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Category: Uncategorized

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

by Dev Ashish 1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Returns of Direct plans are higher than Regular MF plans

by Dev Ashish Leave a comment

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

The simple answer is Yes.

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

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

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

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

There should be no doubt about these 3 things.

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

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

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

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

Regular Direct NAV Annual Returns

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

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

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

Mutual Funds Regular Direct NAV Difference

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

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

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

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

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

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

Here is the answer:

Regular Direct NAV Difference Lumpsum

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

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

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

Regular Direct NAV Difference SIP

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

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

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

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

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

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

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

Angry Investor. Good Returns a Birthright. Feature not Bug

by Dev Ashish 3 Comments

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.

State of Indian Stock Markets – August 2019

by Dev Ashish Leave a comment

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:

Mutual Funds Investment Tips for Millennials

by Dev Ashish Leave a comment

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.

Can You Retire with Rs 1 Crore Today in India?

by Dev Ashish 6 Comments

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.

Mutual Funds Vs Real Estate – Which is better for Investing in India? (2019 Follow up post)

by Dev Ashish 5 Comments

Note – This is a guest post by Ajay. He has previously written on this topic here. Since a few years had passed, he was kind enough to share his views again (with a useful real-life example). Ajay has also authored other interest posts here like How He created a corpus of Rs 3.7 Crore in just 10 years. So over to Ajay for this post…

______

A few years back, I had written on a controversial topic – Investing in Mutual Funds Vs Real Estate in India. I wanted to do a follow-up post on the topic as with each passing year, a new set of people begin asking the same questions:

  • Are mutual funds better than real estate for investing in India?
  • Can investing in real estate be better than investing in equity funds?
  • Mutual Funds Vs Real Estate – which is better
  • And similar versions asking the same things…

So let me try and address this again…

I once again reiterate that there will be many reasons for investing (or let’s say putting money) in real estate – such as peer pressure, family pressure, social status etc. and I am not debating the same. This question of whether you should invest in Real Estate (for investment) or Mutual Funds, can only be answered by you and you alone.

And therefore, this article should ideally be read in that spirit.

The intention of this post is to present facts based on the actual data, from both real estate and mutual funds from an investor’s perspective and ofcourse, my opinion on the same. 🙂

Also, as stated in the earlier post:

  • A home is a place to live and it should not be linked to one’s investment strategy. There should not be any second thought about buying your 1st property for self-occupancy whether with or without tax benefits.
  • I am aware and acknowledge the fact that being Equity and Equity Funds oriented investor, my views will tend to be biased towards Equity investments than Real Estate investments.
  • The experience and the actual investment returns of Real Estate investors vary from location to location. And therefore, many of you may not agree with the conclusion or findings of this post. Nevertheless, through this article, I have analyzed the actual data from the Real estate and mutual fund investments in India.

So let’s go ahead…

Real Estate Investment

In August-2010, a friend of mine decided to buy a 1200 Square feet (Sq.ft). Flat in the outskirts of Bangalore (@ Rs 2290 per Sq.ft.) through a housing loan. The details are as follows:

  • Cost of Flat (including Car parking, Utilities, Legal costs, Deposits etc.): Rs 31,39,500
  • VAT, Registration & Stamp paper: Rs 3,02,566

Total Cost of Flat (all Inclusive): Rs 34,42,066

To fund this purchase, he used:

  • His own money (Rs 12,42,066) and
  • Took a home loan for Rs 22,00,000 from a bank.

The loan EMI was Rs.21,343.

As like many of you committed individuals, he paid all the loan EMI on or before the due dates, and also increased the EMI amounts as his salary increased during the loan tenure. He also made part payments many times to accelerate the loan closure and to settle the loan as early as possible. He also put this house on monthly rental as he had to live in another city for professional reasons.

Kind of an ideal way of managing a home loan you can say.

Now let’s look at the numbers below (if you are interested in the actual loan cashflow data):

MF SIP vs Real Estate

Now the loan ended recently (in May-2019).

So I sat with my friend and re-calculated the actual cost of his flat:

Total Cost (Flat in Hand) – Rs 34.4 lac

Downpayment – Rs 12.42 lac

Loan – Rs 22.00 lac

Total EMI Paid – Rs 25.73 lac

Total Initial Downpayment & Prepayments – Rs 18.67 lac

Actual Cost of Flat (excl. rent)- Rs 44.40 lac

Rent Received – Rs 11.36 lac

Net Amount Paid for Flat – Rs 33.04 lac

These are real numbers. Real actual numbers.

Let’s move further.

With the loan completed in almost 9 years time, and with the general assumption of property appreciation, we expected the property to fetch at least double the investment (value) of net amount paid for the flat.

So we expected Rs 66 lac from the sale of the property.

However, we did not find a single buyer even at Rs 55 lac!!

From the local brokers and available market information, we got to know that the property could be sold immediately for Rs 40 to 42 lac and if we were lucky, it can be sold for a stretched value of Rs 45-48 lac (let’s say max Rs 50 lac). Also, there will be capital gains tax on the profit amount.

While it is concerning that there was no value appreciation despite the area is connected and having all the basic amenities in the near vicinity, I decided to take this as a case study to see an alternative scenario – where investments had been made in Mutual Funds. I wanted to know what would have been the outcome.

Mutual Fund Investment

I chose 3 funds to feed the investment data in MF (same amount invested as EMI, downpayment and prepayment on the same date as the loan payments were made).

The choice of funds were as follows:

  • 1 decent performing fund (Franklin India Equity),
  • 1 market performer (UTI Nifty 50 Index Fund), and
  • 1 worst performing fund (LIC Multi-Cap Fund)

Since the direct plans weren’t available in 2010, regular plan (i.e. ones with higher fee and lower returns) were chosen for data crunching. So here are the details below (or you can skip and go straight to the summary just after the table):

Mutual Fund SIP vs Real Estate India

Summary of the above investment table is as follows:

Mutual Fund SIP vs Real Estate 2019

Conclusion:

From the table above, it is clearly evident that if instead of buying the flat, the investment was rather made in the worst performing mutual fund, it would still have given returns of Rs 55.5 lac against Rs 40-48 lac current market value of the flat.

Investment in the index fund would have fetched a much better Rs 67.94 lac. And if you luckily had invested in a very good fund, then it would have given you about Rs 78+ lac.

Not bad. Right?

I know what many of you might be thinking…

While we can debate the time of entry in mutual funds, time of entry or locality or high cost paid for the property etc., I still find merit in investing in Mutual Funds instead of Real Estate flats as an investment. And I very well know that irrespective of the above data favouring MFs, many will still argue in favour of the real estate. I leave the decision to you.

An important point that shouldn’t be missed in this Mutual fund vs real estate debate is the importance of selecting a good fund (or avoiding bad ones) for investment. And if we stretch this topic a little, it opens up another separate debate on the Active versus Passive Funds which I guess is best left for another post.

Note: In the calculation of Real Estate, the cost for Home Insurance, Home Maintenance, etc. was not included. Also, the Rs 2 Lac tax savings during this tenure was not considered as there will be a capital gain tax on property investment too. Equity investment until March-2018 were are tax-free and therefore, the tax implication would be negligible in case of equity investment in the above case study’s tenure.

Concluding Thoughts

As stated in the previous post on the debate of real estate vs mutual funds, I once again have the same concluding thoughts.

And this is a repetition of the earlier statement. One should not give any second thought about buying the 1st house/property for self-occupancy, whether it is with or without tax benefits.

However, based on the comparative analysis done above, one should think twice (or even ten times…) before buying a home for investment purpose. One should carefully weigh all the available data (Or as much reliable information you have) and then take a wise call.

Just because your friend or family members are investing in real estate does not mean that you should also do it.

Diversification aspect should also be looked at. But you should not avoid evaluating your own financial goals. This is extremely critical. And don’t just evaluate and feel helpless about it. Find out how you can plan to achieve them and then decide whether you actually need (or want) to ‘invest’ in real estate or not. Different people will get different answers.

Without doubt, a physical asset (like a house) will always give huge mental comfort and satisfaction over other financial assets like mutual funds. But it is also true that it may not always be the best available investment option. In fact, investing in house funded through a loan, is a huge long-term liability – which in many cases, chokes the person’s ability to save and invest for other goals in right instruments.

In my opinion (and it is mine so you can choose to ignore it), after the purchase of the 1st  property for self-use, if there is any surplus cash left to invest, you should invest it as per your asset allocation (which includes debt, equity, gold & real estate). If the asset allocation permits you to invest in real estate, you may very well do it. But if it doesn’t, then you should refrain from investing in it just because it’s what everyone else around you is doing.

And please, investing in real estate for the sake of saving taxes may not necessarily be the best thing to do. If need be, do not hesitate in taking financial advice to put in place a solid investment plan for your life.

As stated at the beginning of this article too, this is one hell of a controversial debate.

And there is no one straight-forward or logical answer to it. There are no thumb rules either. You and you alone can answer the question of Real Estate Vs Mutual Funds.

In this article (and in the earlier one), all I have tried is to attempt to clear the myth that “Real estate investing is the only best Investment Option” available for everyone. As you might have noticed (if you have spent some time reading the tables above), that all calculations have been done by estimating the returns net of expenses. We just cannot ignore expenses like those many who just tell you the number of times their property has appreciated in value. It’s not correct.

Hope you found this analysis interesting and useful.

State of Indian Stock Markets – September 2018

by Dev Ashish 2 Comments

This is the September 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.

So here are the Nifty 50 Heat Maps…

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

Historical Nifty PE 2018 September

P/E Ratio (on last day of September 2018): 26.44
P/E Ratio (on last day of August 2018): 28.40

The 12-month trend of P/E has been as follows:

 

Nifty 12 Month PE Trend September 2018

And here are the average figures of Nifty50’s PE for some recent periods:

Nifty Average PE Trends September 2018

Historical P/BV Ratios – Nifty 50

Historical Nifty Book Value 2018 September

P/BV Ratio (on last day of September 2018): 3.47
P/BV Ratio (on last day of August 2018): 3.76

Historical Dividend Yield – Nifty 50

Historical Nifty Dividend Yield 2018 September

Dividend Yield (on last day of September 2018): 1.23%
Dividend Yield (on last day of August 2018): 1.15%

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

Historical Nifty 500 PE 2018 September

P/E Ratio (on last day of September 2018): 30.2
P/E Ratio (on last day of August 2018): 34.5

Historical P/BV Ratios – Nifty 500

Historical Nifty 500 Book Value 2018 September

P/BV Ratio (on last day of September 2018): 3.24
P/BV Ratio (on last day of August 2018): 3.52

Historical Dividend Yield – Nifty 500

Historical Nifty 500 Dividend Yield 2018 September

Dividend Yield (on last day of September 2018): 1.15%
Dividend Yield (on last day of August 2018): 1.04%

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 returns 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: