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NPS Rs 50,000 per year – Retirement Corpus & Pension Calculation

Even though NPS is a product designed exclusively for retirement planning, what attracts most people to NPS is Rs 50,000 extra tax benefit it offers via deduction.

As per the current tax rules (2019-20), there is an additional Rs 50,000 tax deduction available under Section 80CCD (1B) for NPS contributions made in NPS (Tier 1). This benefit is only available to NPS subscribers and most importantly, is available in addition to the Rs 1.5 lac deduction available under Section 80C.

And this extra Rs 50,000 tax deduction for National Pension Scheme NPS is what catches most people’s interest. And such people keep looking for easy-to-use NPS calculators.

But before we find out the details of NPS pension calculations, let me remind here that ideally, investment decisions should be governed by real financial goals and not tax-saving alone (read why?). But most people ignore this important advice and get attracted / give undue importance to things like tax-saving. But let’s not get into that discussion today.

To summarize the tax angle of NPS, investments of up to Rs 50,000 in NPS Tier I account in a financial year qualify for additional tax deduction under Section 80CCD (1B) of the Income Tax Act. This is in addition to the Rs 1.5 lac deduction available via Section 80C.

Now as mentioned earlier, this extra 50,000 NPS tax benefits attracts many.

And I regularly get queries from people, which are broadly like:

“I already utilize my Section 80C limit of Rs 1.5 lac using EPF, PPF vs ELSS, Home Loan EMI Principal repayments, etc. But I want to save more tax. So can I also use NPS for extra tax savings? And if I do, what would be my final retirement corpus and pension if I put just the additional Rs 50,000 every year in NPS?”

Though suitability of NPS for retirement planning is something worth debating, let’s just limit the scope of this article to answer the question below:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we run the numbers and kind of simulate the NPS Pension Calculator, we need to understand the latest NPS withdrawal rules (2019):

  • Minimum 40% of the NPS maturity proceeds (corpus) must be used to purchase an annuity plan. This 40% isn’t taxed. But, the income (or pension) generated from the annuity will be taxed at the then tax slab rate of the retiree.
  • The remaining 60% is exempt from tax and can be withdrawn as lumpsum.
  • If they want, then NPS retirees can use more than 40% (up to 100%) of the NPS corpus to purchase the annuity. In that case, the lumpsum available will decrease accordingly. For example – one may choose to purchase the annuity plan using 65% of the NPS corpus on retirement (instead of the required minimum of 40%). He will then only get remaining 35% as a one-time lumpsum tax-free payout.

So according to NPS rules, basically, there is no tax at the time of withdrawal at retirement as i) 40% goes towards annuity purchase tax-free and ii) remaining 60% is paid out immediately as a tax-free amount. The only time any tax has to be paid is on the income being generated from the annuity in later years.

That was about NPS income tax benefits, NPS tax saving and NPS tax exemption. Now let’s come back to the question at hand:

What would be the final corpus and pension Rs 50,000 is invested every financial year in NPS Tier 1 account till the age of 60?

Before we do NPS calculations for 2019, let’s make a few assumptions:

  • NPS Starting Age – 25 / 30 / 35 / 40
  • Retirement Age – 60
  • Investment Tenure – 35 / 30 / 25 / 20 years (as starting age is different but retirement fixed at 60)
  • Annual NPS investment – Rs 50,000 only
  • Does investment amount increase every year – No
  • Expected Returns – 10% (assuming a balanced mix of equity and debt)
  • Part of corpus used for Annuity purchase on retirement – 40%
  • Part of corpus used for Lumpsum Payout – 60%
  • Annuity Rate at time of retirement – 6%

So here are the results of calculating NPS maturity calculator and pension:

Start at 25 and Retire at 60 (35 years tenure)

  • Total Contribution – Rs 17.5 lac
  • Total NPS Corpus – Rs 1.49 crore
  • 40% used for Annuity Purchase – Rs 59.6 lac
  • 60% Lumpsum Tax Free Payout – Rs 89.4 lac
  • Monthly Pension from Annuity – Rs 29-30,000 per month (before taxes)

Start at 30 and Retire at 60 (30 years tenure)

  • Total Contribution – Rs 15.0 lac
  • Total NPS Corpus – Rs 90.5 lac
  • 40% used for Annuity Purchase – Rs 36.2 lac
  • 60% Lumpsum Tax Free Payout – Rs 54.3 lac
  • Monthly Pension from Annuity – Rs 18,000 per month (before taxes)

Start at 35 and Retire at 60 (25 years tenure)

  • Total Contribution – Rs 12.5 lac
  • Total NPS Corpus – Rs 54.1 lac
  • 40% used for Annuity Purchase – Rs 21.6 lac
  • 60% Lumpsum Tax Free Payout – 5 lac
  • Monthly Pension from Annuity – Rs 10-11,000 per month (before taxes)

Start at 40 and Retire at 60 (20 years tenure)

  • Total Contribution – Rs 10.0 lac
  • Total NPS Corpus – Rs 31.5 lac
  • 40% used for Annuity Purchase – Rs 12.6 lac
  • 60% Lumpsum Tax Free Payout – Rs 18.9 lac
  • Monthly Pension from Annuity – Rs 6300 per month (before taxes)

Note – These numbers are indicative, based on an assumed constant average rate of return of 10% and annuity rate of 6% (which may not actually remain constant). The actual returns, final NPS pension, final lump sum amount one gets from NPS may be higher or lower. Also, you never know whether the 80CCD deductions will remain until your retirement or not.

And it’s pretty obvious that to make the most of the NPS (like in many other long term investment product too), the subscriber should ideally start investing as early as possible. And if one increases the annual (or monthly) contribution towards NPS every year (in line with the increase in income), then that would make the final NPS Retirement Corpus even bigger.

So now you have your answers to questions like what would be final NPS retirement corpus and monthly pension (income) in retirement years.

By the way, many people do compare NPS with PPF. But PPF is a pure debt product which too can be used to achieve goals like PPF crorepati if nothing else. But jokes apart, NPS is a hybrid equity-debt product and PPF is pure debt. So ideally, they shouldn’t be compared. Read more about PPF here and if you want, try your hands at this PPF calculator as well.

All said and done, National Pension System or NPS is designed to save for the post-retirement years, by making contributions during the working years. But is it the best-suited product for retirement saving or not? The answer isn’t that easy.

It may be suitable for some people and it may not be suitable for many others.

Many people’s retirement plans are best served via simple SIP in Equity Funds, regular EPF contributions and occasional Debt Funds (for rebalancing, etc.). And if the money being saved monthly towards retirement is high, then Rs 50,000 NPS tax rebate doesn’t seem that attractive for them.

Like a true retirement product, NPS is very illiquid and it’s difficult to take out money before you turn 60 (i.e., retirement age). So for those planning early retirement, it might not be the best option. More so because if you quit NPS before turning 60, then the NPS Rule’s original condition of using 40% corpus for annuity purchase changes to 80 percent! That is, you would compulsorily need to purchase an annuity plan using 80% of your NPS savings. And only the remaining 20% will be paid as a one-time payout. That’s kind of unfair to early retirees!

So no doubt the 80CCD deduction gives you additional tax benefits for investing Rs 50,000 in NPS National Pension Scheme. But NPS tax benefit and tax-saving are one thing and product suitability is another. And whether NPS is actually suitable for you as a retirement savings product or not – is another matter altogether.

Note – If you want to find out your NPS retirement corpus and NPS monthly pension, then go ahead and Download FREE Excel-based NPS Pension Calculator.

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Returns of Direct plans are higher than Regular MF plans

I still get queries from readers asking that does it actually make sense to switch their mutual fund investments from regular plans to direct plans.

The simple answer is Yes.

And I also tell them that since direct plans of mutual funds have been in existence for several years (since 2013 to be exact), they are already late!

But jokes apart, let’s put some doubts to rest first.

Here are 3 important facts about Direct plans vs Regular plans:

  1. Returns of direct plans will always be higher than regular plans of the same fund/scheme. That is, direct plans will always outperform the regular ones.
  2. The NAV of Direct plan will always be higher than that of Regular plan of the same fund/scheme
  3. Since the Direct-NAV is higher than Regular-NAV, you will get lesser no. of units for direct plans for the same amount invested. But still, your returns will be higher than those of regular plans.

There should be no doubt about these 3 things.

Under direct plans of the mutual fund schemes, you invest directly with the mutual fund house (AMC). And since there is no intermediary or distributor involved in between, the commissions are saved. And this reflects in the lower expense ratio of the direct plans – which in turn, reflects in better returns as compared to the regular plans. All else remains the same. The fund manager, the portfolio of stocks, everything remains the same.

Now let’s see how the returns of direct plans have fared since when they came into being (in early-2013).

I have chosen the Large-Cap Funds category (from SEBI-specified mutual fund categories) and taken the few popular and big funds as an example (and not as fund recommendations) here.

As you will see below, the Direct Plan of any chosen fund has given higher returns (or lower losses) in each year of existence when compared with the regular version:

Regular Direct NAV Annual Returns

And Direct Plans of MF giving Higher returns than Regular plans will continue to remain so in future as well as the expenses of direct plans will always be lower than the regular plans.

Lets now look at the NAVs of one (randomly chosen) fund to see how NAV changes over the years.

I chose HDFC Equity Fund as an example. As you can see below, the gap between the NAV of Direct Plan and Regular plans is increasing every year. And since the direct plan will give a higher return than regular plan every year, this gap will continue to increase further with each passing year:

Mutual Funds Regular Direct NAV Difference

Some people feel (and after being intentionally confused by regular-plan sellers like MF distributors, agents, banks which always sell regular plans) that Direct Plans are expensive than regular plans – after all, NAV of direct is higher.

But this is a wrong way of thinking. And the opposite is true.

No doubt, NAV of direct plans is and will always be higher than regular plans. But that is not because it’s expensive but because direct plans have a lower expense ratio which allows its NAV to grow faster. Hence, NAVs of direct plans are high and will continue to grow faster than regular plans.

You will get fewer units when you buy direct plans. But it comes with a faster-growing NAV. And this will give you better returns.

Let’s take 2 simple examples of why this is true and why direct plans can create more wealth than regular plans.

What would be the value of Rs 10 lac investment made one-time on 1st January 2013 in HDFC Equity Fund’s Direct Plan and Regular plans separately?

Here is the answer:

Regular Direct NAV Difference Lumpsum

As you can see, the value of investment made in direct plans is higher by almost 5% after just 6 years.

Now that was about lumpsum investment. But what about a Rs 25,000 monthly SIP in both Direct and Regular Plan of the same MF scheme?

Below is shown the value of the SIP between Jan-2013 and Jan-2019. The SIP is done monthly but data is shown only 6-monthly for making it concise:

Regular Direct NAV Difference SIP

Even though you got a lesser number of units in direct plans, you still ended up with a larger corpus at the end. And this is why the argument of you-get-lesser-units-in-direct-plan-so-its-expensive doesn’t stand.

Direct plans will give smaller no. of units but also (more importantly) give better returns than the regular plans.

By the way, if you feel that this % difference isn’t big, then remember that when you are investing in mutual funds, you are investing for the long term – like 10, 20 years or more (like in retirement).

And when that happens, this small difference every year builds up into a much larger difference. Because of compounding – which with each passing year, will grow and grow and convert this small percentage difference into a large absolute difference which you would not be able to ignore then after several years.

With that said, be reminded that Direct mutual funds will always (I repeat ALWAYS) outperform their regular plans of the same mutual fund scheme.

And despite their higher NAV, the Direct plans of Mutual Funds offer better returns than Regular plans.

If you are an investor who doesn’t want to lose out on these additional returns which are available for direct plan investors ‘only’, then you should switch to direct plans as soon as possible. But remember, it only makes sense for you to get into direct plans when you either know which mutual funds are good for you and your goals OR you are getting proper advice by a trustworthy and competent investment advisor.

F.I.R.E – Is going Very Fast really Good?

F.I.R.E - Is going Very Fast really Good

Recently, my wife showed me an interesting tweet (link):

  • Overrated: How fast you are able to reach financial independence.
  • Underrated: How enjoyable is your journey on way to financial independence.

I was like wow! This makes sense.

She was quick to remind me then that she had said something very similar a few years back! J And interestingly, I had even written about this exact idea in a post titled F.I.R.E. = Financial Independence and Retiring Early. So here I reproduce a part of it for context:

…I was trying to talk to her [my wife] about the rationale of early retirement and she said something that hit me like a bullet.

She told me that in order to achieve my destination quickly, I should not screw up the journey.

[in years leading up to that discussion with my wife], I was increasingly becoming addicted to the idea of investing more and more to accelerate my financial independence (or early retirement). This meant that I was quite reluctant in spending money even on things that were worth spending on.

And this was wrong on my part. Goal achievement (atleast this one) should not be at the cost of killing the joy of several-years long journey.

You can continue to lead a ultra frugal life and hoard tons of money when you are 45 or 50 or whatever. But, will you be able to use that money in ways that would have been possible when you were young?

No.

I have never made a secret of my desire to become financially independent as early as possible. But working towards this goal requires sacrifices. You need to defer gratification, curtail unnecessary expenditures, save much more than what normal people do. It’s a tradeoff that is to be accepted in this journey.

For me, financial independence still remains my biggest financial goal.

But will I be stressed and strangulate myself (and not spend money more freely) if I don’t achieve it as planned – i.e. financial independence by 40?

Hell No!

I already made course correction a few years back when I realized this.

I continue to balance the goal of financial freedom with that of spending today on experiences/things that I want.

So maybe, I am not saving as much as I actually can if I push myself more. But that is fine with me even if it means that my so-called ‘early’ retirement will be delayed by a few years. 🙂

Coming back to the original tweet:

Overrated: How fast you are able to reach financial independence.

Underrated: How enjoyable is your journey on the way to financial independence.

Ofcourse fast is quantifiable and enjoyable isn’t. But hopefully, now you understand why it’s worth comparing the two in the context of financial independence.

And let me add a bit of numbers to this discussion to drive home the point better…

Don’t worry. It’s not complex maths. Just simple stuff – understand the basic maths behind financial independence first:

As per a popular FIRE thumb rule, you need a corpus equal to atleast 25* times annual expenses for financial independence.

* – Many say that having 30X or 40X may be a more appropriate and safer approach. But let’s stick to 25X for simplicity and discussion sake.

Now if the X (which is the annual expense) is small, that means you can save more and in turn reach 25X faster.

How?

Read on (and this is important)…

Suppose your annual income is Rs 12 lac. And your annual expenses (i.e. X) are Rs 8 lac. So using 25X thumb rule, you need 25 times Rs 8 lac – which is Rs 2 Cr as the Financial Independence Corpus. And to achieve it, you have Rs 4 lac every year (Rs 12 lac income minus Rs 8 lac expenses) to save for the goal.

Note – Ignore inflation, etc. for simplicity.

Now let’s make the X a little smallER.

Your annual income is still Rs 12 lac. But now, your annual expenses (i.e. X) is smallER at Rs 6 lac (reduced from Rs 8 lac earlier). Now using the 25X rule, you would need 25 times Rs 6 lac – which is Rs 1.5 Cr as the Financial Independence Corpus. More importantly, you now have a higher Rs 6 lac every year (Rs 12 lac income minus Rs 6 lac expenses) to save for the goal.

So the target has reduced from Rs 2 Cr to Rs 1.5 Cr. And you also have a higher amount of Rs 6 lac per year (instead of Rs 4 lac) to save for the goal. Obviously, the time required to reach the target would reduce too. And this is How to really Accelerate your Financial Independence.

Lowering expenses has the double benefit of reducing the target and increasing your savings capability to achieve that reduced target.

Think of it like this – If your expenses are low, you need a smaller corpus to support it for years to come. And a smaller corpus means that you will require a lesser number of years to achieve it. But if your expenses are high, then not only will your required corpus would be high, but it will also require more time and probably a higher saving rate.

And this is the Real Secret of Financial Independence & Early Retirement.

In other words, higher is your savings rate (meaning lower the expenses), sooner can you potentially achieve FI (or FIRE = Financial Independence Retire Early).

In addition, it also prepares you for the worst-case scenario of involuntary Forced Early Retirement which can derail your life.

The maths behind Financial Freedom is such that you can speed up the theoretical goal achievement if you reduce expenses by a lot.

Right? Remember, lower the X, lower will be the target of 25X.

But then, that would mean you are sacrificing your present for the future, which is good to an extent but not beyond it.

We always know how much money we have but we never know how much time we have.

So we should not entirely sacrifice the present. And as the author of the tweet mentioned elsewhere:

You should (also) prioritize how enjoyable your journey to financial independence is rather than prioritizing how fast you can get there.

Angry Investor. Good Returns a Birthright. Feature not Bug

Many investors are angry. And many more are just plain disappointed.

And why not?

All those high returns that they came to identify equity with… are suddenly gone.

In fact, just in the recent past, things were so rosy. Isn’t it?

Have a look at the 2016-2017 period below – making money in equities was so easy then:

Nifty Returns 2016 2017

Nifty Good Returns 2016 2017

It wouldn’t be wrong to say that by the end of 2017, it seemed that a small section of investors (or let’s just call them market participants to avoid corrupting the word investor), started believing that high equity returns were their birthright! It’s like they started believing that equity is a fixed deposit that will give 15-20% returns every year! 😉

And if you were active on Twitter then, you would agree with me that it was so hilarious to see so many people (many famous PMS fund managers and others selling stock tip kind of s*** services) sharing the new highs their portfolios were making every day. It is understandable why they were doing it. The show-off was to attract new clients. But come on. It was so stupid!

ROFL 🙂 🙂 🙂 🙂

Without trying to say here that I got it right or something like that, it was clear by the end of 2017 that the party of 2017 was heading for a bad finish. And if you understand valuations and how it impacts future returns (this detailed study), then you too would have realized it.

Let’s move forward.

This is what has happened since January 2018. Have a look at the below table and graph:

Nifty Returns 2018 2019

Nifty Poor Returns 2018 2019

Many of those angry investors are now sitting on large cuts in their portfolios and more sadly, with their confidence shattered. I do not want to blame them or anyone here. No point doing that.

And if we compare both the table together, it would be clear how dramatically the market returns have changed for those equity-cannot-fall believers.

Nifty Equity Returns 2016 2019

The angry market participants need to realize that Equity is Equity for a reason. It is not a bank FD that will give you fixed straight-line returns. It will have good years (like 2016-17) and bad years (like 2018-19). You cannot avoid bad years (unless you are a perfect timer). This is how equity markets are structured. This volatility is a feature of the market and not a bug. This has remained for decades and will continue to remain in future decades too.

Understand it like this – Fixed Deposit is a safe asset. Right? And because it is safe, it gives constant but low returns. That is the cost of safety. But equity is a volatile asset. And because this volatility can be perceived as risky, it compensates this by giving comparatively higher average returns than FDs. Note that I used the term higher ‘average returns’. It means that where FD gives you 5-7% average annual returns, equity will give 12-15% average annual returns. But where things differ is that it will not give 12-15% every year. Some years you might get +40% and in other years you may get -17%. So a sequence of such up down years will be about 12-15%. Equity gives better average returns but not in a straight line.

I was reading a post by Safalniveshak (here) where he talks about value investing and says – Value investing doesn’t always work. The market doesn’t always agree with you…there are periods when it doesn’t work. And that is a very good thing.

I think this is a good reminder for equity investors in general.

When you begin investing, sooner or later, there will come a time when markets will not perform as you want them too. You may begin to feel that it isn’t working. But that doesn’t mean that it will never work again. It is how the markets are built. They will fall and they will rise. You might feel that it (equity investing) is ‘not working’. But remember that it works in the long term because it sometimes does not work (in the short term). And ‘not working sometimes’ is a feature and not a bug – and this is what most unsuccessful market participants fail to realize.

Explained – Nifty Indices (Nifty50, Nifty Next 50, Nifty 500 & 10 Others)

There are many popular indices in Indian stock markets. You already know Nifty50 and Sensex and you regular lookup for Nifty live or Sensex live data. But these aren’t the only indices as many of you already know.

There are several others as well – like Nifty100, Nifty Midcap 50, Nifty 500, etc. In fact, the NSE maintains around 13 broad market indices. These are:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

Wow! It can be confusing. And there are many more indices like the strategic ones. But let’s try to see how all the above-mentioned 13 indices are related to each other and fit into the broader index Nifty 500.

Below is shown the index hierarchy published by NSE (here) as shown below:

Nifty Index Broad Market India

Let’s try to understand the structure above:

NIFTY 500: This index sits at the top. It represents the top 500 companies based on full market capitalisation from the eligible universe. In a way, you can say that it includes all the other 12 indices within itself.

NIFTY 100: This represents the top 100 companies (i.e. from 1 to 100) from within the NIFTY 500. This index basically tries to track the performance of companies having large market caps.

NIFTY Midcap 150: This index represents the next 150 companies (i.e. companies ranked from 101 to 250) within the NIFTY 500. As is obvious, this index tries to measure the performance of mid-cap companies.

NIFTY Smallcap 250: This index represents the remaining 250 companies (ranked from 251 to 500) in the NIFTY 500. And you guessed it correctly; this index measures the performance of small-cap companies.

So as you see, the index Nifty 500 is basically made up of the following 3:

  • (1 to 100) – Nifty 100
  • (101 to 250) – Nifty Midcap 150
  • (251 to 500) – Nifty Smallcap 250

Nifty 500 Index constituents

Now, these 3 major indices themselves are made up of other individual indices.

The Nifty 100 has two parts:

Nifty 100 constituents

The Nifty Midcap 150 has two parts too:

  • NIFTY Midcap 50: This includes the top 50 companies from within the NIFTY Midcap 150 index.
  • NIFTY Midcap 100: This includes all the companies from NIFTY Midcap 50 above. The remaining companies are selected based on average daily turnover from NIFTY Midcap 150 index.

Nifty Midcap 150 constituents

The Nifty Smallcap 250 has the following two parts:

  • NIFTY Smallcap 50: It represents the top 50 companies selected based on average daily turnover from top 100 companies selected from the NIFTY Smallcap 250 index.
  • NIFTY Smallcap 100: It includes all companies from NIFTY Smallcap 50. And the remaining companies are selected based on average daily turnover from the top 150 companies selected from NIFTY Smallcap 250 index.

Nifty Smallcap 250 constituents

So till now, you have seen that at the top of the index hierarchy is the all-encompassing Nifty 500. From that we have 3 indices derived – (i) Nifty 100 (which is made up of Nifty 50 and Nifty Next 50); (ii) Nifty Midcap 150 (which is itself made up of Nifty Midcap 50 and Nifty Midcap 100) and (iii) Nifty Smallcap 250 (which is itself made up of Nifty Smallcap 50 and Nifty Smallcap 100)

Let’s check the remaining ones

NIFTY 200: This is basically made up of companies belonging to Nifty 50, Nifty Next 50 (or call it NIFTY 100) and the NIFTY Midcap 100.

NIFTY LargeMidcap 250: This includes all companies from NIFTY 100 and NIFTY Midcap 150. It intends to measure the performance of the large and mid-market capitalisation companies.

NIFTY MidSmallcap 400: This includes all companies from NIFTY Midcap 150 and NIFTY Smallcap 250. It intends to measure the performance of the mid and small market capitalisation companies.

Sounds complex no doubt. But if you once again have a look at the image below again, it seems quite logical:

Nifty Index Broad Market India

As per NSE, the calculation for the broad indices such as NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY Midcap 150, NIFTY Smallcap 250, NIFTY 200, NIFTY Midcap 50, NIFTY Midcap 100, NIFTY Smallcap 50, NIFTY Smallcap 100 and NIFTY MidSmallcap 400 are done online on all days that the National Stock Exchange of India is open for trading and disseminated through trading terminals and website and while that of NIFTY LargeMidcap 250 is computed at end of the day.

If you wish to read more about these individual indices, then click the links below:

  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

In addition to the above broad-based indices, NSE also has tons of other indices like NSE Sectoral Indices (about 11 indexes), NSE Thematic Indices (about 20 indexes) and finally NSE Strategy Indices (about 25+ index).

You can check out the fact sheets of all the above indices in once place here – Nifty Index Factsheets. And if you wish to track the Nifty live index data, then you can use this link – Live Nifty Index Data.

The idea of sharing these details is nothing to do with promoting Nifty and its indexes 🙂

It is rather to show how many other important indices are there which get overshadowed by the Nifty50 and Sensex. Atleast if you read the above details even casually, you will get an understanding of how these indices are related to one another and parts and sub-parts of each other.

And as the idea of index funds gradually gain acceptance in India, you will see more and more index funds being launched for various above-discussed indices.

The ones like Nifty 50 Index Funds and Nifty Next 50 Index Mutual Funds are already available and gaining popularity. The others ones like ones for Nifty 100 index fund, Nifty 100 equal-weight index fund, Nifty Midcap 100 index fund, Nifty Midcap 50 index fund, Nifty Smallcap 100 index fund, Nifty Midcap 150 index fund, Nifty 200 index fund will be launched by various fund houses in times to come.

State of Indian Stock Markets – August 2019

This is the August 2019 update for the State of Indian Stock Markets. This update includes the historical analysis (since 1999, i.e. about 20+ years) and Heat Maps for the key ratios like P/EP/BV ratios and Dividend Yield for Nifty50 and Nifty500.

A new section on the last 12 month’s index movements and PE dynamics during the said period has been added recently. This analysis will be done on a rolling basis. That is, it will include monthly analysis (for each of the last 12 months) as well as analysis for specific aggregate periods like the last 1 month, last 3 months and last 6 months. This is being done to highlight (if any) the changes which become evident in market sentiment from a data perspective.

Before we move forward, please remember a few things:

  • The numbers shown in the analysis and tables below are averages of P/E, P/BV and Dividend Yield in each month (unless otherwise stated). Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.
  • National Stock Exchange (NSE) publishes index level PE ratios based on standalone numbers and not consolidated numbers. It would be ideal to use consolidated numbers as many Nifty companies now have subsidiaries that have a significant impact on overall earning numbers. This has a much larger effect now than it would have had in yesteryears. And more importantly, this will matter more and more going forward. But NSE (as of now) continues to publish Nifty PE using its own set of criteria and decisions and sticks with standalone figures.
  • It is possible that at times, some of the sectors in index get far more weight than is prudent to give. And its also possible that at the very same time, their earnings may be unexpectedly high or low. If and when this happens, the index level earnings will be impacted accordingly due to higher-than-necessary sector weight – which in turn may skew the PE data at that point of time.
  • Similar to the point discussed above, it is also possible that at times, some (or few) individual index constituents might have high earning or market cap at an individual level(s) which might, to some extent, skew the PE data at the index level as well. The possibility of this happening is rare but still non-zero as the period under consideration is generally long term here.
  • Caution – Never make any investment decision based on just one or two ‘average’ indicators (here’s Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

Historical Nifty PE 2019 August

P/E Ratio (on the last day of August 2019): 27.27

And if we were to look at the movement of Nifty’s PE in the last 12 months, then here is a graph depicting the same:

Nifty 12 Month PE Trend 2019 August

Now, let’s have a more detailed look at how the last 12 months have panned out when it comes to Nifty movements and its implications (alongwith earnings’) on PE ratio of the index.

I suggest you spend some time on the table below (which shows month-wise data cuts) to gauge its importance in highlighting the trends in the last 1 year:

Nifty Price PE Trends 12 Months Sep 18 Aug 2019

Now from month-wise depiction, let’s have a look at more aggregate time periods in the last few months. Let’s analyse the above-highlighted data points when period under consideration in aggregated to 3-months and 6 months (plus a 1-previous month for more comparative analysis):

Nifty Price PE 1 3 6 Month Trends 2019 August

Now with PE of Nifty50 analysed in various cuts, let’s move ahead to the analysis of P/BV and Dividend Yields of the Nifty50

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2019 August

P/BV Ratio (on the last day of August 2019): 3.35

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2019 August

Dividend Yield (on the last day of August 2019): 1.39%

That was all about Nifty50 – the more popular bellwether index of India.

Now let’s do a historical analysis of the larger space, i.e. Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 96.1% of the free-float market capitalization of the stocks listed on NSE (March 2019). Nifty50, on the other hand, is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 66.8% of the free-float market capitalization of the NSE listed stocks (March 2019).

So obviously, Nifty500 is a much broader index than Nifty50.

So let’s see…

Historical P/E Ratios – Nifty 500

Historical Nifty 500 PE 2019 August

P/E Ratio (on the last day of August 2019): 29.19

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2019 August

P/BV Ratio (on the last day of August 2019): 3.04

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2019 August

Dividend Yield (on the last day of August 2019): 1.33%

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 actual investments have been made (at various P/E, P/BV and Dividend Yield levels), it is strongly suggested that this article may be read and referred to regularly:

How to use Different Mutual Funds for different Financial Goals?

Can all your goals be tackled using mutual funds?

The answer is yes, in most cases.

But you need to understand that it is in my best interest to say this as an advisor, I also advise on Mutual Funds. But whether you believe me or not, the fact of the matter is that:

Mutual Funds can be used to save for most of your Financial Goals.

Why and how is what we discuss in this post.

(Here is an interesting comparison of Mutual Funds vs Real Estate investments)

You already know people can have different financial goals (ranging from common ones like children’s education, saving for retirement to super-rare ones like planning to buy a diamond ring for the spouse 😉 Here is a list of common financial goals that people have.

And you also know why I focus on goals so much here – because Goal-based Investing is the most practical approach to investing which increases the probability of your goal achievement.

And what else do you want to do with your money?

Achieve your real-life goals… right?

No point just generating high returns (and bragging about it) if you are eventually unable to achieve your financial goals. You cannot tell your son that you beat the market in past when you couldn’t even save enough for his education. Think about it. You cannot eat high returns.

So what are the factors that one should consider when chosing mutual funds for financial goals?

It depends on atleast the following 3 dimensions:

  • Time horizon of the goal
  • Importance / Criticality / Flexibility of the goal itself
  • Risk appetite (profile) of the investor himself

In a way, this means that like investors themselves (who have their own risk profiles), even the financial goals have their own risk profiles which are based on the type of goal, time horizon and risk profile of the investor himself!

These are the factors (atleast the major ones) which decide what asset allocation should be for these goals. And which in turn decides the types of mutual funds to invest in.

So let’s deep dive in these points.

Goal’s Time Horizon

Most people are fine with simple goal groupings like short-term, medium-term and long-term. But to make the goal’s risk assessment more precise, it’s better to have a few more divisions like:

  • Near Term (less than 3 years)
  • Short Term (3-5 years)
  • Medium Term (5-10 years)
  • Long Term (10-15 years)
  • Very Long Term (15+ years)

Within this, at times the goals are flexible and not-so-flexible.

For example – suppose your child is 5 years old. You have two financial goals for the child. First is his higher education and second is his marriage.

Now your child will begin his higher education around the age 17/18. So it’s a non-flexible goal and you have fixed 12-13 years to save for it if you begin today. You cannot wish that your child begins his higher education at 21 or 22. No matter what, it will start after his class 12th when he is aged 17/18.

On the other hand, goals like marriages are fairly flexible. Will he marry at 24, 25, 29 or 35? You don’t know. So there is some bit of flexibility as far as goal timelines are concerned.

So even within the spectrum of Near, Short, Medium, Long and Very-Long term you will have goals which are flexible and ones which aren’t, i.e. they are non-flexible goals.

Next step is to identify, how important or critical the goal is.

Goal Importance / Criticality

You already know that some goals are more important than others. Right?

Goals like Children’s Education, Retirement, etc. are More Important, whereas other ones like a vacation, even the child’s marriage are Less Important. Ofcourse its not exactly black and white when it comes to importance. What is important for you may not be important for someone else. But just understand that all goals aren’t alike and have different levels of importance.

If you remember we analyzed the whole process of How to choose Financial Goals (Super detailed Guide) – where we identified these goals as Needs, Wants, Desires, etc. or call it Discretionary goals and Non-negotiable goals.

Note – (FREE Download) Financial Goal Planning Excel Worksheet

Let’s say that on the scale of importance, you have 3 different segregations:

  • Critical + Non-negotiable
  • Very Important
  • Less Important

Now let’s use our understanding of the first two points about (i) Goal Timelines and (ii) Goal Importance to create the following grid:

Financial Goal Timelines

Now depending on where your goals are placed in the above grid, you will need to decide the asset allocation for the goal.

But aren’t we missing something?

Yes, we are.

And that is the Risk Profile of the Investor himself.

Investor Risk Profile

Again, there can be many categorizations, but for simplicity let’s say that the investor can be classified in one of the following 3 types:

  • Conservative
  • Balanced
  • Aggressive

Now our grid morphs into something like this:

Different Investor Risk Profile Portfolios

But why does it matter which type of investor a person is?

Ofcourse it matters!!

Let me give you a very simple example.

Suppose there are 3 friends who coincidently(!) have one daughter each aged 4 years old. Now, all of them want to save for their daughter’s higher education after 14 years, i.e. beginning at the age of 18. Their budget or call it goal cost (in today’s value) is Rs 25 lac each. And it goes without saying that the goal is very important for each of them – kind of a non-negotiable and critical goal.

But unlike the similar Goal Timelines (14 years) and Goal Costs (Rs 25 lac each) and Goal Criticality (Very Important & Non-negotiable), there is one thing which is not common among these three friends.

And that is their risk appetite.

First one is Conservative, the Second one is Balanced and the Third one is an Aggressive Investor.

So now if we go by the rule book, then the long term goals are best served via equity investing. It’s a proven fact and I have written about it countless times (read this recent simple example of why equity is best for long term investing and other mutual fund SIP success stories).

So that would mean a high equity exposure of 80-90% is good for this goal. Right?

But this is where investor’s own risk appetite comes into the picture.

A Conservative and Balanced investor will not be willing to invest 90% in equity. Only the Aggressive investor would be fine with such high equity exposure.

And that is why the Investor’s Own Risk Profile is also an important factor here.

Here is a ‘sample’ suggested asset allocation for various goal types (with respect to their timelines, importance and investor type).

Note (before you proceed) – These are just suggestions and not iron-clad definitions. It’s possible that due to the investor’s unique circumstances or requirements, the actual allocation may differ. And it must also be understood that this is a strategic allocation. It’s possible that due to market conditions, the actual starting allocation may be different. It is also possible that due to market dynamics, it may be advised by a smart advisor to tilt the portfolio slightly differently occasionally to benefit from tactical moves. And remember – Don’t blindly follow any asset allocation thumb rules like this one!

So have a look at the below grids:

Conservative Investor Asset Allocation

Balanced Investor Asset Allocation

Aggressive Investor Asset Allocation

I wish to repeat here that there is no perfect formula to decide the right asset allocation for the goals.

 

But generally speaking, it is wise to avoid equities for the shorter-term and also to embrace equity for the longer-term goals. The medium-term and intermediate goals can be dealt with using a balanced approach.

What would be the actual % of equity and debt (and even gold) depends on the investor’s unique profile and circumstances.

To give a small example here:

  • An Aggressive Investor saving for retirement (which is 20 years away) will be better suited for a 70:30 Equity Debt savings program
  • On the other hand, a Conservative Investor tackling the same retirement goal (which is also 20 years away) will not want to have more than 30-40% equity exposure most of the times. (It is possible that as his equity portfolio grows over the years and he becomes comfortable with high equity %, he might himself change from a conservative investor to a balanced or moderately aggressive investor).

So now, almost 1400+ words, we have understood why and how the right identification of the proper asset allocation can be made for each of the goals.

Now comes the question about how to use mutual funds, and which ones to choose to save for different financial goals.

The first step obviously is to decide the asset allocation for the goal. For that, you can consider the grids discussed above.

Next step is to pick the right ones to invest in mutual funds.

Without getting into the details of why I am suggesting these (and making this post really, really very long), here is what can be considered:

Conservative Investor

  • Near & Short Term Goals – Liquid Funds, Ultra Short Debt Funds (with conservative orientation)
  • Medium-Term Goals – Ultra Short Debt Funds (with conservative orientation) for debt part of the portfolio and Hybrid / Large Cap Funds for equity part
  • Long Term Goals – Ultra Short Debt Funds (with conservative orientation), Short Duration Funds, Money Market Funds etc. for debt and Large Cap Funds, Multi-Cap Funds for equity

Balanced Investor

  • Near Term Goals – Liquid Funds, Ultra Short Debt Funds (with conservative orientation)
  • Short Term Goals – Ultra Short Debt Funds (with conservative orientation) for debt and Aggressive/Balanced Hybrid Funds for equity
  • Medium-Term Goals – Ultra Short Debt Funds, Short Duration, Money Market Debt Funds for debt and Aggressive Hybrid Funds Large / Multi-Cap Funds for equity
  • Long Term Goals – Ultra Short / Short Duration / Medium Duration / Money Market / Dynamic Bond Funds (with a conservative orientation) for debt and Large Cap Funds, Multi-Cap Funds for equity

Aggressive Investor

  • Near Term Goals – Liquid Funds, Ultra Short Debt Funds
  • Short Term Goals – Ultra Short Debt Funds (with conservative orientation) for debt and Aggressive/Balanced Hybrid / Dynamic AA Funds for equity
  • Medium-Term Goals – Ultra Short Debt Funds, Money Market / Dynamic / Short Duration Funds for debt and Aggressive Hybrid Funds or Large / Multi-Cap Funds for equity
  • Long Term Goals – Ultra Short / Short Duration / Medium Duration / Money Market / Dynamic Bond Funds for debt and Large Cap Funds, Multi-Cap, Mid & Small-Cap Funds for equity

Before you tell me what is right and wrong in the above, please understand that this is just a broad generalization. The actual fund choice may differ from the above ones to some extent due to various factors. Also, some other fund categories might be suitable for certain clients based on their unique needs.

My suggestion is to also read what these mutual fund categories mean?

And here is something more to note about goal timelines.

As years pass, you need to ensure that the asset allocation of the goal portfolio still remains relevant from the perspective of remaining time for the goal.

What does it mean?

A long term goal will eventually become a medium-term goal and then a short term goal.

Right?

For example – Let’s say you start with a goal of your son’s education after 16 years. And being an aggressive investor, you start with only equity funds. After 4-5 years of equity accumulation and when about 12 years are left, you begin to rebalancing your goal portfolio periodically. Now, when only a few years like 4-5 years are left for the goal, the goal no longer remains a long term goal or a medium-term goal. It becomes a short term goal. Right? So you should start reducing equity gradually or tactically (if the advisor advises) over the next few years.

I know when it comes to saving, you simply wish to find out the best mutual fund SIPs for all your different financial goals. And who wouldn’t? But as you might have understood by now, unless and until you find out what a good asset allocation for your goals is, you will not be picking the right fund category (leave alone the specific schemes).

Remember, more important than trying to pick the best mutual fund scheme is to find the appropriate asset allocation for your goal-specific savings first; and then finding out the right fund category. Only then you should try to find out which scheme is to be picked from several available.

Hope you found this article useful.

Additional Suggested Readings:

Mutual Fund Vs. Portfolio Management Service (PMS) – Suitable for Whom?

Till very recently, there was a steadily growing interest among small investors about PMS. In fact, the number of queries on lines of ‘Is PMS better than mutual funds?’ saw a constant rise in the last few years.

And why not?

After all, the Portfolio Management Service or PMS had long been perceived as some sort of exotic investment product, which offered high returns to sophisticated investors.

Right?

But after the recent (and I am afraid ongoing) stock market carnage, especially in the non-large cap space where most of these PMS schemes operate in, the PMS investors have experienced the obvious-but-often-forgotten downside of high-risk taking.

No… I am not pointing any fingers on any PMS fund managers here.

PMS schemes, by design, are high-risk products which are focused on enhancing returns for investors by taking (and not surprisingly) very high concentrated risks at times. Sometimes this works and the results are phenomenal (If you search for the returns delivered by best portfolio management services in India in good years, you will understand how much). But at other times, it doesn’t and the results are horrible.

PMS is an equity product and falls on the higher end of the risk spectrum. And due to its concentrated portfolio and the high inherent risk, it is best suited for investors with prior market knowledge and understanding.

But small investors are small investors for a reason. 😉 Lured by the eye-popping claims* of high returns made by the PMS funds in India, many small less experienced and gullible investors got attracted to PMS funds in recent times. Unfortunately, they focused just on the returns and not on the risks.

It was exactly like trying to cover a 500-km journey fast by driving at 150+ kmph. You may reach the destination in 3.5 hours. But at such high speeds, there is an obvious risk of life-ending accidents.

Same is the case with PMS. High speed (returns) come with high risk-taking. Plain and simple.

* Not all PMS do well as it seems to outsiders. Many can’t even beat simple well-diversified equity funds.

That said, I am a strong believer that equity can create enormous wealth for people in the long run. But that doesn’t mean that anyone and everyone should be fully invested in equity. Different people have different goals and their portfolios should be constructed accordingly. Even within the equity space, the exposure to different types of shares comes with different levels of risks. And people forget this.

At the cost of sounding repetitive, I would say that when it comes to equity, most Indian investors are better suited for the Mutual Funds. In the choice of PMS vs Mutual Funds, it can be said that PMS is best left for people who actually understand the consequences of high-risk strategies and have decently large portfolios (of which a small part can be parked in high-risk strategies like PMS).

That brings us to the differences between PMS and Mutual Fund.

You already know what a mutual fund is and what are the different categories of mutual funds and what are the various types of mutual funds. So I won’t address that aspect.

Let’s instead see what a PMS exactly is and then we will discuss what suits whom.

Portfolio Management Service or PMS is an investment vehicle that replicates investment strategies made available by the PMS fund manager in the client’s portfolios.

There is a perception that PMS offers a great degree of customization. And this is considered by many as one of the key benefits of Portfolio Management Services apart from the perception of a high-return-promise. But this isn’t the case for every PMS or for every PMS investor. Most PMS offer standardized model portfolios for smaller clients. Once a client is on-boarded, the manager will try to replicate the client portfolio to as close to the model portfolio as possible. But the real customization is available only to the large clients – who can invest atleast a few crores in the PMS. If the client account size is big enough, the PMS manager will give proportionately large attention to the creation of a customized portfolio (broadly in line with PMS model portfolio or strategy if need be) to cater to the client needs. Remember, Such levels of customization is not available for smaller PMS clients.

What else?

Unlike mutual funds which are tightly regulated by SEBI and to some extent AMFI, the PMS is very less regulated and hence, allows fund managers to take a lot of risks. This can also be seen as extra flexibility available to PMS managers. But this no doubt increases the risk too as the fund manager has a free hand.

So for less experienced clients, such a level of risk-taking isn’t even required.

Note – And if you do check portfolio management services SEBI circulars and compare it with those of mutual funds, you will also realize that PMS managers are less answerable than MF AMCs.

Since the risks are high in PMS, the regulator has set a minimum investment limit of Rs 25 lakh in PMS to keep it out of reach of very small investors. Whereas in Mutual funds, you already know that you can even start with Rs 1000 per month SIP.

The most important thing apart from the highly risky nature of the product itself is the high fee that PMS charges. In MFs, you pay about 1-2% on the amount as expenses. In PMS, the fee has 3 distinct components:

  • Upfront setup fee paid during the initial investment
  • Fixed ongoing Management fee (annual fee)
  • Performance fees – generally as a share in profits generated

The basic fixed (on-going annual) fee is 2-2.5% per annum. But depending on the size of individual accounts, the on-going fee or performance fee is based on mutual agreement. So for example, someone investing the minimum Rs 25 lakh in a PMS may have to pay a 2.5% recurring annual fee whereas a Rs 5 crore investor in the same PMS strategy may be paying a lower fee (1-1.5%) as he brought in more money to the table.

Apart from the annual fixed fee (and unlike in MFs), PMS also has performance-linked fees (called profit share). This applies when the gains cross a predetermined level.

For example, a PMS can have multiple offerings like:

  • 50% annual fee + performance fee of 10% of the gains above 15%
  • 50% annual fee + performance fee of 15% of the gains above 12%
  • 25% annual fee + performance fee of 20% of the gains above 10%

This fixed fee + performance fee structure makes PMS cost higher and it eventually eats into the portfolio returns if the returns aren’t being delivered. And given the high risk that comes associated with PMS investments (and for those who aren’t very aggressive), mutual funds are more prudent investment option in equity and far cheaper. Remember, the investor can negotiate the fee with PMS providers depending on how much money he is investing with them.

But think about it – PMS which were earlier considered a product for the rich and the sophisticated, are now being pushed by agents, distributors and banks much more aggressively to everyone capable of sparing Rs 25 lac!

Why is it?

I will tell you.

SEBI, the regulator has been steadily curbing the commissions on the sale of mutual funds. So the distributors get attracted to the relatively high upfront commissions given to them by PMS operators. So the distributors, in order to protect their income are hard-selling clients to opt for these high-upfront-commission PMS schemes in spite of knowing that they might be unsuitable for them.

Now you know why its gaining popularity 😉

Is PMS for you?

I will put this very plainly here.

Based on the little experience I have and things I understand (or atleast feel that I understand…), most people are better off not investing in PMS. When it comes to equity investing, most people are best served by investing in mutual funds alone.

In any case, the entry limit of Rs 25 lac is high enough for very small investors.

But just because you have Rs 25 lac to invest in equity doesn’t mean that you are suited to invest in PMS. Just because you can doesn’t mean you should.

PMS is suitable for high net worth (affluent) and institutional investors with a suitably large investment portfolio. There is no perfect threshold figure here but let’s say that unless you have a few crores to invest, you shouldn’t even think about PMS. 

And since the product is high-risk, its best to keep exposure limited to a small percentage of the overall portfolio if you eventually do invest in it.

So for example – Let’s say your overall portfolio is Rs 10 Cr. Now based on some goal-based analysis, it is found that your asset allocation should be 50:50 equity debt. So that means Rs 5 Cr for equity and the other Rs 5 Cr for debt. Now out of the Rs 5 Cr for equity, it’s best to limit the PMS exposure to 10-20% here for most large and aggressive investors too.

Why?

Because just because you are investing in equity doesn’t mean that you go straight full to the highest risk component. You divide the equity corpus between various levels of risk. Right? That’s how a prudent portfolio is built.

It is also suited for more sophisticated clients having large portfolios who wish to invest in themes that aren’t easily available through mutual fund portfolios. In such cases, the PMS manager can create tailor-made solutions for larger clients.

Sorry for this long rant.

If you have had enough of this Mutual Fund vs PMS debate, and wish to go away with just a few things from this article, then here they are:

  • PMS is a high-risk equity product which is suitable for sophisticated investors who know what high-risk concentrated equity portfolio investing really is.
  • PMS is not suitable for small investors.
  • Just because you have Rs 25 lac (minimum required) to invest doesn’t mean that you are suitable to be a PMS investor
  • If your agent, bank is pushing you to buy it then remember that he gets good commission and may not be advising you as per your needs or product suitability.
  • For most of you, it’s better to stick with Goal-based Investing and take the route of Mutual Fund investing.

Now don’t ask me if PMS is better than mutual funds or which is mutual funds or PMS? You already know what I think after having read till here.