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.
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.
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.
This is the July 2019 update for the State of Indian Stock Markets. This update includes the historical analysis (since 1999, i.e. about 20+ years) and Heat Maps for the key ratios like P/E, P/BV ratios and Dividend Yield for Nifty50 and Nifty500.
This time (and going forward) a new section on the last 12 month’s index movements and PE dynamics during the said period will also be analyzed. The analysis will be done on a rolling basis. That is, it will include monthly analysis (for each of the last 12 months) as well as analysis for specific periods like the last 1 month, last 3 months and last 6 months. This is being done to highlight (if any) the changes which become evident in market sentiment from a data perspective.
Before we move forward, please remember a few things:
The numbers shown in the analysis and tables below are averages of P/E, P/BV and Dividend Yield in each month (unless otherwise stated). Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.
National Stock Exchange (NSE) publishes index level PE ratios based on standalone numbers and not consolidated numbers. It would be ideal to use consolidated numbers as many Nifty companies now have subsidiaries that have a significant impact on overall earning numbers. This has a much larger effect now than it would have had in yesteryears. And more importantly, this will matter more and more going forward. But NSE (as of now) continues to publish Nifty PE using its own set of criteria and decisions and sticks with standalone figures.
Its possible that at times, some of the sectors in index get far more weight than is prudent to give. And its also possible that at the very same time, their earnings may be unexpectedly high or low. If and when this happens, the index level earnings will be impacted accordingly due to higher-than-necessary sector weight – which in turn may skew the PE data at that point of time.
Similar to the point discussed above, it is also possible that at times, some (or few) individual index constituents might have high earning or market cap at an individual level(s) which might, to some extent, skew the PE data at the index level as well. The possibility of this happening is rare but still non-zero as the period under consideration is generally long term here.
Caution – Never make any investment decision based on just one or two ‘average’ indicators (here’s Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
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:
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:
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):
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
P/BV Ratio (on the last day of July 2019): 3.45
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of July 2019): 1.33%
That was all about Nifty50 – the more popular bellwether index of India.
Now let’s do a historical analysis of the larger space, i.e. Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 96.1% of the free-float market capitalization of the stocks listed on NSE (March 2019). Nifty50, on the other hand, is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 66.8% of the free-float market capitalization of the NSE listed stocks (March 2019).
So obviously, Nifty500 is a much broader index than Nifty50.
So let’s see…
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of July 2019): 29.25
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of July 2019): 3.14
Historical Dividend Yield – Nifty 500
Dividend Yield (on the last day of July 2019): 1.29%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the actual investments have been made (at various P/E, P/BV and Dividend Yield levels), it is strongly suggested that this article may be read and referred to regularly:
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.
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:
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:
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:
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.
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:
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.
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.
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…
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.
Now let’s look at the numbers below (if you are interested in the actual loan cashflow data):
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):
Summary of the above investment table is as follows:
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.
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.
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.
So if you understand the whole premise of asset allocation and also understand the need to have debt in the investment portfolio, then PPF is a great option. (Try thisPPF excel calculator). But ignoring equities just because it can be volatile in short term is not wise.
Equity will go up as well as down. It is in its nature. It’s not a bank FD. But if you stick to it for long, the returns delivered are much higher than debt products.
And that is what I wanted to convince my relative about.
He seems to be convinced now. Whether he takes any action on this new found conviction is another matter.
I also shared with him the idea of investing on a monthly basis viaSIP in equity funds if he (like most people) doesn’t have lumpsum amounts to invest. He got inspired by the severalSIP success storiesthat one can easily find.
So if you too feel that someone needs a little push to consider equity for long term investments, then you can use the examples above to convince them.
It instead means that he will get something like this:
-5%, 22%, 4%, 13%, -17%, 57%, 10%, 19%, -12%, 29%
Or let’s put it this way:
Related to the actual sequence of return an investor gets in real life, I came across an interesting post that talks about how the end-portfolio size differs depending on whether the investor gets strong early returns vs strong late returns.
What is the difference you may ask…
This simply means that in one case, you get good returns in early years while in other, you get good returns in later years.
Does it matter?
Yes indeed… as you will see soon in the remainder of this post.
Good Later Years – You earn 7% every year in the first 15 years and 14% every year during the next 15 years, on your investments.
Good Early Years – You earn 14% every year in the first 15 years and 7% every year during the next 15 years, on your investments.
What will be the value of your portfolio after 30 years in either case?
Rs 5.81 crore after 30 years (for sequence 7% followed by 14%)
Rs 3.95 crore after 30 years (for sequence 14% followed by 7%)
That’s a large difference of about Rs 1.86 crore!
And that too for the same ‘average return’ during the 30 year period. Isn’t it?
Many of you may have guessed the reason.
It is because of the Sequence of Returns you get. That is, the order of annual returns that your portfolio is subjected to.
In the first case (where portfolio grows to a larger Rs 5.81 crore), you get strong late returns – due to which, a bigger corpus earns better returns (14%) in the later years. Whereas in the second case (where portfolio grows to a comparatively smaller Rs 3.95 crore), you get strong early returns – due to which, a smaller corpus earns better returns (14%) early on while the bigger corpus earns lower returns (7%) in later years.
And how do these two cases compare with the actual average return (10.5%)?
Here is how different the 3 scenarios end up looking, even though all have the same exact average returns:
And this is exactly what I wanted to highlight.
The sequence of returns that investor gets has a big impact on the final overall portfolio size.
You may be hoping to get a portfolio size based on your average return assumption. But the actual size may vary even though average returns are same, due to a different sequence of returns your portfolio undergoes. Averages and Actual differ (River Depth example).
And let’s take this a step further.
Let’s see how the actual investment in Sensex in the last 20 years fared when compared to the reverse sequence of returns.
In this scenario analysis, Rs 2.4 lakh (or Rs 20,000 per month) is invested in Sensex every year during the last 20 years. The sequence of returns that are given in the second column in the image below are the actual Sensex returns in the last 20 years. The value of portfolio changes as depicted by the green line in graph below. Also, a portfolio that runs on the basis of the reverse Sensex returns (the returns have been reversed in the third column) is shown as the blue line in the graph.
As you can see, depending on the different sequence of returns considered (one real other reversed), the portfolio value varies every year and also, the final values are different.
So the sequence of returns does matter a lot.
All said and done, can anything be done for this?
To be honest, it’s difficult.
You don’t get to decide what sequence of market returns you get in future.
You don’t get to decide what sequence of market returns you get in future.
This simply but unfortunately means that we have no control over the sequence of returns in the markets.
It is possible that some of you may get better markets early in your investing career and worse ones later. Or if powers above favour you, then you may have not-so-great market returns during initial years but super returns in later ones. This is the very reason why young investors should pray for bad markets in initial years. It may be painful and may not be for everyone, but it’s a wonderful thing for real long-term investors.
But even though we cannot control the sequence of returns, we can manage the risk to some extent.
At times, using market valuations as an indicator can help you estimate the possibility of a weak or a strong market in the coming years and rebalance your portfolio accordingly. By doing this, only a part of the portfolio may be exposed to market returns when required tactically.
So to more practically manage the Sequence of Return Risk, you should be slightly conservative in your return expectations. It’s better to have lower return expectations and save more than having higher return expectations and saving less but getting shocked later on when it is already late to do anything.
Health insurance is like an umbrella – something that you don’t need every day; but once in a while when it rains, it really saves the day for you. On all other days, you won’t miss it. But when it rains and if you don’t have it, you will feel its need.
And besides the obvious medical coverage, health insurance plans also provide tax benefits to you.
Luckily, under Section 80D of the Income Tax Act, you get tax benefits for expenses towards health insurance premiums, preventive health checkup and other medical expenses.
Since most of you will not be hospitalized ever (I hope so!), you would be more interested in the tax benefits on the medical insurance premiums. And yes, indeed the premium paid towards health insurance is tax deductible under section 80D of the Income Tax Act, 1961.
Let’s move on and understand the tax benefits on health insurance in a bit more detail.
What is Section 80D that gives Tax Benefits on Health & Medical Insurance?
Why would you want to pay big hospital bills when you can buy medical insurance by paying a small premium to cover that risk.
Imagine not buying health insurance and saving Rs 10,000 for 3-4 years and then getting hospitalized with a big bill of Rs 5 lakh. All small savings you made by ‘not buying’ health insurance is screwed up with a medical bill several times larger.
Unfortunately, most Indians still don’t see it like that.
They feel its an unnecessary expense and waste of money. Luckily, our governments have offered additional freebies in form of tax benefits to push people to buy health insurance.
And this benefit is offered via the Section 80D of the Income Tax Act, 1961 which relates to the tax deductions on medical insurance.
Section 80D specifically provides deduction in taxable income to the extent of the premiums paid on the purchase of health insurance or medical insurance or mediclaim products.
It even includes the premiums paid for the health insurance of your parents, children and spouse (wife/ husband).
And it doesn’t matter whether you purchase health insurance through a person or go for an online health insurance cover which are gaining popularity these days. You will get tax benefits in either case.
Also, the tax benefits under Section 80D are over and above the benefits under other sections like Section 80C.
Who is eligible for Tax Benefits under Section 80D?
If you are paying premiums for health or medical insurance purchased for the following, you will get tax benefits under section 80D:
What about other family members?
Like, let’s say your brothers, sisters, father-in-law, mother-in-law, uncles, aunts, cousins, etc.?
Health insurance premium paid for any other person is not eligible for tax deduction. But you can ofcourse include other family members in the health insurance coverage if you wish to. It is just that the premium paid for them cannot be considered for tax benefits.
Maximum Deduction Limit under Section 80D for FY 2018-19 (AY 2019-20)
There are several different types of deductions that you can be claimed for tax benefits under Section 80D:
Tax deduction on health insurance premiums paid for yourself, spouse & children
Tax deduction on health insurance premiums paid for parents
Tax deduction on medical expenses of super senior citizens
Tax deduction on preventive health check-up expenses
Let’s have a look at each of these in detail:
Tax Deduction on Health Insurance Premiums Paid for Self, Spouse & Children (Family):
If you pay the premium for health insurance taken for you, spouse and children, then you can claim a total deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20).
If you or spouse is a senior citizen, then you can claim a higher total deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised upwards in the past years. Earlier (in FY 2017-18 AY 2018-19), if you or spouse were a senior citizen, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.
In addition to the above deduction, you can also get tax deductions for premiums paid for parents.
Tax Deduction on Health Insurance Premium Paid for Parents:
If you pay the premium for medical or health insurance of your parents’, then you can claim deductions as follows:
If both parents are not senior citizens (< 60 years), then you can claim a deduction of up to Rs 25,000 for FY 2018-19 (AY 2019-20)
If even one parent is a senior citizen (>=60 years), then you can claim a deduction of up to Rs 50,000 for FY 2018-19 (AY 2019-20). This limit for senior citizen was revised in the past year. Earlier (in FY 2017-18 AY 2018-19), if your parents were senior citizens, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.
It is worth noting that while claiming deductions under Section 80D, you cannot include premiums paid for children who are earning. But you can still claim the benefit for earning spouse and parents.
Tax Deduction on Preventive Health Checkup Expenses:
If you spend money on getting health checkups done during the financial year, then you can also claim a deduction of up to Rs 5000 for preventive health checkup for self, spouse and children under Section 80D.
But this is not an additional benefit but is inclusive within the overall limits discussed above. That is, the total tax benefit for health insurance premium and preventive health checkup is limited to Rs 25,000 (or Rs 50,000), as the case may be. Remember that the limit of Rs 5000 is the maximum total deduction allowed for preventive health check-ups.
Also, this deduction cannot be claimed on a per person basis but as an aggregate option available – so the total deduction allowed cannot be more than Rs 5000.
For example – Suppose you pay a health insurance premium of Rs 21,000 for self, wife and children. In addition, you also get yourself a preventive health checkup that costs Rs 6000. Now, how much tax deduction are you eligible for? You are allowed a maximum deduction of Rs 25,000 under Section 80D. So you get a deduction of Rs 21,000 towards insurance premiums paid; and Rs 4000 for expenses towards preventive health check-up. The deduction towards preventive health check-up has been restricted to Rs 4000 (against your actual expense of Rs 6000) as the overall deduction cannot exceed Rs 25,000 in this case (i.e. Rs 21,000 + Rs 4000).
Side Note – As you cross 35-40, it actually makes sense to get yourself evaluated medically atleast once a year so that any condition/disease in its early stages can be better handled and addressed appropriately. So this tax deduction on preventive health check-up expenses under section 80D also has positive health side effects!
Tax Deduction on Medical Expenses for Uninsured Senior Citizens (>= 60 years) (Section 80D) – You or Parents
If you or any of your parents are a senior citizen, i.e. above 60 years, and have not purchased any health or medical insurance, then you can avail a deduction for any medical expenditure incurred up to Rs 50,000 in FY 2018-19 (AY 2019-20).
Remember, to claim this deduction for actual medical expense, the concerned person must be a senior citizen (you, spouse or parents) and also uninsured (i.e. no premium should have been paid for any health insurance).
Before FY2018-19 and till FY2017-18, this rule was applicable for uninsured ‘very senior’ citizen (above 80 years) and the limit was set at Rs 30,000 per financial year. Now, this benefit is available to younger(!) senior citizens (who are above 60 years) too.
So let me summarize the Income Tax deduction of Health Insurance Premiums in India.
Tax Deductions under Section 80D for Health Insurance (Financial Year 2018-19 or Assessment Year 2019-20)
The table below lists the tax deduction limits applicable to health insurance premiums (for the financial year 2018-2019 or assessment year 2019-2020):
So what will be combined limits on tax deductions for a family with self, spouse, children and parents?
If you, spouse, children and parents are all below 60 years of age, then the total limit is Rs 25,000 + Rs 25,000 = Rs 50,000 under Section 80D
If you, spouse, children are below 60 years; and if even one of your parents is above 60 years of age, then the total limit is Rs 25,000 + Rs 50,000 = Rs 75,000 under Section 80D
If any of you or spouse is above age 60; and if even one of your parents is also above 60 years of age, then the total limit is Rs 50,000 + Rs 50,000 = Rs 1,00,000 Rs 1 lakh under Section 80D
But please do remember that these are maximum limits specified under Section 80D. If the actual premium paid is less than the limits, then the benefit will be limited to the actual premiums paid only.
To further aid the understanding, allow me to share a few examples.
Examples of Medical Insurance Premiums & Section 80D Tax Benefits
Case 1: You (28), Spouse (27), Child (2), Father (58), Mother (56)
You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 25,000 towards health insurance premium and checkup for parents. Since no one in the family has attained 60 years of age, the total deduction eligible under Section 80D is Rs 50,000 for the financial year.
Case 2: You (31), Spouse (29), Child (4), Father (63), Mother (58)
You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one of the parent is above 60). Since one of the parents has attained the age of 60, the total deduction eligible under Section 80D is Rs 75,000 for the financial year.
Case 3: You (61), Spouse (55), Father (82), Mother (79)
You are eligible for Rs 50,000 towards health insurance premium and checkup for self and spouse as you are in senior citizen category yourself. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one or both the parent are above 60). Since both you and your parents have crossed the age of 60, the total deduction eligible under Section 80D is Rs 1,00,000 or Rs 1 lakh for the financial year.
Sample Calculation of Tax Deductions under Section 80D
Suppose you are aged 38, your wife is 35, son is 8 and daughter is 5 years old.
You have taken a health insurance plan for all for of you that has an annual premium of Rs 23,000. In addition, you had to pay Rs 8000 for preventive health checkup during the financial year.
In addition, your parents aged 66 and 59 are also dependent on you. For insuring their health, you have taken a health cover for them separately for which the premium is Rs 57,000.
So what all tax deductions can be claimed by you for the financial year under Section 80D?
For Self (+ spouse + children) – All of you are under the age of 60. You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. Since the premium + health checkup costs exceed the limit (Rs 23,000 + Rs 8000 = Rs 31,000), the benefit available will be limited to Rs 25,000 only.
For Parents – One of the parents is above 60 and hence, senior citizen. Since you are paying medical insurance premium for them, you are eligible for Rs 50,000 towards health insurance premium. Since the premium exceeds the limit (Rs 57,000), the benefit available will be limited to Rs 50,000 only.
Therefore, the total deduction available in this case will be Rs 25,000 + Rs 50,000 = Rs 75,000 only.
I hope this fully explains everything there is about the tax savings that you can do with your health insurance under Section 80D.
So let’s move on…
Tax benefit on Multi-year Health Insurance policy under Section 80D
Many people pay health insurance premiums for several years in one go as there are discounts on offer for multi-year health insurance policies.
If that’s the case, then the tax deduction is allowed proportionately over the years for which the benefit of health insurance is available, subject obviously to the overall limit for each financial year).
So let’s say you are 35 years old (i.e. less than 60 years) and your health insurance policy for 1 year has a premium of Rs 15,000 and that for 2 years us Rs 27,000.
So if you go for the 2-year health insurance plan and pay the premium for two years in one financial year itself, then what will be the tax deductions eligible?
Since current rules state that an individual is allowed to claim a deduction of up to Rs 25,000 in a financial year, you will be allowed to claim the total premium paid, but proportionately, over the 2-year period. This means that you will get a tax deduction of Rs 13,500 each (Rs 27,000 divided by 2) in both the financial years.
More things to know about Section 80D tax benefits
It is not necessary to claim deduction using just one policy. You can claim deductions under multiple policies subject to overall limits of Rs 25,000 or Rs 50,000 as explained earlier.
The group health insurance premium paid by your employer is not eligible for deduction under Section 80D. However, if you pay an additional premium to increase the coverage of the existing group cover, then you can claim the deduction against this additional contribution.
The premiums paid for Critical Illness policies are also eligible for tax benefits under Section 80D.
The premiums paid for Top-Up or Super Top-Up health insurance plans are also eligible for tax benefits under Section 80D.
If you have taken a Critical Illness rider as part of the life insurance policy, then the premium paid for the specific rider is eligible for tax deduction under Section 80D.
Whether you are paying a health insurance premium for the first time or you are paying the renewal premium for continuing your existing health insurance, you can claim deductions in either case.
As mentioned earlier, you cannot get benefits on health premiums paid for your brother or sister. You can also not claim benefits for premiums of your father-in-law and mother-in-law. But your spouse, if paying the premiums from her own taxable income, then the benefits can be claimed by your spouse.
A lot of people get confused between Section 80D and very popular Section 80C of the Income Tax Act. Let’s briefly see what is the major difference between the two.
On the other hand, Section 80D is, in addition, to limit of Section 80C and is meant exclusively for health insurance premiums paid and preventive health checkup, etc. The tax benefit available under Section 80D varies from Rs 25,000 to Rs 1 lakh subject to certain conditions.
I am sure that by now, you would have a clear idea about how to save taxes using health insurance in India.
But let me remind you that whether you get tax benefits or not, health insurance is extremely important.
It’s a must-have for everyone!
Why would anyone want to be penny-wise-pound-foolish and try their lucks? The medical costs are rising and just one visit to a hospital and hospital bill can set you back by a lot of money which will be much higher than the money you can save by avoiding health insurance.
If you are unlucky and end up in a hospital without health insurance, it can erode your hard-earned savings and plunge you in a financial crisis. So do not test your luck for saving just a few thousands.
Luckily in India, you are getting tax benefits on the health insurance premiums you pay.
So you have an added incentive there. You can maximize your tax savings by using health insurance for yourself, family and parents by paying the premiums.
The Section 80D of the Income Tax Act offers one of the best tax-saving benefits in India of up to Rs 1 lakh deduction specifically for premiums paid on the purchase of health insurance or medical insurance or mediclaim products. Do not ignore this tax benefit for your own good.
This is the February 2018 update for the State of Indian Stock Markets and includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.
Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers (Read why this may matter too).
Caution – Never make any investment decision based on just one or two ‘average’ indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.
P/E Ratio (on the last day of February 2019): 26.32P/E Ratio (on the last day of January 2019): 26.26
The 12-month trend of P/E has been as follows:
And here are the average figures of Nifty50’s PE for some recent periods:
Historical P/BV Ratios – Nifty 50
P/BV Ratio (on the last day of February 2019): 3.41P/BV Ratio (on the last day of January 2019): 3.37
Historical Dividend Yield – Nifty 50
Dividend Yield (on the last day of February 2019): 1.25% Dividend Yield (on the last day of January 2019): 1.25%
Now, to the historical analysis of Nifty500 companies…
As the name suggests, Nifty500 is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).
Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).
So obviously, Nifty500 is comparatively a much broader index than Nifty50.
Historical P/E Ratios – Nifty 500
P/E Ratio (on the last day of February 2019): 29.23P/E Ratio (on the last day of January 2019): 29.13
Historical P/BV Ratios – Nifty 500
P/BV Ratio (on the last day of February 2019): 3.17P/BV Ratio (on the last day of January 2019): 3.15
Historical Dividend Yield – Nifty 500
Dividend Yield (on last day of February 2019): 1.17%Dividend Yield (on last day of January 2019): 1.16%
You can read the previous update here. The State of Markets section has also been updated with new Nifty heat maps (link).
For a detailed analysis of how much return you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts: