Is it better to invest lump sum or
monthly SIP in mutual funds?
A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP?
Why I don’t
like these questions (are SIPs better
than lumpsum investments?) is because as usual, there is no one right
answer here.
There are
shades of grey and it isn’t exactly an ideal comparison.
People want
to simply compare SIP vs one time investment in mutual funds or just want to find
out which are top mutual funds for SIP in 2019 or best mutual funds for lump
sum investment in 2019 and what not. But there are no perfect answers or ready
lists that predict anything.
And let’s
look at it from a common-sense perspective.
Before even
getting into lump sum vs monthly investment debate, the decision to invest in
lump sum or SIP depends on whether one actually has enough investible surplus
that can be called as lumpsum!
Right?
If one doesn’t
even have this ‘lump sum’ then this question of SIP or lump sum in itself is
meaningless. It’s only when this ‘lumpsum’ is actually available that the
question holds any relevance.
And once
the lump sum is there, the next question should be whether investing in one go
is better or whether it’s wiser to spread that lump sum over a short period of
time, as there can be several best ways to invest a large sum of money in
mutual funds. Just because the lump sum is available doesn’t mean that the
money should be invested in one go. There are can various other tactics to
deploy it more efficiently.
But nevertheless, there are those who prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing.
And to be
honest, both methods work in different set of circumstances.
Let’s try
to do this comparison as objectively as possible.
SIP vs Lumpsum in Rising
(Bull) Markets
In a rising
market, your lumpsum investments in mutual funds will produce higher returns
than SIPs. That’s because the cost of purchase in a lumpsum investment in a
rising market would always be lower than the average cost of purchase in SIP, which
is spread out across higher and higher purchase prices for each SIP
installment.
Let’s take a
very simple hypothetical example to show this.
Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months:
As can be
seen above, the average cost (average NAV) for the SIP investor in a rising
market is higher. And hence, the future hypothetical profit when sold later,
will be lower for the SIP than that of the lumpsum investor.
Now let’s
look at a falling market scenario.
SIP vs Lumpsum in Falling
(Bear) Markets
In a
falling market, the SIP investing would result in comparatively lower losses
than that in lump sum. And that is because the cost of purchase in a lumpsum
investment in a falling market would always be higher than the average cost of
purchase in SIP.
Here is how
it looks:
As can be
seen, the average cost for the SIP investor in a falling market is lower. And
hence, the future hypothetical profit when sold later, will be higher for the SIP
investor than it is for the lumpsum investor.
So
basically what is happening is that if the market grows continuously, then lump
sum investing gives higher returns whereas if it falls continuously, then SIP
investing is better (lesser losses than that of lumpsum investing in such
scenario).
Ofcourse in practice, the markets neither go up nor go down continuously for very long. So the actual reality may be somewhere in between the two above discussed scenarios of sip vs one time investment in mutual funds.
In some cases, SIP may give better
returns than lumpsum investing. While in other cases, lumpsum will give better
return than SIP investing. And in many other cases, the result of both will be
pretty similar.
It all depends on the future sequence of returns that the investor gets. If you want to know how much wealth your SIP will create, try using this SIP maturity value calculator.
But let me
circle back to the original point I made – whether
you invest lumpsum or otherwise first depends on whether you have a lumpsum or
not.
Right?
And if you
have, then obviously it would be wiser to just invest lumpsum when the market
is low. Remember Buy-low-sell-high?
But problem
is that you will never know when the market is really low. You can be wrong
about your assessment and enter at precisely wrong times.
And that
said, what about our ‘real’ nature and how we behave?
Most
investors are unable to use common sense when their portfolios are down.
But very
few people have the guts to go out and invest more money (assuming they have
more). Fear plays a major role in investing and unfortunately, you can neither back-test
emotions nor fear. And you will only know in hindsight whether is it best time
to invest in mutual funds or not.
Imagine
investing lumpsum in December 2007 when markets were peaking and then
helplessly witnessing the fall down till March 2009. On the other hand, if you
invested a lump sum in March 2009 instead (at the bottom), you would have been called
the next Warren Buffett!
Both are
extreme examples but show how lumpsum investors potentially expose their portfolios
to the vagaries of the market. There is always the risk of being completely
wrong and mistiming. And that is the problem. To be fair, one can also get the
timing right and if willing to spend sleepless nights in the short term, can go
on to make much higher returns than usual in medium to longer term. But that’s
how the dynamics of lumpsum investments are.
Due to their
structural nature, SIPs reduce this risk of being completely wrong as the
investments are spread out. So asking whether is this the right time to invest
in SIP is immaterial as SIP spreads out your investments. Ofcourse your returns
will depend on how the markets play out during the spreading-out period. But
that is how it is.
For small
investors, SIP is also suitable from their cashflow perspective. They rarely have
access to large lumpsum that is ‘surplus enough’ to be available for long term
investing.
By putting away small amounts periodically, there isn’t a large pressure on their resources and no doubt is convenient. This is the reason that for small investors, SIP is their best bet even if not a perfect strategy.
Remember
that SIP is a tool to optimize returns and match your investment needs to your
cashflows. It is not a magician’s magic to generate superior returns to lumpsum
investing. Read that again.
One can use the SIP investing to slowly build up a large corpus over the years without straining the finances in present or worrying about timing the markets perfectly. You can try to use this sort of yearly SIP calculator to understand how much money you need to save for various financial goals.
I know that
many of you are more focused on saving taxes.
And one popular way to save taxes these days is to go for best tax saving ELSS funds vs PPF. But there also, people tend to get confused whether to go for SIP or lump sum for ELSS when investing in top ELSS mutual funds. Nevertheless, the logic that we have been discussing till now remains the same irrespective of whether it’s an ELSS fund or a normal mutual fund.
Now let’s take
a step further…
What if you
have a lump sum that can be invested. Should you go ahead and invest it in one
go or do something else?
Should you Invest Lump Sum
In One Shot Or Systematically & Gradually?
A smart
investor would recognize the market bottoming out and invest in one go. But we
all aren’t smart. So if you aren’t sure if it’s the right time to invest in one
go, you can even deploy your lump sum gradually.
There is no
one single answer to which is the best
method to invest a lump sum in mutual funds?
So
depending on the market conditions, investor’s investment horizon and risk (and
volatility) appetite, a deployment strategy may have to be worked out. This
strategy may either aim for lowering risk or maximizing returns or a
combination of the two.
One way is
to put lump sum investment in debt mutual fund and gradually deploy the money using
STP or Systematic Transfer Plan into an equity fund.
Different
investor needs would demand different lumpsum deployment strategies.
Being a small investor, it can be daunting to find out which are the best SIP plans that can be considered for long term investments. Or for that matter to find out which are the best mutual funds for lumpsum investment or the best tax saving mutual funds in India or whether to do ELSS SIP or lump sum.
If you don’t know how to find good funds or need help with planning your investments, do get in touch with a capable advisor to help you. It is worth it.
Finally…
I am sorry
if you did not find the one specific answer to your question of SIP
or Lumpsum which is better for investing.
A direct
comparison between SIP and lumpsum investing is neither fair nor accurately
possible. And unless we know everything about the investor in question, one
cannot say confidently which is better suited for whom.
You may feel that there is a secret to find the best time to invest in mutual funds India but there is no secret. Different investors need to follow different investment strategies for SIP and lump sum investing. And ofcourse an awareness of market conditions and how market history plays out is absolutely necessary. You can’t be blind to that.
All said
and done, SIP is a comparatively safer option but we cannot deny that at times,
lump sum investing will provide better returns if done correctly.
Which is better SIP or lump sum investment in top best mutual funds in 2019?
This may
sound repetitive but the truth is the superiority of SIP over lump sum or of
lumpsum investments over SIP varies under different conditions.
Is SIP better
than one time investment? Or lump sum is better than SIP? Systematic Investment
Plan vs Lump sum Investment? It is all a matter of probability and what is the sequence
of returns that comes in future and how investor behaves during the period in
consideration. That’s all there is to it.
You already
know why life insurance is important. Atleast for common people like us who
still aren’t rich enough to ignore it. After all, being underinsured and dying can be tragic for the dependents.
But one of
the major problems that many insurance buyers face is finding out how much life insurance to buy.
There is a
simple and methodical way to easily calculate how much life insurance to buy. But most people aren’t interested
in putting in the required effort. They want easier answers. They just want
someone to come and tell them what to do.
If that
wasn’t enough, there are tons of insurance products ranging from term plans,
endowment plans, moneyback plans, Ulips and what not. So people don’t know how
to actually choose the right insurance product. Among the various options to
save taxes, life insurance is also one of the most popular tax
saving investments options in India. But still people don’t see
insurance in the right perspective.
So let’s
try to change the perspective a bit – let’s see how people’s life insurance
requirements change with age.
This approach
will hopefully provide a different and more relatable perspective on how to
decide what the right life insurance cover is.
And no,
picking a random figure like Rs 1 crore life insurance is not the right way to buy life insurance. J
So let’s
move on… and begin when our hypothetical insurance buyer is a young man
beginning his career.
Aged 20 to 25 – Unmarried
Assuming
parents aren’t financially dependent on him, there aren’t any financial
liabilities or responsibilities as such on the person. It’s possible that there
might be an education loan. Insurance is needed only if there is a loan or
possibility of parents becoming financially dependent in near future.
How much life insurance
is needed?
Buying a small insurance plan (even
if it isn’t needed immediately) can be a good idea as the premiums at a young
age are very low. If the income is good enough, taking a larger cover is fine
too as sooner or later (after marriage), responsibilities will increase and
there would be a need to increase the cover anyhow.
Aged 25 to 30 – Married
Since the
person is now married, there is a need to protect spouse’s financial interests.
And if still not bought, this is the right and urgent time to take life
insurance. The dependency logic of parents discussed above still stands. If a car
or a home loan
are also there, then that should also be accounted for when purchasing
insurance.
How much life insurance
is needed?
A term plan of up to atleast 10-15 times of annual income + outstanding loans might be a good idea if spouse working too. Being somewhat over-insured at this stage is fine too.
Aged 30 to mid 40s – Married with Kids
Life moves
on and now with spouse and kids, there is a real need to protect their
financial futures. An insurance cover should be such that it takes care of
outstanding loans, regular expenses of the family for atleast 15-20 years,
children’s higher education costs, etc. If there is an existing life cover,
then it should be topped up or additional life insurance policy should be purchased.
How much life insurance
is needed?
No shortcuts here. To correctly find
out how much life cover is needed now, best to do it methodically using the
method discussed here.
Aged late 40s to mid 50s: Earning
Well + Kids in college
By now, the
asset base would have grown substantially. Children would also be more or less
on their way to become independent in a few years. Depending on how much existing
savings are, it’s possible that there may not even be a need for insurance
coverage as the existing assets will be more than sufficient to take care of
just one risk – regular expenses of spouse in case of death of the insured
person.
But since
the insurance premiums won’t be too large when compared to the then income, it
might make sense to continue with the existing cover for some more time. If
there are any loans, then atleast that amount should be covered. It might also
be a good idea to include a buffer amount for future medical expenses (for
spouse) in insurance calculations too.
Aged 60 & Beyond
Mostly, the
insurance need would not be there as the savings corpus would be much larger
than what might be required to fund regular family (spouse’s) expenses in
remaining years. Children it is assumed will be independent and not require any
financial security.
So ideally,
life insurance won’t be required anymore unless there is a need to leave a
legacy behind.
As you can see, the life
insurance needs of a person vary across different life stages.
Initially, it increases
with increase in responsibilities and liabilities. But then eventually, it goes
down and reaches a stage where it is not required at all.
To summarize, the
insurance amount should be big enough, at any given moment, to take care of the
present and future financial needs of the dependents. That ways, a big
insurance claim would help sort out the financial life of the dependents.
And since it’s possible
to purchase a large life insurance cover at a very low premium using term
plans, it also
makes sense to purchase a large cover (even if it doesn’t seem to be required)
early on as premiums would be low. Ofcourse there is the angle of insurance
premium affordability. But if income is decent, taking a slightly larger cover
is fine too.
Now there are several
types of insurance products – or let’s say financial products that provide
various levels of insurances. For example – term plans, endowment plans,
moneyback plans, Ulips, etc.
And once you have
decided the right life insurance cover amount, you have to choose a product
that provides insurance. When it comes to high coverage and low premium, nothing beats a term plan. But still, a lot of people feel that they are better served
by traditional insurance plans like moneyback, endowment plans, etc.
I have already written about
how these products are structured and provide a mix of insurance and investment. You cannot expect to get a very big life cover at a
very low premium.
Nevertheless, for a
section of the savers’ community, who are conservative and aren’t too clear about
the idea of ‘not mixing insurance and
investments’, these products have been extremely popular.
Apart from these traditional
insurance plans, the unit-linked insurance plans or Ulips are also available.
Here again, one single product provides insurance with investments. So
naturally, getting a very big cover without paying a large premium is next to
impossible.
In Ulips, the sum
assured is generally a multiple of annual premium paid and more importantly,
you pay much more for the same life cover as compared to a Term plan. For
example, a term plan of Rs 1 crore would cost you a few thousands every year,
whereas a Ulip providing a cover of Rs 1 crore would cost you several lakhs!
Yes…several lakhs!
So if you wish to go
with the Ulips but cannot afford very high premiums, chances are that you will
end up being under-insured. Which is extremely risky and can be disastrous for
the family if you die in between.
Unfortunately, most
Indians still buy life insurance to save taxes!
They are normally not
concerned about ‘how much sum assured is actually needed’ and instead focus on
premiums and taxes they can save.
How much income tax benefit can I get on life insurance
premiums? – is the
main question for many insurance buyers! J
The premiums that are
paid for life insurance policy qualify for a tax deduction of up
to Rs 1.5 lakh under Section 80C of the Income tax Act.
But if the sum assured of
the policy is less than 10 times the annual premium, then the buyer will get a
deduction on the premium of only up to 10% of the sum assured.
So if let’s say you buy
an insurance policy of sum assured Rs 5 lakh at an annual premium of Rs 63,000,
then only the 10% of the sum assured, i.e. Rs 50,000 will be tax deductible and
not full Rs 63,000. So any premium that is in excess of the limit of 10% of Sum
Assured) won’t qualify for the tax deduction under section 80C.
This is important
because a lot of traditional plans like endowment, moneyback policies or Ulips
have high premiums in comparison to sum assured. So one must be careful in this
regard.
This was about tax
saving while paying the premiums. But what about taxes on maturity or amount
paid on death?
This is an important
aspect that people forget about as they are blinded by their short-term
thinking and the need to immediately gratify their urge to save some quick taxes.
Most people feel that
the money they (or nominees) get in later years, on maturity or death from
insurance policies is tax-free. This is true to an extent. But there is a small
possibility that it might not be tax-free. Yes. It’s possible.
The death benefit, i.e. money paid to the nominee on death of policyholder
is exempt from taxes.
But in case of survival of the policy holder, the maturity amount may not
necessarily be tax-free. As per Section 10(10D) of the Income tax Act, if the
premium paid is greater than 10% of the Sum Assured, then the maturity amount
is taxable. So if the premium you pay is not more than 10% of the sum
assured, then you are safe. Else the amount will be taxed on maturity.
This is why when you are buying life insurance, make sure you understand
and more importantly, don’t ignore the taxation of the policy on maturity (as
per exemption condition stated in Section 10(10D) of the IT Act.
The actual income tax benefit available to you under Section 80C or
Section 10(10D) will vary for different policies. So it makes sense to spend
some time to understand the income tax benefits on insurance plans, income tax
benefits on term plans, income tax benefits on endowment plans, income tax
benefits on single premium plans, income tax benefits on money back policies
before you sign on the dotted line.
If you wish to really know how to buy the right life insurance policy,
then first you need to clear your head about what life insurance’s real purpose
is.
It is not there for tax saving. It is there to provide sufficient money
to dependents to live their life comfortably and achieve their real life goals
in your absence.
And there are several varieties of life insurance products that people
can choose from ranging from simple term plans to endowment policies to Ulips. The
ideal life insurance strategy for a person will depend on what stage they are
in life, their financial goals, outstanding liabilities and responsibilities.
So make sure that you don’t pick random numbers to find the life
insurance amount you need and chose the right insurance policy as soon as
possible.
Remember, planning your insurance portfolio (both
life and health) properly is very important if you don’t want to be at the
mercy of luck in your life.
This is the January 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.
Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).
Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
P/E Ratio (on the last day of January 2019): 26.28 P/E Ratio (on the last day of December 2018): 26.26
The 12-month trend of P/E has been as follows:
And here are the average figures of Nifty50’s PE for some recent periods:
Historical P/BV Ratios – Nifty 50
P/BV Ratio (on the last day of January 2019): 3.37 P/BV Ratio (on the last day of December 2018): 3.40
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of January 2019): 1.25% Dividend Yield (on the last day of December 2018): 1.24%
Now, to the historical analysis of Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).
Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).
So obviously, Nifty500 is comparatively a much broader index than Nifty50.
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of January 2019): 29.13 P/E Ratio (on the last day of December 2018): 29.61
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of January 2019): 3.15 P/BV Ratio (on the last day of December 2018): 3.20
Historical Dividend Yield – Nifty 500
Dividend Yield (on last day of January 2019): 1.16% Dividend Yield (on last day of December 2018): 1.14%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:
This is a common question that I am asked quite often, more
so during the tax saving season.
Choosing between the ever so popular Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS).
To be fair, comparing one to the other isn’t exactly
correct. But I will get to that in a bit.
If you think about it, the main motive behind such PPF vs ELSS questions is fairly obvious – the more tax you pay, the less money remains in your hands. So you will naturally try to find ways to save more taxes. And if these tax saving efforts can help you earn good returns, then nothing like it. Isn’t it?
Unfortunately, people want a clear-cut, crisp,
one-word answer to such ELSS vs PPF questions.
But that’s easier said than done. Things aren’t
always black and white. There are hundreds of shades of greys in between.
Another question derived from the earlier one is whether doing SIP in ELSS funds is better
than investing in PPF every month?
Those who are risk averse obviously feel PPF is a better savings option. While those who have got good returns from ELSS funds in the past (or know that equity is the best asset to create long-term wealth) advocate going for SIP in ELSS funds.
And here is an interesting fact: the number of such PPF vs tax saving ELSS debates
rises during the tax saving season. JPeople are in a mad rush to do some glamorous,
last-minute tax savings and portray themselves as financial superheroes!
But last-minute tax saving efforts near the end of the
financial year is a recipe for disaster.
But let’s not digress and instead focus on the main questions
at hand:
Is ELSS mutual fund better tax-saving investment option than PPF (Public Provident Fund)? Or
Is PPF better tax-saving option than ELSS funds (Equity Linked Saving Schemes)?
No doubt both are very popular.
And when you ask people about the best tax saving
investment options, chances are high that you will get either ELSS or PPF as
the answer.
But as I said earlier, there is no perfect or one clearly
defined right or wrong answer to this debate.
Ofcourse if you pick just one of the several parameters,
you are bound to find one clear winner. But that is not the right approach.
But let’s begin the comparison anyway…
Most people prefer to compare returns.
Unfortunately, that is neither wise nor a fair
comparison.
PPF
as a product is extremely safe and gives assured returns whereas returns
from ELSS depend on the performance of the stock markets. So the returns of
ELSS can be very high or very low and fluctuate somewhere in between.
Both are completely different products and target
different needs of a portfolio. So we shouldn’t even be comparing them!
But people do and will continue to compare.
And one very big reason why people compare them is that both have a good and instant side-effect of providing tax-saving… that too under the same Section 80C of the Income Tax Act. Hence people tend to compare.
I know what you are thinking.
Firstly, we are concerned about tax-saving. Right? That’s
common between ELSS and PPF. So nothing much to compare.
Next obvious choice is to compare returns. What else
could it have been?
You are right to an extent.
But I am of this view that all investments should be linked to financial goals. Tax saving should not be the prime motive for most investors (Talking of goals, if you still aren’t sure which goals you are or should be targeting, I strongly suggest you use this FREE Excel-based Financial Goal Planner to find out what your real personal financial goals are.)
Your goals and investment horizon play a major role
in defining how you invest. If investing for long-term goals, the investment
portfolio should ideally have a larger equity component. Whereas when saving
for short-term goals, it should be a less volatile and debt-heavy portfolio. The
asset allocation differs for different financial goals. That’s how it should
be.
I will not delve into the full details of what PPF
is or what tax-saving ELSS funds are. I am sure you already know most things
about them. But just to recap a bit:
PPF (or Public Provident Fund) is a government-backed debt product that assures returns that are declared from time to time. How much to invest in PPF to save tax? A maximum of Rs 1.5 lakh can be invested in lump sum or installments in one financial year. The lock-in period is 15 years and the account can be extended in blocks of 5 years multiple times after the original 15-year maturity period is over. Tax benefits for investment in PPF under Section 80C are limited to upto Rs 1.5 lakh.
ELSS (or Equity Linked Savings Scheme) is a diversified mutual fund that invests in stocks and also offers benefits under Section 80C. There is no limit on maximum investment but tax benefit is available only on Rs 1.5 lakh. The lock-in period is 3 years. Returns are neither guaranteed nor assured. They are market linked and (average returns) tend to beat inflation in the long term.
Comparison of Returns – ELSS vs PPF
As I have already said, comparing returns of PPF
with ELSS isn’t 100% correct.
Both have very different investment objectives.
PPF is a debt product whose returns are fixed but
limited due to its very nature. There is no potential for positive or negative
surprises. You get what you are promised by the authorities. ELSS, on the other
hand, is an equity product that aims to maximize returns. To achieve this aim,
it takes risks which can turn out well at times and not turn out well at other
times.
To give you some idea about how returns in ELSS
funds and PPF differ every year, I have tabulated the annual returns of some of
the popular tax-saving ELSS mutual funds in the table below:
The data has been sourced from Value Research. This is not a perfect comparison but is still good
enough to give you a comparative snapshot. You can compare the year-wise
returns and average category-return of these ELSS funds with PPF annual
interest rates. This table will give you some idea about how the returns vary
in reality, so I suggest you spend some time on it.
And the funds above are one of the best ELSS funds
that have been in existence for last several years now. But do not think of
this as an advice of best-ELSS-funds-to-invest kind of list. The data is just
for illustration purposes.
But nevertheless, read the observations below:
PPF returns have mostly ranged from 8.0% to 8.7% in the recent past. To know more about PPF account interest rate in different banks, check the updated latest PPF interest rates.
The years with green colored PPF-return grids indicate that the PPF was the better performing when compared with other ELSS funds in that year. Like in 2008, PPF delivered 8% whereas the chosen set of ELSS funds gave average returns of -54% with individual funds delivering anything between -48% to -63%. Similarly in 2011, PPF did better than ELSS schemes.
The years with red PPF return grids show that ELSS gave higher returns than PPF in those years. For example: in 2017, ELSS returns ranged from 26% to 46%. Obviously PPF couldn’t match that with its 8%.
The smaller grids (max/min) show the maximum and minimum annual return for different ELSS funds for that given year.
It’s clear from above that depending on the market conditions,
the ELSS returns can have wild fluctuations. PPF returns on the other hand are
more or less constant due to government’s blessings.
So where PPF returns average around 8%, tax saving
ELSS mutual funds have the potential to deliver a much superior return – a 12%
to 15% average returns is possible, but not guaranteed. And the top best ELSS
funds have given much better returns than these average returns.
So does it mean that you should simply dump PPF and
start investing everything in ELSS funds?
Ofcourse not! The average return comparison of ELSS and PPF does seem to show that ELSS offers superior returns in the long run. But basing your investment decisions only on one factor is very risky. Here’s why.
Let’s check another aspect before we get judgmental.
A lot of people don’t invest in lumpsum and rather
invest every month. So for them, it’s better to find out how SIP in ELSS
funds Vs monthly PPF investment compares.
Let’s check that out too.
I have simulated Rs 10,000 monthly investment in Franklin India Tax Shield Fund* starting
from January 2008 to December 2018. This is to be compared with Rs 10,000 per
month savings in PPF for the same period.
*Chosen randomly
from several ELSS funds. Don’t consider it as a recommendation.
The value of investment in Franklin’s ELSS fund at the end of 2018 would be about Rs 29-30
lakhs. On the other hand, the value of PPF corpus is 20-21 lakh.
Once again and maybe not surprisingly, it seems ELSS
is the way to go.
You can also say that in the above case, the
PPF-investor has actually lost out on more than 50% extra returns. (Rs 30 lakh
– Rs 20 lakh)
I have compared Rs 10,000 monthly SIP in Franklin Tax Shield vs monthly 10,000
savings in PPF starting from April 2007 (when the bull run was about to peak in
coming months).
I chose that starting point because due to high
returns from equity in recent past (2004-early-2007), many people would be
attracted to stock markets and would be interested in ELSS – as it combined tax
savings with much higher returns than PPF.
So here is a 2-year story – starting from April 2007
to March 2009:
In 2 years, the total contribution would have been
Rs 2.4 lac in each.
And the value of ELSS investment would be Rs 1.6 lac
and that of PPF would have been about Rs 2.6 lac (yellow cells in the bottom
row).
Now think…
We know equity will do well in long term. That is
what has been told and proven countless times
But how many people would remain convinced and loyal
to that idea when their Rs 2.4 lakh investment goes down to Rs 1.6 lakh after 2
years?
They might be cursing themselves for ignoring PPF
that would have saved them from such losses.
And this is what I wanted to highlight.
And no PPF vs ELSS calculator or SIP vs PPF
calculator will tell you this. All such ELSS SIP investment calculators work on
the principle of average returns which will not show the real picture.
Just looking at historical average returns, you might feel that investing 100% of the money in stock markets is the right way. But when markets correct, not many people have the ability to stay invested and accept the temporary losses, even though it is best for them.
Looking at the average long-term returns in
isolation can give the wrong picture. Equity investing (directly or via mutual
funds) does need a lot of will power to remain invested when markets are down.
Not many people have it.
So is it better to
invest in ELSS mutual funds SIP than in PPF?
It is true that
investors of ELSS mutual funds are rewarded for accepting the short-term
volatility. They are paid back handsomely as average return table above suggests.
But when you invest in markets, you will face periods of stock market
volatility every now and then. Like in 2008, the ELSS category fell by almost
50%. Again in 2011, the category average was about -24%.
Equity is perfectly fine for long-term investors and
equity funds have given much better returns than PPF over long-term. But you
just cannot ignore debt (like PPF) as the investors have different responses to
volatility. Some might exit ELSS after 20-30% losses (which is normal in
equities).
Another factor is that you don’t have to ‘choose’
anything in PPF. It’s simple.
But in ELSS funds, you have to choose the fund among
many available ones. Is there any guarantee that you will be able to choose the
right ELSS fund that will do well in future? Think about it. What if you picked
the wrong funds?
That was about the
comparison of investment returns of PPF vs ELSS mutual funds.
Let’s see other
factors.
Tax Benefits on investments in ELSS Vs PPF
Both ELSS and PPF
are quite tax efficient.
Under the Income Tax
Act Section 80C, investment in ELSS mutual funds and PPF (Public Provident
Fund) give you a full tax deduction upto Rs 1.5 lakh every financial year.
Under Section 80C, you cannot claim deduction of more than Rs 1.5 lac when investing in ELSS or/and PPF and/or other section-80 tax saving options.
Also, you cannot
invest more than Rs 1.5 lakh in a PPF account in a year. But this restriction is
not there in ELSS schemes. You can invest as much as you want, but the tax
benefits available will be limited to Rs 1.5 lakh.
And let me answer
two more questions that you might have:
A PPF account has a
maturity period (lock-in) of 15 years. ELSS funds on the other hand have a lock
in period of only 3 years. But wait. There is more to know than just that…
Assuming you make
annual investments in PPF, only your first installment in locked-in for 15
years. The 2nd year installment is locked-in for 14 years. The 3rd year
installment is locked-in for 13 years…and so on. Also, the PPF accounts that
have completed 15-year lock-in and have been extended have a fresh lock-in of
only 5-years.
In ELSS, each SIP
installment has its own 3-year lock-in. many people get confused here. Do not
think that lock in is valid on full amount that you have invested from the date
of first investment in ELSS.
So first SIP in
April 2017 will be locked in till April 2020. Second SIP in May 2017 will be
locked-in till May 2020. And so on…
But let me remind
you that equity is best suited for long-term. Like for periods exceeding 5
years. The money is locked for only 3 years in an ELSS fund. But even if the
lock-in gets over after 3 years, you shouldn’t withdraw the funds and remain
invested for as long as you don’t need the money.
As investors you need to be very clear that the asset that you are investing in is equity and thus you should be ready to stay invested for at least 5 to 7 years to get good returns.
What if you Invest 100% in PPF or 100% in ELSS?
These type of questions come from people who are unwilling to see the
bigger picture and are only narrowly focusing and asking about PPF vs mutual
funds which is better?
But neither approaches is advisable.
Is PPF a good option for investment?
Is ELSS a good option for investment?
Ofcourse yes.
But theoretically speaking, if you invest Rs 1.5 lakh in PPF every year for 15 years, your total corpus would be around Rs 43 lakh. You can use this Excel PPF Maturity Calculator to try out other scenarios (or find out how to save Rs 1 crore in PPF).
Regular SIP in equity funds (both ELSS and non-ELSS) can create a lot of wealth in long run. Here is a good real-life success story of SIP-based Wealth Creation. To know how much wealth you can possibly create by investing small amounts every month, check out the following links:
Again, you might
feel that why to use PPF when you can get more returns with ELSS.
But remember, PPF is
a debt product and ELSS is an equity product. All goal-based investment
portfolios are best constructed by diversifying across assets.
You should not be 100%
in equities or 100% in debt.
It is not sensible
either way.
For most people, the best approach is to invest in line with your goal requirements. Using the powerful concept of Goal based Investing, you find out how much you should be investing for each goal.
Let’s assume that the goal you have in mind is retirement planning – which is a nasty problem in itself.
It’s a big goal. And
since for most people its decades away, its best served by an equity heavy portfolio.
For someone in 30s,
it can be safely said that a portfolio with 70% equity and 30% debt is
suitable.
And you also wish to
save tax. Right?
So here is how to go
about it:
You are investing for your financial goal of retirement planning.
After doing some calculations yourself (or taking help from an investment advisor), you have come to know that you need to invest Rs 20,000 every month in 70-30 Equity-Debt ratio.
That means investing Rs 14,000 in equity and Rs 6000 in debt every month.
But you are already making an EPF contribution of Rs 4000 every month. That also counts towards the 30% debt bucket.
EPF takes care of 48,000 under Section 80C tax saving options. Assuming you have a Rs 1 crore term insurance with Rs 12,000 annual premium, the total eligible deduction goes upto Rs 60,000 (48K+12K).
The remaining Rs 2000 per month (from debt) can be put in PPF. Or if you have the option of VPF, that’s better too. This totals to Rs 84,000.
And this increases eligible deductions to Rs 84,000 (48K+12K+24K). You need another Rs 66,000 for fully utilizing Section 80C limit.
You can now do a Rs 5500-6000 SIP in ELSS fund. That will take care of your tax-savings.
For the remaining Rs 8000-9000 (in equity bucket of Rs 14,000), you can choose other normal equity funds (non-ELSS). Or you can even do full Rs 14,000 SIP in ELSS funds.
And if you think
like that, then you will easily get answers to questions like ‘how much should I invest in ELSS’ and ‘how much should I invest in PPF’?
But you don’t need
to decide between PPF and ELSS because of just returns.
You instead simply need
to focus on asset allocation (which is 70-30 in the above example). Therefore,
the choice between doing SIP in ELSS funds and investing in PPF must also be
seen in the context of overall portfolio asset allocation.
If there is room
under the 30% debt bucket after deducting EPF contributions, you use PPF. For
equity’s 70% bucket, you can use ELSS to the extent it is needed for tax
saving.
And if your Section 80C limit of Rs 1.5 lac is fully utilized using EPF contributions, life insurance premiums and home loan principal repayment, there is no need for ELSS mutual funds investment. You can easily focus on non-tax saving equity funds instead.
But that doesn’t mean that you don’t invest for your goals. Tax-saving
is not a financial goal. Just remember that.
The approach that I discussed above is in line with goal-based
investment’s philosophy.
One simpler approach can be to take a middle path and do a 50-50 split
between PPF and ELSS.
Another can be (for those who are interested in being more tactical
about tax-saving) to use market valuations as an indicator to decide where to
invest. If valuations are low, invest in ELSS. If valuations are very high,
invest in PPF.
I am not suggesting that the tactical approach discussed above is a better way. Just highlighting that there can be multiple approaches. But most people are better off not trying to time the markets. 🙂
But the actual split between ELSS and PPF will depend on factors like
your risk profile, existing assets, etc.
Just to reiterate, if you are young, keep a larger portion of your savings directed towards equity when investing for long term goals like retirement.
Both ELSS and PPF are suitable for retirement savings. But equity is
better suited as long as you have several years left for the goal.
How to choose good Tax-Saving ELSS Mutual Funds?
Before even you consider ELSS as the choice for tax saving, do not
forget that always invest in ELSS with a long-term perspective – something like
5+ years or even more.
Why?
Because ELSS is about equity investing. And equity as an asset class
isn’t risk free. There is always a risk of loss of capital. But this risk is
higher when you invest for short term. The longer your investment horizon, the
lower is the risk of loss.
With that aside, how do we go about picking the best ELSS funds among
all ELSS mutual fund schemes out there?
These days, the disclaimers about past performance not being
necessarily sustained in the future fall on deaf ears.
So despite mutual fund companies highlighting great short term returns,
you should focus on things that matter.
When looking for which ELSS funds to invest in for tax saving, keep the
below discussed points in mind.
Depending solely on performance numbers from recent past can be misleading. Do not run after previous year’s best performing tax saving ELSS funds. Look for consistency in returns over several years. Has the fund been in the top quartile of its category for almost all the years? Has the fund protected the fall in poor markets? These are just some of the questions that should come to your mind when picking ELSS or building a proper mutual fund portfolio. You can even consult an investment advisor to find out these answers.
Also, all ELSS funds are not the same in terms of portfolio
construction.
All ELSS funds are actively managed and its fund manager’s job to
decide what to hold in fund’s portfolio. It can a portfolio with a bias towards
large cap, midcaps, all caps or whatever.
What is worth remembering is that one ELSS fund’s investment mandate
will not be the same as that of the ELSSs out there.
And there is absolutely no need to pick a new ELSS fund every year for your
tax saving.
This often happens when you do last minute tax saving. You are in a hurry and want to find out the best performing ELSS fund on the basis of 1-year return. This is not advisable.
Over the years, investors end up with several ELSS schemes as they
invest lump sums every year by picking one from the best performer of previous
years. Like picking from Top ELSS Funds of 2018 or Top ELSS Funds of 2019.
But having more than 1 or 2 ELSS funds is useless. In any case, if you have other non-tax saving diversified mutual funds, having more ELSS funds will only lead to an overlap in your portfolio. Building a mutual fund portfolio isn’t tough but still people mess it up.
So don’t wait for January, February or March for planning your tax
savings.
Do some homework earlier and find out how much is to be invested in ELSS in the year. And then begin investing in ELSS through SIP (systematic investment plans). This way, you would have time to pick good ELSS funds on the basis of long-term consistent performance. You will also benefit from averaging (and avoid timing the market through last minute lump sum investments).
We began this article with the question of whether to invest in PPF
or ELSS to save taxes.
You should not decide randomly between ELSS or PPF. And there is no
one-size-fits-all answer as both ELSS and PPF target different needs of the
investment portfolio.
The decision should be made after you have a clear view of your financial
goals and tax requirement.
But when it comes to combining equity investing with tax saving, there
is no doubt that ELSS is good for long term investments. It scores well
above several other tax saving products. And investing in ELSS through SIP (or
systematic investment plans) over a long time horizon can help you do proper
tax planning and financial goal planning.
If you have a well-thought out investment plan for your financial goals, you will not need to ask questions like which is a better investment option ELSS or PPF?
You don’t need to choose between the most suitable tax saver between ELSS vs PPF. That is because you will invest on basis of your goal-specific strategic allocation rather than randomly. And that is what goes a long way in sensible investment management and wealth creation. So taking sides on ELSS vs PPF is fine. But invest smartly and using correct goal-based approach.
Budget 2019 initially proposed something that excited millions of Indians – No income tax on Rs 5 lakh income.
It seemed that the zero percent (0%) income tax slab was indeed increased to Rs 5 lakh in India.
But when actual details emerged, the reality was a little different.
If you still aren’t sure about this whole zero tax 5 lakh thing or are looking for answers, then this article might help.
What really happened is something like this:
Individuals with taxable income of up to Rs 5 lakh will get full tax rebate under section 87A. What this means is that if your net taxable income is up to Rs 5 lakh, then you don’t need to pay any taxes. However, if the net taxable income is above Rs 5 lakh, then the rebate under Section 87A cannot be availed.
But, there are no tax slab changes in the Budget 2019.
The only thing that has changed is the tax rebate under Section 87A – which has been revised; and it’s because of that alone, that there will be no tax liability for those whose taxable income is less than or equal to Rs 5 lakh (Rs 5,00,000) in India.
If this sounds a little confusing, then let’s go step-by-step and it
will be crystal clear to you by the end.
Income Tax Slabs FY 2019-20 (AY 2020-21)
As I said, there hasn’t been any revision in the income tax slabs from the previous year. It remains the same the for Financial Year 2019-20 as follows (for individuals below 60):
This simply means that, currently:
Taxable income up to Rs 2.5 lakh has zero (nil) tax.
Taxable income between Rs 2,50,001 to Rs 5,00,000 taxed at 5%
Taxable income between Rs 5,00,001 to Rs 10,00,000 taxed at 20%
Taxable income above Rs 10,00,000 taxed at 30%
In addition to the above, following are also applicable: 10% surcharge on income tax if Rs 50 lakh < income < Rs 1 crore and 15% surcharge on if the total income > Rs 1 crore.
4% Health & Education cess on income tax (including surcharge) to be added.
Remember, we are talking about the ‘Taxable Income’ here and not ther ‘Gross or Total Income’. The ‘net taxable income’ is the total income reduced by the amounts of permissible deductions under various sections (like Section 80C, etc.).
I know you might be thinking – if the tax exemption limit is still Rs 2.5 lakh, then how can there be zero tax on income of up to Rs 5 lakh?
Your curiousity is correct.
And the reason is hidden in the changes made in the Section 87A during the Budget 2019.
Revised Tax Rebate – Section 87A
What has happened is that the limits specified earlier in Section 87A
have been revised. The changes are as follows:
Earlier: If the taxable income is less than Rs 3.5 lakh, then a rebate of Rs 2500 applies to the total
tax payable (before cess). And if the tax payable is less than Rs 2500 then the
entire tax amount is discounted.
Now (after Budget 2019): If the taxable income is less than Rs 5 lakh, then a rebate of Rs 12,500 applies to the total tax
payable (before cess). And if the tax payable is less than Rs 12,500 then the
entire tax amount is discounted.
So the earlier limit of Rs 3.5 lakh has been revised upwards to Rs 5
lakh. And the rebate available has been increased from Rs 2500 to Rs 12,500.
Remember, that a rebate is the specified amount of tax that the taxpayer is not
liable to pay.
Here is simple example to show the working
How Income Tax is Zero (nil) on Rs 5 lakh income?
Suppose, your net taxable income is Rs 5 lakh.
As per the tax slabs, calculated normal tax liability is as follows:
0 to Rs 2.5 lakh –
0% – Nil
Rs 2.5 lakh to Rs 5.0 lakh – 5% of Rs 2.5 lakh – Rs 12,500
(ignoring cess, etc. for simplicity)
So the total tax = 0 + Rs 12,500 = Rs 12,500
But, the revised Section 87A limits offer a rebate of Rs 12,500 for
taxable income of up to Rs 5 lakh.
Result
Tax of Rs 12,500 – Rebate of Rs 12,500 = Zero Tax.
That is, if the net taxable income is Rs 5 lakh or less, then the entire tax liability will be less than the rebate of Rs 12,500 – which means effectively no (zero) tax on income up to Rs 5 lakh.
So you can say that the so called zero tax is applicable only for those whose taxable income is Rs 5 lakhs or less.
But what happens in case taxable income is
more than Rs 5 lakh?
Let’s see…
Income Tax on income above Rs 5 lakh
If you wish to calculate income tax on your net taxable income above Rs 5 lakh, then let’s take an example to understand it.
Since your taxable income is Rs 5.5 lakh, which is not less than Rs 5 lakh, you are not eligible for the rebate under Section 87A of the Income Tax Act.
So your tax liability remains as Rs 22,500 and you have to pay the full amount. Sorry! But you can still be wise about tax planning by giving priority to your investment planning.
It makes sense to repeat that the rebate is available only if taxable income is Rs 5 lakh or less. Not if it’s above it.
Had you by some means been able to further
reduce your taxable income to less than Rs 5 lakh (in above example of Rs 7
lakh total income), you would have become eligible for the rebate of Rs 12,500.
So that’s it…
There has been no change in income slab or tax
rates in Budget 2019. Only the limits in the Section 87A have been revised to
benefit those whose taxable income is less than Rs 5 lakh.
Individuals with taxable income of up to Rs 5 lakh will get the full tax rebate under section 87A. This effectively means that they will not be required to pay any taxes. However, for those whose net taxable income is above Rs 5 lakh, there is not tax rebate that they can avail.
I hope this article clarifies your doubts about how income of Rs 5 lakh is tax free and what is the zero percent (0%) income tax slab in India.
If you are a mutual fund SIP investor, you would already have been bombarded with thousands of articles about why mutual funds and more particularly mutual fund SIPs are great.
And that is true.
But I wanted to re-highlight this fact in a different light.
SIP is not perfect like the theoretical (but attractive) concept of Buying-Low-Selling-High. But still, it works best for small investors and is their best bet when it comes to equity investing.
I recently wrote an article for MoneyControl on this topic. If you wish to understand why SIP isn’t Perfect but still the small investor’s best bet, then please do read the article by clicking the link below:
Rs 1 crore is still not a small amount. But whether it is sufficient or not depends on why you actually need it.
So for example, if you were to ask me whether Rs 1 crore is enough for retirement? In most cases, the answer would be a No. Retirement planning is a nasty problem and you can’t just ahead with random numbers for your retirement corpus.
But still,
there is a psychological attraction to this figure of Rs 1 crore and becoming a
crorepati that us Indians can relate to.
PPF is a beautiful debt product. I have already written about it earlier too (link).
And even though investing in equity is a necessity and highly advisable for the long term, a product like the PPF can still be a part of the overall portfolio. And I am sure the term PPF crorepati in the title would have already captured your interest by now. 🙂
However,
PPF is not a short term investment option as it has a lock-in period of 15
years. But still, you can make partial withdrawal after few years. And You can
even extend the maturity by a block of 5 years for multiple times. It currently
falls under the ‘EEE’ category, which means that PPF contribution, interest
earned on PPF and PPF maturity proceeds are exempted from tax.
Interestingly,
a few days back I got a mail from a self-confessed conservative investor.
He said that he was slowly increasing his equity investments. But still he felt that he cannot part ways with something as sure-shot and as risk-free as a PPF account. And he wanted to know how long would it take to accumulate Rs 1 crore in PPF?
I felt that
this question might interest others as well.
So this
post is about finding out:
How to accumulate Rs 1
Crore in PPF (Public Provident Fund)?
And if you
are low-risk conservative investor who wishes to accumulate Rs 1 Crore,
then PPF is a decent option.
Let me try
to answer this from various perspectives:
If you contribute Rs 1.5 lac every year for a period of 15 years, your
PPF balance will be about Rs 43.9 lac at the end of 15 years (assuming a stable
interest rate of 8.0% per annum).
If you contribute Rs 1.5 lac every year for a period of 15 years and
then don’t liquidate your holding for another 15 years, then your PPF balance
will be about Rs 1.39 crore at the end of 30 years (assuming a stable interest
rate of 8.0% per annum). You will achieve the target of Rs 1 crore around the 27th
year.
If you contribute Rs 1.5 lac every year for a period of 15+5+5+5=30
years, then your PPF balance will be about Rs 1.83 crore at the end of 30 years
(assuming a stable PPF interest rate of 8.0% per annum). And you will reach Rs
1 crore during the 24th year itself.
But what if
you are unable to invest Rs 1.5 lac every year (the full PPF annual limit),
then obviously your target of reaching Rs 1 crore in PPF will be delayed
accordingly.
Also, if
the interest rates go down in years to come, then once again your target of
reaching Rs 1 crore in PPF will be delayed to that extent.
So to sum it up, you can become a crorepati if you put Rs 1.5 lac every year in PPF then you can accumulate a corpus of Rs 1.08 crore by the end of the 24th year (assuming that 8% return)
But as you know, neither the PPF limit remains same nor PPF interest rates remain unchanged over the long term.
So let’s
try a hypothetical scenario which might actually play out in the near future:
Suppose you begin saving full Rs 1.5 lac in PPF today. Government increases the annual PPF investment limit by Rs 50,000 every 5 years. It is assumed you will continue to invest as much as is needed to fully utilize the annual investment limit of PPF every year. The interest rates also reduce by an average 0.5% every 3 years or so.
What will
be the result then?
At the end
of 15th year, your total investment of Rs 30 lac would have become about Rs
49.4 lac.
If you
continue investing (after extending your PPF account with contribution) for
another 5+5+5=15 years, then at the end of 30th year, your total investment of
Rs 82.5 lac would have become about Rs 2.02 crore.
Here is the
tabular depiction of the excel:
As you might have observed by you, it is only after the initial few years that the actual compounding of the PPF investments becomes visible. And it is for this very reason that you should try not to disturb (withdraw from) your PPF account for as long as possible and try to extend its tenure after the first 15 years lock-in period.
Do you want
to try some different scenarios of your own?
You can do
so.
You can
download this FREE Excel PPF Calculator and play around with inputs. If the previous
link doesn’t work, use the link below:
You can even check out historical PPF interest rate and how things have changed in the past when it comes to PPF.
Now, the
current limit for PPF is Rs 1.5 lakh per year.
But what if
you want to invest more?
Obviously,
you need to respect the limit.
But if both
husband and wife can contribute to PPF, then things can get fastened a bit.
Save Rs 1 crore Quickly using
Husband PPF + Wife PPF
What needs to be done is that a PPF account needs to be opened for both you and your spouse.
Since both the husband and the wife can deposit Rs 1.5 lakh per annum, it means you can contribute Rs 3 lakh every year in PPF. And you will get interest in both these PPF accounts for the entire period of 15 years or more if extended.
So how much
do you end up with if both you and spouse contribute Rs 1.5 lakh every year for
15 years?
The answer
is Rs 43.9 lakh each, i.e. a total of Rs 87.8 lakh.
So if both
of you save diligently, you can achieve Rs 1 Crore in about 17 years. Here is a
sample depiction of PPF Husband Wife calculation:
So if you are a conservative investor, who isn’t much interested in volatile investment options, then PPF can be helpful. PPF can help you become a crorepati in a safe way.
If you put Rs 1.5 lakh every year in PPF, then you can accumulate a corpus of Rs 1 crore by the end of the 24th year.
If both you and your spouse put Rs 1.5 lakh each every year in individual PPFs, then you both accumulate a corpus of Rs 1 crore by the 17th year itself.
And if
somehow you manage to continue investing for the 30 years (i.e. 15 year
original and 3 extensions of 5 year each), then you will be able to accumulate
a really big corpus.
So before I
close, let me list down some facts about the PPF for your ready reference:
Extension of PPF Account – After the maturity period of original 15 years, it can be extended in blocks of 5 years each multiple times
Minimum deposit amount (per year): Rs 500
Maximum deposit amount (per year) : Rs 1,50,000
Number of installments every year: 1 (min) to 12 (max)
Number of accounts an individual can open: Only 1. If there is a 2nd PPF account, it is treated as invalid and doesn’t earn any interest.
Tax Savings – EEE status, i.e. the annual contribution (upto Rs 1.5 lakh) provides tax benefit under Section 80C. Interest earned and the maturity amount is fully exempted from taxes.
Interest on PPF is calculated on the minimum balance in the account between 5th and the last day of each month. So if you invest monthly, then it makes sense to do it before 5th every month.
You can further maximize your returns in PPF by investing the full amount at the beginning of the financial year itself. Ofcourse this is not easy for everyone. But if you do so, the full amount earns interest every month of the year.
Here is the link to download the free excel-based PPF Calculator again:
Investing in equity does come with its own share of ups and downs in the near term. But if you look at the average annual returns of Indian Stock Market, then it will show how you can create some serious wealth from equity. The idea of this post was to tell how a comparatively safe and risk-free savings option like PPF can be used to accumulate a large corpus of PPF Rs 1 crore.
For most people, its advisable to have a balance between equity and debt when investing for long.
But if you aren’t sure whether you are saving and investing properly, do get in touch with an investment advisor soon (how?).
When it comes to buying life insurance for yourself, the best option is to go for a simple term insurance policy. Period.
With that aside, your next question would be – which is the best term insurance plan to buy?
The answer isn’t simple anymore.
Earlier, term plans came in just one version, i.e. they paid lumpsum (sum assured) at the death of the insured person.
But now, the insurance companies have introduced many variations of these term life insurance plans.
Majorly, these variations give the policyholder different options to decide how the total sum assured is paid out to the nominee in case of policyholder’s death.
But think about it…
Why would you anyone even think about the other versions of the simple term plan?
It will become clear as I explain it in the next sections.
You will realize that just buying a Rs 1 crore term plan or some other plan is not enough. You really need to think hard about how the money will be handled after you and accordingly, choose the right version of the term plan.
So let’s move on…
Types of Term Insurance Policies in India
Let’s see how these term plan varieties differ from each other.
1 – Term Plan with Lumpsum Payout
This is the most basic version.
Let’s say you buy a term plan of Rs 1 crore. In case you die during the policy tenure, your nominee will be paid the full amount of Rs 1 crore in one go. Nothing more, nothing less.
There is nothing much to explain about this option.
In this plan, there is no lumpsum payout. Instead, the sum assured is utilized to provide a regular monthly income to the nominee for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, then the sum assured is paid out as a monthly income of Rs 83,333 for next 10 years (i.e. Rs 83,333 x 12 x 10 = Rs 1 Cr).
This monthly income can either be fixed (as above) or can also be increasing one.
3 – Term Plan with Lumpsum + Fixed Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which is a fixed percentage of the remaining sum assured for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining 60% (or Rs 60 lac) is paid out as monthly income of Rs 50,000 for next 10 years (i.e. Rs 50,000 x 12 x 10).
4 – Term Plan with Lumpsum + Increasing Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which increases at a pre-determined percentage on a simple interest basis on every policy/death anniversary for a fixed number of years.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining is paid out as a starting monthly income of Rs 50,000 which increases by let’s say 10% every year. So next year, the monthly payout will be Rs 55,000 and so on. Generally, the total payout in this version is more than the original sum assured.
In both the above options (lumpsum + fixed monthly payout and lumpsum + increasing monthly payout), the lumpsum % can be different as per insurer’s or policyholder’s choice. There are many plans that even pay 100% of the sum assured upfront and additionally pay a monthly income (fixed or increasing) to the nominee.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, full Rs 1 crore is paid out to the nominee immediately. In addition, a monthly payout of Rs 50,000 is made for the next 10 years. The total payout in this version is more than the original sum assured. To be exact, it is Rs 1 crore + Rs 60 lac (Rs 50,000 x 12 x 10).
These are the major versions of the term plans that are available these days.
Now let me address the point that I raised earlier – Why would anyone even think about the other versions of the simple term plan where the payout is staggered?
Quite often, the nominees lack proper personal financial knowledge when it comes to handling large sums of money. So once they receive a large amount, they may be unable to properly manage the sudden increase in wealth and end up losing it by listening to the wrong people.
So in order to overcome this concern, many insurance companies came up with various other payout options.
This way, the nominees receive a part of the amount as lumpsum to take care of immediate concerns (like closing all loans, other big expenses in the near term). The remaining amount is paid as monthly payments over a pre-decided number of years, to replicate the regular income pattern and help smoothen the life of the nominees.
That is the major reason for the launch of these different versions.
So depending on the ability of your nominees to handle money, you should pick the adequate option:
If you are sure your nominee is well-versed in personal finance, then you can go for the full lumpsum payout term plan.
If you feel the nominee is better off not having a large amount suddenly (due to any reason you think), then you can go for the staggered-payout term plans.
If you feel that if your sudden death will result in financial chaos (due to outstanding loan or planned big expenses in the near term), then you can take the term plan that pays a % as lumpsum and remaining as monthly income (if you feel the nominee will be unable to handle money properly).
As you might be feeling right now, there are cases where opting for the staggered payout option actually makes sense.
Ofcourse from a purely financial perspective, it’s best to take the lumpsum and invest it efficiently and try to generate income from it for the nominees. But all decisions cannot be taken just from mathematical perspectives.
Do premiums vary for different Term Plans?
Yes of course.
Different versions of the term plan have different premiums.
To give you an idea, here is a snapshot of the various versions, with their benefits and approximate annual premiums for a 30-year old, non-smoking male living in a metro city and buying a 30-year term plan:
The first one is the normal term plan that you know of – pays lumpsum amount (equal to the sum assured at the death of policyholder). Others are different plans paying different monthly incomes which is either fixed or increasing each year.
There are several term insurance premium calculator available online. It’s best to check out the premiums for different types of policies for yourself.
The actual premium that you will have to pay will depend on a variety of factors. If you take a policy for a longer tenure, then it will cost more. In general, shorter the policy term, lower will be the premiums. To choose the right policy term, do read what should be the ideal term insurance policy term?
And I almost forgot telling you about another variety of Term Plans that has been pitched by a lot of agents in recent times – Return of Premium Term Plan.
Is Return of Premium Term Plan Good?
A lot of people who wish to buy term plans have this feeling that since they will survive the policy period, the premium which they are paying will be wasted.
For these people, insurance companies have come up with a term plan where the premium paid over the course of policy tenure is returned back if the person survives.
At the face of it, this seems like a good idea. And this policy did address the concerns of people who thought that the term plans are a waste of money.
But if you deep dive a bit, things aren’t that great. Such policies have premiums much higher than the normal term plans.
If we were to compare a plain term plan (that only pays lumpsum amount) with a term plan (that also only pays lumpsum) with the return of premium option, then the premiums are Rs 9717 for a plain term plan and Rs 24,968 for return-of-premium term plan.
These premiums are for a 30-year old, non-smoking male buying a 30-year term plan living in a metro city.
Let’s compare these two plans a bit more.
The total premium paid is Rs 2.91 lac for plain term plan (Rs 9717 annually x 30 years) and Rs 7.49 lac for return-of-premium term plan (Rs 24,968 annually x 30 years).
In case of death during policy tenure, the nominee gets Rs 1 crore in both cases (as the sum assured is same).
But in case of survival, things change.
In case of plain term plan, you get back nothing – that is, you don’t get back Rs 2.91 lac. On the other hand in case of Return-of-Premium Term Plan, you get back your Rs 7.49 lac.
You may again feel that the return of premium plan is better. But remember that you are paying a high premium for that.
The difference between the annual premium of the two plans is a little more than Rs 15,000 (= Rs 24,968 – Rs 9717).
If you invest this difference amount of Rs 15,000 every year at just 8%, then at the end of 30 years you will have about Rs 18-19 lac. Compare this with the amount the return-of-premium offers you at the end, i.e. Rs 7.49 lac.
So the obvious conclusion is that it’s better to not purchase a return of premium term plan. You are better off with either a simple term plan (or some of its variants that offer monthly income).
But since term plans also come in various shapes in sizes, its natural to ask which is the best term insurance plan for you?
As mentioned earlier, the choice of the term plan variety is dependent a lot on how capable do you feel your nominees are in managing money. If they are financially aware, going for a lumpsum payout is best. If they aren’t and you want to provide them with a regular income for a few years after you die, then take the lumpsum + monthly income payout option. Or you can have the best of both worlds by taking two policies combining the two approaches.
