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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.

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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/E, P/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.

Mutual Funds Investment Tips for Millennials

When it comes to investments, the word ‘Tips’ is an overused and an over abused one. But in this post, I try to distil down some thoughts (or call them tips if you prefer 😉 ) for the young investors of mutual funds.

And why do I want to offer these tips for mutual funds investors and that too who are the young Millennials?

Because in recent past and thanks to aggressive campaigns by mutual fund houses and regulators and ofcourse those selling mutual funds, there has been a rise in interest in these investment vehicles. And unfortunately, many agents, distributors (who wrongly call themselves advisors), bank relationship managers and those giving free financial advice end up overpromising and overcommitting what these mutual fund investments can do and cannot do.

So this list of tips is a sort of what’s right and what isn’t and what you as a mutual fund investor should know of:

So here we go:

  • First a bit of common advice – irrespective of whether you want to go for mutual fund investment or some other investment, always invest with a goal in mind. Aligning your investments to goals helps you stay on track, be in control and clearly understand how much you have saved up for each of your financial goals. This is the extremely helpful concept of Goal-based Investing that is intuitive and gaining a lot of interest these days.
  • Those who invest randomly here and there and for stupid reasons like ‘just to save tax’ are doing themselves a disservice by not managing their money properly.
  • Mutual funds allow you to invest in various assets like equity, debt and gold. So there are several types of mutual funds and hundreds/thousands of individual schemes. Atleast when it comes to equity mutual funds, it is best to have a long term view. Because equity as an asset class is best suited for long term investment. It may give good returns in the short term as well. But due to the very nature of equity and how the short term returns can fluctuate, you should be willing to stick around for long enough to get good average returns.
  • And being a millennial, you have decades in front of you. Right? So you need to and actually can think about the really long term.
  • Now, how many equity funds should you be investing in? For starters when you can only spare a small amount for investing in mutual funds, you can start with just 1 or 2 funds. As your income increases and so does your investment capability, you can add more funds to your mutual fund portfolio. It is said that 4-5 funds are good enough and provide proper diversification. Anything more (atleast for a not-so-large portfolio) wouldn’t help much – neither from a diversification perspective nor returns perspective.
  • Which mutual funds to choose? The answer ideally will depend on the kind of investor you really are from amongst – super defensive, conservative, balanced, moderately aggressive, super aggressive. Assuming you are somewhere in the middle, i.e. in the balanced category – If you are investing for the near term (less than 3 years), do not invest in equity funds. Go for debt funds. If you are investing for short term (3-5 years), it is still advisable to have a major chunk in debt funds and just a small part in equity funds. For medium-term horizon like 5 to 10 years, you can have equal amounts of equity and debt (or can even have slightly higher equity part). And for really long term goals like those which are 10+ years away, best to have a major part invested in equity funds and a small part in debt funds.
  • Now comes to the task of choosing the actual funds in equity and debt funds space. Please for heaven’s sake do not randomly pick funds or rely blindly on the advice of your colleagues or friends. To put it simply, stick with funds have done well not just in last 1-2 years but have performed well consistently over the long term. Ideally, the fund should have proven its mettle across the cycle and be amongst atleast the top 25% of its category for the last several years. Do not blindly invest in last year’s table toppers. It generally doesn’t work and the past winners cannot guarantee a win next year or years thereafter. You should also check other factors like rolling returns, risk ratios, expense ratios, fund manager’s ability to deliver on what is being promised, comparative performance in peer-group and category and with respect to the chosen benchmarks. You may also check star ratings but again, do not trust mutual fund star ratings blindly. I know all this may sound complicated if you are just starting. But this is the right way to do it. And if you feel you need help, its best to consult an investment advisor.
  • Should you wait to invest when markets are falling so that you can get mutual fund units at a lower price? Ideally, that is a perfect way. But the problem with this approach is that you never know when markets will fall and this wait may be of years. So you will miss out the returns of rising markets in the years in between. Therefore if you are investing for long term goals in equity funds, it is best to do regular investing via SIPs. A small amount invested periodically can create a lot of wealth in the long run. There are many SIP success stories to take inspiration from.
  • Most investors of equity funds start small. Like they start with a SIP of Rs 1000 or SIP of Rs 5000. But over the years, the income also increases. So you should always try to increase your regular investment in mutual funds at least at a rate equal to your income hikes. So let’s say you start with Rs 5000 per month in the first year. In next year or so, you should aim to increase it to Rs 6000 monthly or more and Rs 7-8000 in the next year.
  • After you have begun investing and you have begun to accumulate a small corpus, you should become serious about monitoring your MF investments as well. You should keep track of how well your investments are performing. But it is not required to be done very frequently. Reviewing your investments once in a while (like once a year) is all that is required. This way, you can remove non-performing funds and replace them with ones which have better potential to deliver your expected results.
  • A lot of people are under the myth that you cannot lose money if you invest in mutual funds through SIPs. This is not true. SIP simply averages out your investment across time. Many also feel that simply running a SIP is not the perfect strategy for investing. I don’t deny that as aiming to perfectly time the market entries and exit is what is supposedly glamorous and ofcourse profitable. But realistically speaking, most people are not good timers (leave alone perfect). So their best bet is to take the systematic route of SIP investing in mutual funds which has a good probability of delivering decent and acceptable returns.

That is enough for this post. 🙂

But if you still have doubts about whether you should even be investing in mutual funds or not, let me remind you that unlike previous generations which had some level of social security via pension, etc. to take care of them later in life, us millennials have none.

We are on our own. It is our responsibility to ensure that we save and invest properly for all our goals.

So think about it.

State of Indian Stock Markets – July 2019

This is the July 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/E, P/BV ratios and Dividend Yield for Nifty50 and Nifty500.

This time (and going forward) a new section on the last 12 month’s index movements and PE dynamics during the said period will also be analyzed. The 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 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.
  • Its 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 July

P/E Ratio (on the last day of July 2019): 27.42

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 July

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 Aug 18 Jul 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 Jul 2019

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 JulyP/BV Ratio (on the last day of July 2019): 3.45

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2019 JulyDividend Yield (on the last day of July 2019): 1.33%

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 JulyP/E Ratio (on the last day of July 2019): 29.25

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2019 July

P/BV Ratio (on the last day of July 2019): 3.14

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2019 July

Dividend Yield (on the last day of July 2019): 1.29%

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:

Can You Retire with Rs 1 Crore Today in India?

Recently, a friend told me that he had ‘finally’ managed to save Rs 1 crore (not including his real estate investments). And he was quite happy about this achievement as the first crore is a big milestone no doubt when it comes to us Indians.

In the course of our conversation, he casually asked a simple question –

Can I Retire with Rs 1 Crore in India today?

To me, it seemed that the bug of early retirement had bitten him too as he is just 33 – though the disease seemed in its infancy. 😉

But given my prior knowledge of his not-so-frugal lifestyle (despite good income), I knew that it won’t be possible. And I told him so. His reaction was that of a person who had been slapped hard. 😉

But this got me thinking…

What if someone had a comparatively more frugal lifestyle than my friend or was much older and nearing retirement (around 60), then would Rs 1 crore be enough to retire in India today?

Ofcourse it would depend on various factors. But what do you think?

Suppose you too had Rs 1 Crore today. Can you retire comfortably depending on where you are in life?

I can already hear the ‘No’ssss…

So let me disappoint you all a bit.

For most readers of Stable Investor, a corpus of Rs 1 crore will not be enough to retire.

Sorry. That’s the reality.

But let’s anyway see why Rs 1 crore may not be enough for most people’s retirement now. And if you too are thinking why I have chosen the figure of Rs 1 crore, then its more about the psychological attachment we Indians have with such large figures (more so with the word ‘Crore’) when it comes to saving for long term goals like retirement.

So let’s move on…

Is Rs 1 crore enough for 60-year old to Retire?

Some assumptions (for starters):

  • Annual Expenses – Rs 6 lakh (= Rs 40,000 monthly + additional Rs 1.2 lakh insurance / travel / medical / buffer / etc.)
  • Retirement Corpus Returns – 8% – portfolio mainly has debt (giving 6-8%) and some equity (giving 10-12%)
  • Average Inflation – 6%
  • Life Expectancy – 85 years

In this scenario, the money runs out by 79th year. Here is how:

Retire 1 crore India plan 1

So you see that Rs 1 crore is insufficient to provide for all expenses in 25 years of retirement (from age 60 to 85) in the given scenario.

Your options? Either reduce the expenses or don’t live long enough. Only the former is under your control as the latter (forcing yourself to not live long enough) is suicide and punishable under Indian laws.

But jokes apart, there are few important things to think about this above scenario:

First, in spite of regular expense being Rs 40,000 monthly or Rs 4.8 lac annually, an additional buffer of Rs 1.2 lac has been kept. You may feel that why am I overestimating the expenses, maybe unnecessarily? But this kind of overestimation or let’s say, having such buffers in retirement calculations is advisable. And that is because the retirement portfolio is open to some big risks:

  • Sequence of Returns Risk – In the calculations, it is assumed that corpus will generate 8% average returns each and every year. But in reality, when the corpus is deployed in a mix of equity and debt, some years you might get higher returns from equity while in other years, you might see lower (or even negative) returns. Even debt returns move around a bit. So the overall portfolio returns will fluctuate accordingly. And if the initial sequence of returns in first few years is bad (or less than our assumption of 8%), then the corpus will get depleted much faster due to withdrawals for regular expenses and much lower returns replenishing the corpus (or losses depleting the corpus).
  • Higher inflation Risk – We have assumed a reasonable (but more than the currently prevalent) 6% inflation in retirement years. But it is possible that the actual inflation in atleast few years may be unexpectedly higher. Who knows? This will naturally result in faster depletion of the retirement corpus if the retiree cannot reduce his expenses appropriately.
  • Longevity Risk – We have assumed that life expectancy (from corpus dependence perspective) is 85. It’s entirely possible that you or spouse or luckily both (!) live much longer. If that’s the case, then you don’t want to run out of money at that age. Isn’t it?
  • Unexpected and Uninsured Big Medical Expense – Its possible that an unexpectedly large medical expense (which is not fully covered by health insurance) might force you to dip into the retirement corpus (assuming no help from family/friends etc.). If that happens, then that too can compromise the corpus’s potential to last for full 25+ years.
  • Adverse Future Taxation – You never know when the tax regime may change for the worse. They might unexpectedly introduce some new taxes or clauses which will result in lower in-hand post-retirement income or need to withdraw more from the corpus as the in-hand after-tax figures will be less.

So it is for these reasons (potential risks) that you need to have some buffers while calculating the retirement scenarios.

Another aspect is, and you will agree with me here, that “8% return every year” is a hypothetical scenario.

A more realistic scenario would be the retiree parking the corpus of Rs 1 crore in a conservative portfolio with 25% equity and 75% debt. With equity returns fluctuating every year between very high (let’s say +49%) to very low (let’s say -27%) and debt returns ranging from 6% to 9%.

I have simulated a return sequence of 25-26 years which eventually delivers 8% CAGR (our original return assumption used earlier). Have a look below:

8 percent retirement returns portfolio

Spend some time on the table above. A portfolio of 25% equity and 75% debt sees fluctuating returns every year. So the actual portfolio return every year varies but the 25+ year CAGR works out to be just what we wanted – a neat 8%.

And this is the problem with the concept of CAGR – an average CAGR of 8% does not mean 8% every year. I have written about this phenomenon in detail here and here. A lot of people fail to understand it and make mistakes in their expectations. And that can be disastrous.

Let’s now use the above sequence of realistic fluctuating returns on the Rs 1 Crore retirement portfolio from which, withdrawals for retirement expenses are taking place.

Let’s see how long it survives now:

1 crore Retirement Portfolio Utilization

Coincidently, this also survives till the age of 79-80.

You might ask – nothing has changed from the earlier example. But remember that this is just one of the possible sequence of returns. There can be millions of other sequence of year-wise returns.

As I mentioned in the risks of getting a string (sequence) of poor returns in the initial years, it can suddenly destroy the retirement corpus and lead to a retirement failure. More so if the equity allocation is unnecessarily high to begin with.

How?

Let’s simulate it:

  • Portfolio Allocation – 50% Equity & 50% Debt (not so conservative now)
  • Equity Returns in the first 4 years: (-)12% returns each in first 4 years
  • Equity Returns in later years: same as used in the above example
  • Debt Returns: same as in the above example
  • Expenses: same as in the above example

Have a look at the simulation below. The corpus struggles due to a bad sequence of returns in the first 4 years (and high allocation to that struggling asset, i.e. equity) and gets exhausted in just the 72-73rd year itself:

1 crore Retirement India Utilization

This is exactly what the Sequence of Return Risk is.

A poor sequence of returns in initial years can deplete the corpus very fast if exposure to the asset giving poor returns is high.

And you never know what would be the sequence of returns in the initial years of your retirement. It may be good. It may be bad. You cannot choose the sequence. So that risk is always there. There are ways to manage this risk to some extent.

So now you see the difficulty in answering optimistically to questions like Will Rs 1 crore last full life? Or, How long your Rs 1 crore will last?

If you too were looking for the perfect answer to Can I Retire With Rs 1 Crore in India today? then it really depends on a ton of factors. There are no simple thumb rules here.

Retirement planning isn’t exactly rocket science. But its fairly tricky and a little difficult.

And not because it involves number crunching, but because of the uncertainties associated with all the factors that impact it. It is really not just about punching numbers in an online retirement planner or excel retirement calculator that many people feel it is. It has been rightly called as the Nastiest Problem in Finance. Do read the linked article and you too will be stressed about the idea of retirement calculations themselves! My apologies for painting a bleak picture but I try to share realities on Stable Investor.

And please if you do get hold of any sample Rs 1 crore retirement plan, then remember that it is not necessary that it will be applicable in your case too. Copy-pasting doesn’t work in personal finance.

For all middle class and young people, even though Rs 1 crore sounds like a large number, it won’t be enough because of not-so-low inflation and lack of social security in India. It might still work in certain cases where there are other sources of income post-retirement (like rental, your or/and spouse’s pension, etc.). But if the dependency is only on the retirement corpus, then it can be safely said that:

Don’t retire with Rs 1 crore in India!

Make sure you give retirement planning (or early retirement planning) the serious thought it deserves.

Ideally, the very first step should be to separate the goal of retirement planning from all other short/medium-term goals like a house purchase, children’s higher education and marriage, travelling, etc. Keeping the goal of retirement separate from other goal ensures that you can give it the undivided attention it deserves and more importantly, you don’t end up dipping into the retirement savings like many people do without realizing its consequences.

And it may sound repetitive but its best to start early when saving for retirement. Here is a great example of how saving for 10 years works better than saving for 30 years if started earlier.

Is Rs 1 crore good enough for your retirement is not the right question. You should rather ask How much money is enough to retire in India?

Ideally, a methodical and mathematical approach should be followed for planning your retirement savings. If you can do it correctly (and you should first know what can go wrong and where – do not miss reading this to understand), then it is fine. Else, better to take good advice from an advisor for proper retirement planning. Or you can even consider full financial planning that among other things, will also take care of your retirement goal.

Whatever path you chose to put in place your retirement plan, make sure you do not delay it, don’t get your assumptions wrong and more importantly, begin soon.