac (yellow cells in the bottom
row).
Now think…
We know equity will do well in long term. That is
what has been told and proven countless times
But how many people would remain convinced and loyal
to that idea when their Rs 2.4 lakh investment goes down to Rs 1.6 lakh after 2
years?
They might be cursing themselves for ignoring PPF
that would have saved them from such losses.
And this is what I wanted to highlight.
And no PPF vs ELSS calculator or SIP vs PPF
calculator will tell you this. All such ELSS SIP investment calculators work on
the principle of average returns which will not show the real picture.
Just looking at historical average returns, you might feel that investing 100% of the money in stock markets is the right way. But when markets correct, not many people have the ability to stay invested and accept the temporary losses, even though it is best for them.
Looking at the average long-term returns in
isolation can give the wrong picture. Equity investing (directly or via mutual
funds) does need a lot of will power to remain invested when markets are down.
Not many people have it.
So is it better to
invest in ELSS mutual funds SIP than in PPF?
It is true that
investors of ELSS mutual funds are rewarded for accepting the short-term
volatility. They are paid back handsomely as average return table above suggests.
But when you invest in markets, you will face periods of stock market
volatility every now and then. Like in 2008, the ELSS category fell by almost
50%. Again in 2011, the category average was about -24%.
Equity is perfectly fine for long-term investors and
equity funds have given much better returns than PPF over long-term. But you
just cannot ignore debt (like PPF) as the investors have different responses to
volatility. Some might exit ELSS after 20-30% losses (which is normal in
equities).
Another factor is that you don’t have to ‘choose’
anything in PPF. It’s simple.
But in ELSS funds, you have to choose the fund among
many available ones. Is there any guarantee that you will be able to choose the
right ELSS fund that will do well in future? Think about it. What if you picked
the wrong funds?
That was about the
comparison of investment returns of PPF vs ELSS mutual funds.
Let’s see other
factors.
Tax Benefits on investments in ELSS Vs PPF
Both ELSS and PPF
are quite tax efficient.
Under the Income Tax
Act Section 80C, investment in ELSS mutual funds and PPF (Public Provident
Fund) give you a full tax deduction upto Rs 1.5 lakh every financial year.
Under Section 80C, you cannot claim deduction of more than Rs 1.5 lac when investing in ELSS or/and PPF and/or other section-80 tax saving options.
Also, you cannot
invest more than Rs 1.5 lakh in a PPF account in a year. But this restriction is
not there in ELSS schemes. You can invest as much as you want, but the tax
benefits available will be limited to Rs 1.5 lakh.
And let me answer
two more questions that you might have:
A PPF account has a
maturity period (lock-in) of 15 years. ELSS funds on the other hand have a lock
in period of only 3 years. But wait. There is more to know than just that…
Assuming you make
annual investments in PPF, only your first installment in locked-in for 15
years. The 2nd year installment is locked-in for 14 years. The 3rd year
installment is locked-in for 13 years…and so on. Also, the PPF accounts that
have completed 15-year lock-in and have been extended have a fresh lock-in of
only 5-years.
In ELSS, each SIP
installment has its own 3-year lock-in. many people get confused here. Do not
think that lock in is valid on full amount that you have invested from the date
of first investment in ELSS.
So first SIP in
April 2017 will be locked in till April 2020. Second SIP in May 2017 will be
locked-in till May 2020. And so on…
But let me remind
you that equity is best suited for long-term. Like for periods exceeding 5
years. The money is locked for only 3 years in an ELSS fund. But even if the
lock-in gets over after 3 years, you shouldn’t withdraw the funds and remain
invested for as long as you don’t need the money.
As investors you need to be very clear that the asset that you are investing in is equity and thus you should be ready to stay invested for at least 5 to 7 years to get good returns.
What if you Invest 100% in PPF or 100% in ELSS?
These type of questions come from people who are unwilling to see the
bigger picture and are only narrowly focusing and asking about PPF vs mutual
funds which is better?
But neither approaches is advisable.
Is PPF a good option for investment?
Is ELSS a good option for investment?
Ofcourse yes.
But theoretically speaking, if you invest Rs 1.5 lakh in PPF every year for 15 years, your total corpus would be around Rs 43 lakh. You can use this Excel PPF Maturity Calculator to try out other scenarios (or find out how to save Rs 1 crore in PPF).
Regular SIP in equity funds (both ELSS and non-ELSS) can create a lot of wealth in long run. Here is a good real-life success story of SIP-based Wealth Creation. To know how much wealth you can possibly create by investing small amounts every month, check out the following links:
Again, you might
feel that why to use PPF when you can get more returns with ELSS.
But remember, PPF is
a debt product and ELSS is an equity product. All goal-based investment
portfolios are best constructed by diversifying across assets.
You should not be 100%
in equities or 100% in debt.
It is not sensible
either way.
For most people, the best approach is to invest in line with your goal requirements. Using the powerful concept of Goal based Investing, you find out how much you should be investing for each goal.
Let’s assume that the goal you have in mind is retirement planning – which is a nasty problem in itself.
It’s a big goal. And
since for most people its decades away, its best served by an equity heavy portfolio.
For someone in 30s,
it can be safely said that a portfolio with 70% equity and 30% debt is
suitable.
And you also wish to
save tax. Right?
So here is how to go
about it:
You are investing for your financial goal of retirement planning.
After doing some calculations yourself (or taking help from an investment advisor), you have come to know that you need to invest Rs 20,000 every month in 70-30 Equity-Debt ratio.
That means investing Rs 14,000 in equity and Rs 6000 in debt every month.
But you are already making an EPF contribution of Rs 4000 every month. That also counts towards the 30% debt bucket.
EPF takes care of 48,000 under Section 80C tax saving options. Assuming you have a Rs 1 crore term insurance with Rs 12,000 annual premium, the total eligible deduction goes upto Rs 60,000 (48K+12K).
The remaining Rs 2000 per month (from debt) can be put in PPF. Or if you have the option of VPF, that’s better too. This totals to Rs 84,000.
And this increases eligible deductions to Rs 84,000 (48K+12K+24K). You need another Rs 66,000 for fully utilizing Section 80C limit.
You can now do a Rs 5500-6000 SIP in ELSS fund. That will take care of your tax-savings.
For the remaining Rs 8000-9000 (in equity bucket of Rs 14,000), you can choose other normal equity funds (non-ELSS). Or you can even do full Rs 14,000 SIP in ELSS funds.
And if you think
like that, then you will easily get answers to questions like ‘how much should I invest in ELSS’ and ‘how much should I invest in PPF’?
But you don’t need
to decide between PPF and ELSS because of just returns.
You instead simply need
to focus on asset allocation (which is 70-30 in the above example). Therefore,
the choice between doing SIP in ELSS funds and investing in PPF must also be
seen in the context of overall portfolio asset allocation.
If there is room
under the 30% debt bucket after deducting EPF contributions, you use PPF. For
equity’s 70% bucket, you can use ELSS to the extent it is needed for tax
saving.
And if your Section 80C limit of Rs 1.5 lac is fully utilized using EPF contributions, life insurance premiums and home loan principal repayment, there is no need for ELSS mutual funds investment. You can easily focus on non-tax saving equity funds instead.
But that doesn’t mean that you don’t invest for your goals. Tax-saving
is not a financial goal. Just remember that.
The approach that I discussed above is in line with goal-based
investment’s philosophy.
One simpler approach can be to take a middle path and do a 50-50 split
between PPF and ELSS.
Another can be (for those who are interested in being more tactical
about tax-saving) to use market valuations as an indicator to decide where to
invest. If valuations are low, invest in ELSS. If valuations are very high,
invest in PPF.
I am not suggesting that the tactical approach discussed above is a better way. Just highlighting that there can be multiple approaches. But most people are better off not trying to time the markets. 🙂
But the actual split between ELSS and PPF will depend on factors like
your risk profile, existing assets, etc.
Just to reiterate, if you are young, keep a larger portion of your savings directed towards equity when investing for long term goals like retirement.
Both ELSS and PPF are suitable for retirement savings. But equity is
better suited as long as you have several years left for the goal.
How to choose good Tax-Saving ELSS Mutual Funds?
Before even you consider ELSS as the choice for tax saving, do not
forget that always invest in ELSS with a long-term perspective – something like
5+ years or even more.
Why?
Because ELSS is about equity investing. And equity as an asset class
isn’t risk free. There is always a risk of loss of capital. But this risk is
higher when you invest for short term. The longer your investment horizon, the
lower is the risk of loss.
With that aside, how do we go about picking the best ELSS funds among
all ELSS mutual fund schemes out there?
These days, the disclaimers about past performance not being
necessarily sustained in the future fall on deaf ears.
So despite mutual fund companies highlighting great short term returns,
you should focus on things that matter.
When looking for which ELSS funds to invest in for tax saving, keep the
below discussed points in mind.
Depending solely on performance numbers from recent past can be misleading. Do not run after previous year’s best performing tax saving ELSS funds. Look for consistency in returns over several years. Has the fund been in the top quartile of its category for almost all the years? Has the fund protected the fall in poor markets? These are just some of the questions that should come to your mind when picking ELSS or building a proper mutual fund portfolio. You can even consult an investment advisor to find out these answers.
Also, all ELSS funds are not the same in terms of portfolio
construction.
All ELSS funds are actively managed and its fund manager’s job to
decide what to hold in fund’s portfolio. It can a portfolio with a bias towards
large cap, midcaps, all caps or whatever.
What is worth remembering is that one ELSS fund’s investment mandate
will not be the same as that of the ELSSs out there.
And there is absolutely no need to pick a new ELSS fund every year for your
tax saving.
This often happens when you do last minute tax saving. You are in a hurry and want to find out the best performing ELSS fund on the basis of 1-year return. This is not advisable.
Over the years, investors end up with several ELSS schemes as they
invest lump sums every year by picking one from the best performer of previous
years. Like picking from Top ELSS Funds of 2018 or Top ELSS Funds of 2019.
But having more than 1 or 2 ELSS funds is useless. In any case, if you have other non-tax saving diversified mutual funds, having more ELSS funds will only lead to an overlap in your portfolio. Building a mutual fund portfolio isn’t tough but still people mess it up.
So don’t wait for January, February or March for planning your tax
savings.
Do some homework earlier and find out how much is to be invested in ELSS in the year. And then begin investing in ELSS through SIP (systematic investment plans). This way, you would have time to pick good ELSS funds on the basis of long-term consistent performance. You will also benefit from averaging (and avoid timing the market through last minute lump sum investments).
We began this article with the question of whether to invest in PPF
or ELSS to save taxes.
You should not decide randomly between ELSS or PPF. And there is no
one-size-fits-all answer as both ELSS and PPF target different needs of the
investment portfolio.
The decision should be made after you have a clear view of your financial
goals and tax requirement.
But when it comes to combining equity investing with tax saving, there
is no doubt that ELSS is good for long term investments. It scores well
above several other tax saving products. And investing in ELSS through SIP (or
systematic investment plans) over a long time horizon can help you do proper
tax planning and financial goal planning.
If you have a well-thought out investment plan for your financial goals, you will not need to ask questions like which is a better investment option ELSS or PPF?
You don’t need to choose between the most suitable tax saver between ELSS vs PPF. That is because you will invest on basis of your goal-specific strategic allocation rather than randomly. And that is what goes a long way in sensible investment management and wealth creation. So taking sides on ELSS vs PPF is fine. But invest smartly and using correct goal-based approach.
And here are the average figures of Nifty50’s PE for some recent periods:
