SIP Vs Lump sum – Which is better in Mutual Funds Investing?

I don’t like such questions.

Is it better to invest lump sum or monthly SIP in mutual funds?

A lot of people ask me such questions – whether SIP (Systematic Investment Plan) is better than lump sum investing in mutual funds in India? Or whether lumpsum investing is better than mutual fund SIP?

Why I don’t like these questions (are SIPs better than lumpsum investments?) is because as usual, there is no one right answer here.

There are shades of grey and it isn’t exactly an ideal comparison.

People want to simply compare SIP vs one time investment in mutual funds or just want to find out which are top mutual funds for SIP in 2019 or best mutual funds for lump sum investment in 2019 and what not. But there are no perfect answers or ready lists that predict anything.

And let’s look at it from a common-sense perspective.

Before even getting into lump sum vs monthly investment debate, the decision to invest in lump sum or SIP depends on whether one actually has enough investible surplus that can be called as lumpsum!

Right?

If one doesn’t even have this ‘lump sum’ then this question of SIP or lump sum in itself is meaningless. It’s only when this ‘lumpsum’ is actually available that the question holds any relevance.

And once the lump sum is there, the next question should be whether investing in one go is better or whether it’s wiser to spread that lump sum over a short period of time, as there can be several best ways to invest a large sum of money in mutual funds. Just because the lump sum is available doesn’t mean that the money should be invested in one go. There are can various other tactics to deploy it more efficiently.

But nevertheless, there are those who prefer SIP (and have SIP success stories to tell) and there are those who prefer lump sum investing.

And to be honest, both methods work in different set of circumstances.

Let’s try to do this comparison as objectively as possible.

SIP vs Lumpsum in Rising (Bull) Markets

In a rising market, your lumpsum investments in mutual funds will produce higher returns than SIPs. That’s because the cost of purchase in a lumpsum investment in a rising market would always be lower than the average cost of purchase in SIP, which is spread out across higher and higher purchase prices for each SIP installment.

Let’s take a very simple hypothetical example to show this.

Suppose one investor invests Rs 5000 per month in a rising market for 12 months. While the other invests Rs 60,000 as lumpsum at the start itself. Both invest in mutual funds a total of Rs 60,000. Here is how it pans out over the next 12 months:

As can be seen above, the average cost (average NAV) for the SIP investor in a rising market is higher. And hence, the future hypothetical profit when sold later, will be lower for the SIP than that of the lumpsum investor.

Now let’s look at a falling market scenario.

SIP vs Lumpsum in Falling (Bear) Markets

In a falling market, the SIP investing would result in comparatively lower losses than that in lump sum. And that is because the cost of purchase in a lumpsum investment in a falling market would always be higher than the average cost of purchase in SIP.

Here is how it looks:

As can be seen, the average cost for the SIP investor in a falling market is lower. And hence, the future hypothetical profit when sold later, will be higher for the SIP investor than it is for the lumpsum investor.

So basically what is happening is that if the market grows continuously, then lump sum investing gives higher returns whereas if it falls continuously, then SIP investing is better (lesser losses than that of lumpsum investing in such scenario).

Ofcourse in practice, the markets neither go up nor go down continuously for very long. So the actual reality may be somewhere in between the two above discussed scenarios of sip vs one time investment in mutual funds.

In some cases, SIP may give better returns than lumpsum investing. While in other cases, lumpsum will give better return than SIP investing. And in many other cases, the result of both will be pretty similar.

It all depends on the future sequence of returns that the investor gets. If you want to know how much wealth your SIP will create, try using this SIP maturity value calculator.

But let me circle back to the original point I made – whether you invest lumpsum or otherwise first depends on whether you have a lumpsum or not.

Right?

And if you have, then obviously it would be wiser to just invest lumpsum when the market is low. Remember Buy-low-sell-high?

But problem is that you will never know when the market is really low. You can be wrong about your assessment and enter at precisely wrong times.

And that said, what about our ‘real’ nature and how we behave?

Most investors are unable to use common sense when their portfolios are down.

We know that the best returns come after markets have crashed.

But very few people have the guts to go out and invest more money (assuming they have more). Fear plays a major role in investing and unfortunately, you can neither back-test emotions nor fear. And you will only know in hindsight whether is it best time to invest in mutual funds or not.

Imagine investing lumpsum in December 2007 when markets were peaking and then helplessly witnessing the fall down till March 2009. On the other hand, if you invested a lump sum in March 2009 instead (at the bottom), you would have been called the next Warren Buffett!

Both are extreme examples but show how lumpsum investors potentially expose their portfolios to the vagaries of the market. There is always the risk of being completely wrong and mistiming. And that is the problem. To be fair, one can also get the timing right and if willing to spend sleepless nights in the short term, can go on to make much higher returns than usual in medium to longer term. But that’s how the dynamics of lumpsum investments are.

Due to their structural nature, SIPs reduce this risk of being completely wrong as the investments are spread out. So asking whether is this the right time to invest in SIP is immaterial as SIP spreads out your investments. Ofcourse your returns will depend on how the markets play out during the spreading-out period. But that is how it is.

For small investors, SIP is also suitable from their cashflow perspective. They rarely have access to large lumpsum that is ‘surplus enough’ to be available for long term investing.

By putting away small amounts periodically, there isn’t a large pressure on their resources and no doubt is convenient. This is the reason that for small investors, SIP is their best bet even if not a perfect strategy.

Remember that SIP is a tool to optimize returns and match your investment needs to your cashflows. It is not a magician’s magic to generate superior returns to lumpsum investing. Read that again.

And it is for this reason that SIP is better suited when investing for long term goals like retirement planning, children’s future planning, etc.

One can use the SIP investing to slowly build up a large corpus over the years without straining the finances in present or worrying about timing the markets perfectly. You can try to use this sort of yearly SIP calculator to understand how much money you need to save for various financial goals.

I know that many of you are more focused on saving taxes.

And one popular way to save taxes these days is to go for best tax saving ELSS funds vs PPF. But there also, people tend to get confused whether to go for SIP or lump sum for ELSS when investing in top ELSS mutual funds. Nevertheless, the logic that we have been discussing till now remains the same irrespective of whether it’s an ELSS fund or a normal mutual fund.

Now let’s take a step further…

What if you have a lump sum that can be invested. Should you go ahead and invest it in one go or do something else?

Should you Invest Lump Sum In One Shot Or Systematically & Gradually?

A smart investor would recognize the market bottoming out and invest in one go. But we all aren’t smart. So if you aren’t sure if it’s the right time to invest in one go, you can even deploy your lump sum gradually.

There is no one single answer to which is the best method to invest a lump sum in mutual funds?

So depending on the market conditions, investor’s investment horizon and risk (and volatility) appetite, a deployment strategy may have to be worked out. This strategy may either aim for lowering risk or maximizing returns or a combination of the two.

One way is to put lump sum investment in debt mutual fund and gradually deploy the money using STP or Systematic Transfer Plan into an equity fund.

Different investor needs would demand different lumpsum deployment strategies.

Also, it’s important to invest in the right funds and build a solid mutual fund portfolio.

Even after the recent SEBI’s mutual fund cleanup exercise, there are still several categories and hundreds of funds out there.

Being a small investor, it can be daunting to find out which are the best SIP plans that can be considered for long term investments. Or for that matter to find out which are the best mutual funds for lumpsum investment or the best tax saving mutual funds in India or whether to do ELSS SIP or lump sum.

If you don’t know how to find good funds or need help with planning your investments, do get in touch with a capable advisor to help you. It is worth it.

Finally…

I am sorry if you did not find the one specific answer to your question of SIP or Lumpsum which is better for investing.

A direct comparison between SIP and lumpsum investing is neither fair nor accurately possible. And unless we know everything about the investor in question, one cannot say confidently which is better suited for whom.

You may feel that there is a secret to find the best time to invest in mutual funds India but there is no secret. Different investors need to follow different investment strategies for SIP and lump sum investing. And ofcourse an awareness of market conditions and how market history plays out is absolutely necessary. You can’t be blind to that.

All said and done, SIP is a comparatively safer option but we cannot deny that at times, lump sum investing will provide better returns if done correctly.

Which is better SIP or lump sum investment in top best mutual funds in 2019?

This may sound repetitive but the truth is the superiority of SIP over lump sum or of lumpsum investments over SIP varies under different conditions.

Is SIP better than one time investment? Or lump sum is better than SIP? Systematic Investment Plan vs Lump sum Investment? It is all a matter of probability and what is the sequence of returns that comes in future and how investor behaves during the period in consideration. That’s all there is to it.

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PPF vs ELSS – Which is better for Tax Saving investments?

Should I invest in PPF or ELSS to save taxes?

This is a common question that I am asked quite often, more so during the tax saving season.

Choosing between the ever so popular Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS).

To be fair, comparing one to the other isn’t exactly correct. But I will get to that in a bit.

If you think about it, the main motive behind such PPF vs ELSS questions is fairly obvious – the more tax you pay, the less money remains in your hands. So you will naturally try to find ways to save more taxes. And if these tax saving efforts can help you earn good returns, then nothing like it. Isn’t it?

Unfortunately, people want a clear-cut, crisp, one-word answer to such ELSS vs PPF questions.

But that’s easier said than done. Things aren’t always black and white. There are hundreds of shades of greys in between.

Another question derived from the earlier one is whether doing SIP in ELSS funds is better than investing in PPF every month?

Those who are risk averse obviously feel PPF is a better savings option. While those who have got good returns from ELSS funds in the past (or know that equity is the best asset to create long-term wealth) advocate going for SIP in ELSS funds.

And here is an interesting fact: the number of such PPF vs tax saving ELSS debates rises during the tax saving season. J People are in a mad rush to do some glamorous, last-minute tax savings and portray themselves as financial superheroes!

But last-minute tax saving efforts near the end of the financial year is a recipe for disaster.

Many end up buying shi*** traditional insurance policies to save tax. That’s even worse than being wrong about choosing between ELSS and PPF.

But let’s not digress and instead focus on the main questions at hand:

  • Is ELSS mutual fund better tax-saving investment option than PPF (Public Provident Fund)? Or
  • Is PPF better tax-saving option than ELSS funds (Equity Linked Saving Schemes)?

No doubt both are very popular.

And when you ask people about the best tax saving investment options, chances are high that you will get either ELSS or PPF as the answer.

But as I said earlier, there is no perfect or one clearly defined right or wrong answer to this debate.

Ofcourse if you pick just one of the several parameters, you are bound to find one clear winner. But that is not the right approach.

But let’s begin the comparison anyway…

Most people prefer to compare returns.

Unfortunately, that is neither wise nor a fair comparison.

PPF as a product is extremely safe and gives assured returns whereas returns from ELSS depend on the performance of the stock markets. So the returns of ELSS can be very high or very low and fluctuate somewhere in between.

Both are completely different products and target different needs of a portfolio. So we shouldn’t even be comparing them!

But people do and will continue to compare.

And one very big reason why people compare them is that both have a good and instant side-effect of providing tax-saving… that too under the same Section 80C of the Income Tax Act. Hence people tend to compare.

I know what you are thinking.

Firstly, we are concerned about tax-saving. Right? That’s common between ELSS and PPF. So nothing much to compare.

Next obvious choice is to compare returns. What else could it have been?

You are right to an extent.

But I am of this view that all investments should be linked to financial goals. Tax saving should not be the prime motive for most investors (Talking of goals, if you still aren’t sure which goals you are or should be targeting, I strongly suggest you use this FREE Excel-based Financial Goal Planner to find out what your real personal financial goals are.)

Your goals and investment horizon play a major role in defining how you invest. If investing for long-term goals, the investment portfolio should ideally have a larger equity component. Whereas when saving for short-term goals, it should be a less volatile and debt-heavy portfolio. The asset allocation differs for different financial goals. That’s how it should be.

I will not delve into the full details of what PPF is or what tax-saving ELSS funds are. I am sure you already know most things about them. But just to recap a bit:

  • PPF (or Public Provident Fund) is a government-backed debt product that assures returns that are declared from time to time. How much to invest in PPF to save tax? A maximum of Rs 1.5 lakh can be invested in lump sum or installments in one financial year. The lock-in period is 15 years and the account can be extended in blocks of 5 years multiple times after the original 15-year maturity period is over. Tax benefits for investment in PPF under Section 80C are limited to upto Rs 1.5 lakh.
  • ELSS (or Equity Linked Savings Scheme) is a diversified mutual fund that invests in stocks and also offers benefits under Section 80C. There is no limit on maximum investment but tax benefit is available only on Rs 1.5 lakh. The lock-in period is 3 years. Returns are neither guaranteed nor assured. They are market linked and (average returns) tend to beat inflation in the long term.

Comparison of Returns – ELSS vs PPF

As I have already said, comparing returns of PPF with ELSS isn’t 100% correct.

Both have very different investment objectives.

PPF is a debt product whose returns are fixed but limited due to its very nature. There is no potential for positive or negative surprises. You get what you are promised by the authorities. ELSS, on the other hand, is an equity product that aims to maximize returns. To achieve this aim, it takes risks which can turn out well at times and not turn out well at other times.

To give you some idea about how returns in ELSS funds and PPF differ every year, I have tabulated the annual returns of some of the popular tax-saving ELSS mutual funds in the table below:

The data has been sourced from Value Research. This is not a perfect comparison but is still good enough to give you a comparative snapshot. You can compare the year-wise returns and average category-return of these ELSS funds with PPF annual interest rates. This table will give you some idea about how the returns vary in reality, so I suggest you spend some time on it.

And the funds above are one of the best ELSS funds that have been in existence for last several years now. But do not think of this as an advice of best-ELSS-funds-to-invest kind of list. The data is just for illustration purposes.

But nevertheless, read the observations below:

  • PPF returns have mostly ranged from 8.0% to 8.7% in the recent past. To know more about PPF account interest rate in different banks, check the updated latest PPF interest rates.
  • The years with green colored PPF-return grids indicate that the PPF was the better performing when compared with other ELSS funds in that year. Like in 2008, PPF delivered 8% whereas the chosen set of ELSS funds gave average returns of -54% with individual funds delivering anything between -48% to -63%. Similarly in 2011, PPF did better than ELSS schemes.
  • The years with red PPF return grids show that ELSS gave higher returns than PPF in those years. For example: in 2017, ELSS returns ranged from 26% to 46%. Obviously PPF couldn’t match that with its 8%.
  • The smaller grids (max/min) show the maximum and minimum annual return for different ELSS funds for that given year.

It’s clear from above that depending on the market conditions, the ELSS returns can have wild fluctuations. PPF returns on the other hand are more or less constant due to government’s blessings.

So where PPF returns average around 8%, tax saving ELSS mutual funds have the potential to deliver a much superior return – a 12% to 15% average returns is possible, but not guaranteed. And the top best ELSS funds have given much better returns than these average returns.

So does it mean that you should simply dump PPF and start investing everything in ELSS funds?

Ofcourse not! The average return comparison of ELSS and PPF does seem to show that ELSS offers superior returns in the long run. But basing your investment decisions only on one factor is very risky. Here’s why.

Let’s check another aspect before we get judgmental.

A lot of people don’t invest in lumpsum and rather invest every month. So for them, it’s better to find out how SIP in ELSS funds Vs monthly PPF investment compares.

Let’s check that out too.

I have simulated Rs 10,000 monthly investment in Franklin India Tax Shield Fund* starting from January 2008 to December 2018. This is to be compared with Rs 10,000 per month savings in PPF for the same period.

*Chosen randomly from several ELSS funds. Don’t consider it as a recommendation.

The value of investment in Franklin’s ELSS fund at the end of 2018 would be about Rs 29-30 lakhs. On the other hand, the value of PPF corpus is 20-21 lakh.

Once again and maybe not surprisingly, it seems ELSS is the way to go.

You can also say that in the above case, the PPF-investor has actually lost out on more than 50% extra returns. (Rs 30 lakh – Rs 20 lakh)

Right?

But even if you see it highly possible that you will get more return on ELSS, you need to understand the short-term risks of investing in ELSS funds and how you react to such risks when you actually face them.

Here is why:

I have compared Rs 10,000 monthly SIP in Franklin Tax Shield vs monthly 10,000 savings in PPF starting from April 2007 (when the bull run was about to peak in coming months).

I chose that starting point because due to high returns from equity in recent past (2004-early-2007), many people would be attracted to stock markets and would be interested in ELSS – as it combined tax savings with much higher returns than PPF.

So here is a 2-year story – starting from April 2007 to March 2009:

In 2 years, the total contribution would have been Rs 2.4 lac in each.

And the value of ELSS investment would be Rs 1.6 lac and that of PPF would have been about Rs 2.6 lac (yellow cells in the bottom row).

Now think…

We know equity will do well in long term. That is what has been told and proven countless times

But how many people would remain convinced and loyal to that idea when their Rs 2.4 lakh investment goes down to Rs 1.6 lakh after 2 years?

They might be cursing themselves for ignoring PPF that would have saved them from such losses.

And this is what I wanted to highlight.

And no PPF vs ELSS calculator or SIP vs PPF calculator will tell you this. All such ELSS SIP investment calculators work on the principle of average returns which will not show the real picture.

Just looking at historical average returns, you might feel that investing 100% of the money in stock markets is the right way. But when markets correct, not many people have the ability to stay invested and accept the temporary losses, even though it is best for them.

Looking at the average long-term returns in isolation can give the wrong picture. Equity investing (directly or via mutual funds) does need a lot of will power to remain invested when markets are down. Not many people have it.

So is it better to invest in ELSS mutual funds SIP than in PPF?

It is true that investors of ELSS mutual funds are rewarded for accepting the short-term volatility. They are paid back handsomely as average return table above suggests. But when you invest in markets, you will face periods of stock market volatility every now and then. Like in 2008, the ELSS category fell by almost 50%. Again in 2011, the category average was about -24%.

Equity is perfectly fine for long-term investors and equity funds have given much better returns than PPF over long-term. But you just cannot ignore debt (like PPF) as the investors have different responses to volatility. Some might exit ELSS after 20-30% losses (which is normal in equities).

Another factor is that you don’t have to ‘choose’ anything in PPF. It’s simple.

But in ELSS funds, you have to choose the fund among many available ones. Is there any guarantee that you will be able to choose the right ELSS fund that will do well in future? Think about it. What if you picked the wrong funds?

That was about the comparison of investment returns of PPF vs ELSS mutual funds.

Let’s see other factors.

Tax Benefits on investments in ELSS Vs PPF

Both ELSS and PPF are quite tax efficient.

Under the Income Tax Act Section 80C, investment in ELSS mutual funds and PPF (Public Provident Fund) give you a full tax deduction upto Rs 1.5 lakh every financial year.

Under Section 80C, you cannot claim deduction of more than Rs 1.5 lac when investing in ELSS or/and PPF and/or other section-80 tax saving options.

Also, you cannot invest more than Rs 1.5 lakh in a PPF account in a year. But this restriction is not there in ELSS schemes. You can invest as much as you want, but the tax benefits available will be limited to Rs 1.5 lakh.

And let me answer two more questions that you might have:

  • Is maturity of PPF taxable or not?
  • Is maturity of ELSS taxable or not?

The answer is:

Lock In Period – PPF vs ELSS

A PPF account has a maturity period (lock-in) of 15 years. ELSS funds on the other hand have a lock in period of only 3 years. But wait. There is more to know than just that…

Assuming you make annual investments in PPF, only your first installment in locked-in for 15 years. The 2nd year installment is locked-in for 14 years. The 3rd year installment is locked-in for 13 years…and so on. Also, the PPF accounts that have completed 15-year lock-in and have been extended have a fresh lock-in of only 5-years.

In ELSS, each SIP installment has its own 3-year lock-in. many people get confused here. Do not think that lock in is valid on full amount that you have invested from the date of first investment in ELSS.

So first SIP in April 2017 will be locked in till April 2020. Second SIP in May 2017 will be locked-in till May 2020. And so on…

But let me remind you that equity is best suited for long-term. Like for periods exceeding 5 years. The money is locked for only 3 years in an ELSS fund. But even if the lock-in gets over after 3 years, you shouldn’t withdraw the funds and remain invested for as long as you don’t need the money.

As investors you need to be very clear that the asset that you are investing in is equity and thus you should be ready to stay invested for at least 5 to 7 years to get good returns.

What if you Invest 100% in PPF or 100% in ELSS?

These type of questions come from people who are unwilling to see the bigger picture and are only narrowly focusing and asking about PPF vs mutual funds which is better?

But neither approaches is advisable.

  • Is PPF a good option for investment?
  • Is ELSS a good option for investment?

Ofcourse yes.

But theoretically speaking, if you invest Rs 1.5 lakh in PPF every year for 15 years, your total corpus would be around Rs 43 lakh. You can use this Excel PPF Maturity Calculator to try out other scenarios (or find out how to save Rs 1 crore in PPF).

On the other hand, if you put in Rs 12,500 per month (= Rs 1.5 lakh per year) in ELSS funds, then your corpus after 15 years would be between Rs 60-82 lakh depending on assumed returns of 12-15%. Also check out How much to invest every month in ELSS funds for Rs 1 crore in 20 years.

Regular SIP in equity funds (both ELSS and non-ELSS) can create a lot of wealth in long run. Here is a good real-life success story of SIP-based Wealth Creation. To know how much wealth you can possibly create by investing small amounts every month, check out the following links:

Again, you might feel that why to use PPF when you can get more returns with ELSS.

But remember, PPF is a debt product and ELSS is an equity product. All goal-based investment portfolios are best constructed by diversifying across assets.

You should not be 100% in equities or 100% in debt.

It is not sensible either way.

For most people, the best approach is to invest in line with your goal requirements. Using the powerful concept of Goal based Investing, you find out how much you should be investing for each goal.

Let’s assume that the goal you have in mind is retirement planning – which is a nasty problem in itself.

It’s a big goal. And since for most people its decades away, its best served by an equity heavy portfolio.

For someone in 30s, it can be safely said that a portfolio with 70% equity and 30% debt is suitable.

And you also wish to save tax. Right?

So here is how to go about it:

  • You are investing for your financial goal of retirement planning.
  • After doing some calculations yourself (or taking help from an investment advisor), you have come to know that you need to invest Rs 20,000 every month in 70-30 Equity-Debt ratio.
  • That means investing Rs 14,000 in equity and Rs 6000 in debt every month.
  • But you are already making an EPF contribution of Rs 4000 every month. That also counts towards the 30% debt bucket.
  • EPF takes care of 48,000 under Section 80C tax saving options. Assuming you have a Rs 1 crore term insurance with Rs 12,000 annual premium, the total eligible deduction goes upto Rs 60,000 (48K+12K).
  • The remaining Rs 2000 per month (from debt) can be put in PPF. Or if you have the option of VPF, that’s better too. This totals to Rs 84,000.
  • And this increases eligible deductions to Rs 84,000 (48K+12K+24K). You need another Rs 66,000 for fully utilizing Section 80C limit.
  • You can now do a Rs 5500-6000 SIP in ELSS fund. That will take care of your tax-savings.
  • For the remaining Rs 8000-9000 (in equity bucket of Rs 14,000), you can choose other normal equity funds (non-ELSS). Or you can even do full Rs 14,000 SIP in ELSS funds.
  • All this is assuming that there aren’t any home loan tax benefits to accommodate.

The above approach is a very simple one.

And if you think like that, then you will easily get answers to questions like ‘how much should I invest in ELSS’ and ‘how much should I invest in PPF’?

But you don’t need to decide between PPF and ELSS because of just returns.

You instead simply need to focus on asset allocation (which is 70-30 in the above example). Therefore, the choice between doing SIP in ELSS funds and investing in PPF must also be seen in the context of overall portfolio asset allocation.

If there is room under the 30% debt bucket after deducting EPF contributions, you use PPF. For equity’s 70% bucket, you can use ELSS to the extent it is needed for tax saving.

And if your Section 80C limit of Rs 1.5 lac is fully utilized using EPF contributions, life insurance premiums and home loan principal repayment, there is no need for ELSS mutual funds investment. You can easily focus on non-tax saving equity funds instead.

But that doesn’t mean that you don’t invest for your goals. Tax-saving is not a financial goal. Just remember that.

The approach that I discussed above is in line with goal-based investment’s philosophy.

One simpler approach can be to take a middle path and do a 50-50 split between PPF and ELSS.

Another can be (for those who are interested in being more tactical about tax-saving) to use market valuations as an indicator to decide where to invest. If valuations are low, invest in ELSS. If valuations are very high, invest in PPF.

I am not suggesting that the tactical approach discussed above is a better way. Just highlighting that there can be multiple approaches. But most people are better off not trying to time the markets. 🙂

But the actual split between ELSS and PPF will depend on factors like your risk profile, existing assets, etc.

Just to reiterate, if you are young, keep a larger portion of your savings directed towards equity when investing for long term goals like retirement.

Both ELSS and PPF are suitable for retirement savings. But equity is better suited as long as you have several years left for the goal.

How to choose good Tax-Saving ELSS Mutual Funds?

Before even you consider ELSS as the choice for tax saving, do not forget that always invest in ELSS with a long-term perspective – something like 5+ years or even more.

Why?

Because ELSS is about equity investing. And equity as an asset class isn’t risk free. There is always a risk of loss of capital. But this risk is higher when you invest for short term. The longer your investment horizon, the lower is the risk of loss.

With that aside, how do we go about picking the best ELSS funds among all ELSS mutual fund schemes out there?

These days, the disclaimers about past performance not being necessarily sustained in the future fall on deaf ears.

So despite mutual fund companies highlighting great short term returns, you should focus on things that matter.

When looking for which ELSS funds to invest in for tax saving, keep the below discussed points in mind.

Depending solely on performance numbers from recent past can be misleading. Do not run after previous year’s best performing tax saving ELSS funds. Look for consistency in returns over several years. Has the fund been in the top quartile of its category for almost all the years? Has the fund protected the fall in poor markets? These are just some of the questions that should come to your mind when picking ELSS or building a proper mutual fund portfolio. You can even consult an investment advisor to find out these answers.

Also, all ELSS funds are not the same in terms of portfolio construction.

All ELSS funds are actively managed and its fund manager’s job to decide what to hold in fund’s portfolio. It can a portfolio with a bias towards large cap, midcaps, all caps or whatever.

What is worth remembering is that one ELSS fund’s investment mandate will not be the same as that of the ELSSs out there.

And there is absolutely no need to pick a new ELSS fund every year for your tax saving.

This often happens when you do last minute tax saving. You are in a hurry and want to find out the best performing ELSS fund on the basis of 1-year return. This is not advisable.

Over the years, investors end up with several ELSS schemes as they invest lump sums every year by picking one from the best performer of previous years. Like picking from Top ELSS Funds of 2018 or Top ELSS Funds of 2019.

But having more than 1 or 2 ELSS funds is useless. In any case, if you have other non-tax saving diversified mutual funds, having more ELSS funds will only lead to an overlap in your portfolio. Building a mutual fund portfolio isn’t tough but still people mess it up.

So don’t wait for January, February or March for planning your tax savings.

Do some homework earlier and find out how much is to be invested in ELSS in the year. And then begin investing in ELSS through SIP (systematic investment plans). This way, you would have time to pick good ELSS funds on the basis of long-term consistent performance. You will also benefit from averaging (and avoid timing the market through last minute lump sum investments).

We began this article with the question of whether to invest in PPF or ELSS to save taxes.

But as you have seen, both are completely different products. Both PPF and ELSS serve their own purposes when you combine goal-based investing with smart tax-saving strategies.

You should not decide randomly between ELSS or PPF. And there is no one-size-fits-all answer as both ELSS and PPF target different needs of the investment portfolio.

The decision should be made after you have a clear view of your financial goals and tax requirement.

But when it comes to combining equity investing with tax saving, there is no doubt that ELSS is good for long term investments. It scores well above several other tax saving products. And investing in ELSS through SIP (or systematic investment plans) over a long time horizon can help you do proper tax planning and financial goal planning.

If you have a well-thought out investment plan for your financial goals, you will not need to ask questions like which is a better investment option ELSS or PPF?

You don’t need to choose between the most suitable tax saver between ELSS vs PPF. That is because you will invest on basis of your goal-specific strategic allocation rather than randomly. And that is what goes a long way in sensible investment management and wealth creation. So taking sides on ELSS vs PPF is fine. But invest smartly and using correct goal-based approach.

SIP may not be perfect; but it’s Small Investor’s Best Bet

If you are a mutual fund SIP investor, you would already have been bombarded with thousands of articles about why mutual funds and more particularly mutual fund SIPs are great.

And that is true.

But I wanted to re-highlight this fact in a different light.

SIP is not perfect like the theoretical (but attractive) concept of Buying-Low-Selling-High. But still, it works best for small investors and is their best bet when it comes to equity investing.

I recently wrote an article for MoneyControl on this topic. If you wish to understand why SIP isn’t Perfect but still the small investor’s best bet, then please do read the article by clicking the link below:

[Click to read] – SIP isn’t Perfect; but it’s the Small Investor’s Best Bet

Hope you find the article useful.

Picking a Fund with 15% p.a. in 10 years Or a fund with 25% p.a. in 3 years?

That’s an interesting problem.

Neither 15% nor 25% can be called as bad returns. After all, risk free rates are at 8% or even less. But ofcourse, we are greedy and we prefer higher returns. Isn’t it?

I recently wrote an article for MoneyControl titled:

‘Which fund should you choose: A 15% annual return for 10 years or 25% annual return for 3 years?’

Here is a short snippet of the article…

_________________

To be fair, both 15% and 25% average annual returns are pretty decent.

And let’s accept that the former is more achievable than the latter in the long run. At least for those who know their fund managers aren’t Warren Buffett.

But jokes apart…

_________________

You can read the rest of the article by clicking the link below:

[Click to read] – Pick an MF with 15% p.a. in 10 years Vs an MF with 25% p.a in 3 years

Hope you find the article useful.


Mutual Fund AUM Data – Sept 2018 Quarter

I am planning to regularly track AMC level AUM data going forward. So hopefully, with each iteration, the information and details will increase.

Please do note that the AUM figures are average quarterly figures published by AMFI.

The table below shows AMC-wise average AUM during Jul-Sep 2018 quarter. It also compares these figures over the previous quarter (Mar-Jun 2018) and also with the same-quarter-previous-year (Jul-Sep 2017):

MF AUM India - Growth Sep 2018

Talking of the Top-3, the ICICI Prudential MF continued to lead with an AUM of Rs 3.10 lakh Cr followed by HDFC MF with Rs 3.06 lakh Cr and Aditya Birla Sun Life MF with Rs 2.54 lakh Cr. SBI MF with Rs 2.53 lakh Cr elevated itself to the 4th spot by replacing Reliance MF with Rs 2.40 lakh Cr.

These top 5 AMCs handle about 56.3% of the AUM.

And as expected, more than 95% of the industry AUM is handled by the top 20 AMCs:

MF AUM India - Sep 2018

Here is the list of all the active AMCs in Indian MF space:

  1. ICICI Prudential Asset Mgmt. Company Limited
  2. HDFC Asset Management Company Limited
  3. Aditya Birla Sun Life Asset Management Company Limited
  4. SBI Funds Management Private Limited
  5. Reliance Nippon Life Asset Management Limited
  6. UTI Asset Management Company Ltd.
  7. Kotak Mahindra Asset Management Company Limited
  8. Franklin Templeton Asset Management (India) Private Ltd.
  9. DSP Investment Managers Private Limited
  10. Axis Asset Management Company Ltd.
  11. L&T Investment Management Limited
  12. IDFC Asset Management Company Limited
  13. Tata Asset Management Limited
  14. Sundaram Asset Management Company Limited
  15. Invesco Asset Management (India) Private Limited
  16. DHFL Pramerica Asset Managers Private Limited
  17. Mirae Asset Global Investments (India) Pvt. Ltd.
  18. LIC Mutual Fund Asset Management Limited
  19. Motilal Oswal Asset Management Company Limited
  20. Edelweiss Asset Management Limited
  21. Canara Robeco Asset Management Company Limited
  22. Baroda Pioneer Asset Management Company Limited
  23. JM Financial Asset Management Limited
  24. HSBC Asset Management (India) Private Ltd.
  25. IDBI Asset Management Ltd.
  26. BNP Paribas Asset Management India Private Limited
  27. Indiabulls Asset Management Company Ltd.
  28. Principal Pnb Asset Management Co.Pvt. Ltd.
  29. BOI AXA Investment Managers Private Limited
  30. Union Asset Management Company Private Limited
  31. Mahindra Asset Management Company Pvt. Ltd.
  32. Essel Finance AMC Limited
  33. IL&FS Infra Asset Management Limited
  34. IIFL Asset Management Ltd.
  35. PPFAS Asset Management Pvt. Ltd.
  36. Quantum Asset Management Company Private Limited
  37. IIFCL Asset Management Co. Ltd.
  38. Taurus Asset Management Company Limited
  39. Quant Money Managers Limited
  40. Sahara Asset Management Company Private Limited
  41. Shriram Asset Management Co. Ltd.



How to build your Mutual Fund Portfolio from scratch?

How to build your mutual fund portfolio from scratch

Perfect Mutual Fund Portfolio.

Yes I know that you are looking for exactly that. 😉

But you need to understand that there is no such thing as a ‘perfect mutual fund portfolio’.

There can be numerous reasonably good portfolios, and there’s no one-size-fits-all.

I recently wrote an article for MoneyControl titled ‘How to build your Mutual Fund Portfolio from scratch?’

Here is a short snippet…

Wish to start building your mutual fund portfolio from scratch? Or maybe you already have purchased funds and want to reboot it?

There’s one thing you need to understand that…

You can read rest of the article by clicking the link below:

How to build your Mutual Fund Portfolio from scratch?

 


How much to invest for Rs 1 Crore in 20 years?

Becoming a crorepati is most people’s wish in India. Atleast for those who still aren’t. And as an investment advisor, I regularly come across questions like:

  • How to get Rs 1 crore in 20 Years by investing?
  • How much to invest in mutual funds every month to get Rs 1 crore in 20 years?
  • How much to invest in SIP to get Rs 1 crore?
  • How to save Rs 1 crore with mutual funds in 20 years?
  • How can I build a corpus of Rs 1 crore in 20 years?

Questions like these clearly tell that the figure of Rs 1 crore still attracts a lot of people. Many of whom continue searching for ways to become SIP crorepati as early as possible.

But why only this exact figure of Rs 1 crore and more importantly, is this amount actually enough?

To be fair, Rs 1 crore was a big amount in early years. But it will soon become a need for most people instead of the wish it is now. A crore today doesn’t mean as much as it used to mean till 10-15 years back.

So imagine what targeting something like Rs 1 crore after 20 years would mean. Not much maybe. But we will get to that a little later.

First let us try to answer the basic questions that people looking to become SIP crorepati have when trying to save Rs 1 crore in 20 years.

I understand that many of you would want to become a crorepati much faster and as soon as possible. But have patience. Good things take time (for most common people). So don’t expect any theoretical nonsense in this post like here are 5 simple tips to earn Rs 1 crore in 3 years kind of stuff.

I will simply share plain, hard numbers… as usual.

How much to invest to save Rs 1 crore in 20 years?

That is the key question.

And some of your next obvious questions would be:

  • How much should I invest every month to save Rs 1 crore in 20 years?
  • How can I save Rs 1 crore in 20 years?
  • How to get 1 Crore by investing in mutual funds?
  • How much to invest in SIP to get 1 crore?
  • SIP for Rs 1 crore
  • And many similar questions…

Given the investment horizon of 20 years, the best asset to invest in is equity. And for most common investors, the goal of Rs 1 Crore in 20 Years is best achieved by investing in equity mutual funds.

We can safely assume that during such long-term periods, equity can deliver about 11-12% average returns (based on historical nifty returns data). And if investment selection is better, achieving even higher rates of return is possible too.

So for the SIP crorepati calculator lovers, let’s see how much you need to invest every month to save Rs 1 crore in 20 years at different rates of returns:

That’s how much you need to invest every month to become a crorepati.

Do note that due to LTCG tax on equity investments, the actual amount that you need to invest will vary and will be slightly higher.

And as you might have already noticed, higher the return expectations, lower the required monthly investment.

But the problem with high return expectations is that it is seldom met. So even if some equity funds have managed to deliver a good 18-20% returns in the past, it is difficult to predict what returns these funds (or any other equity fund) will give over the next 20 years.

So by keeping our expectations low, the chances of ending up with less than Rs 1 crore are further reduced.

That said, it is advisable to have reasonable expectations when investing in equity.

Assuming you earn 12% average returns, then to accumulate Rs 1 crore in 20 years, you need to save about Rs 10-11,000 per month.

That is the required sip for 1 crore and is the exact amount to invest every month to become a SIP crorepati in 20 years.

In long term, equity is the best choice for investing; and for small investors, investing via small amounts monthly via SIP in equity mutual funds is the best bet.

And once you decide to go ahead with this approach to invest regularly, just stick with it. It works. Also, keep monitoring your mutual fund portfolio closely. There will be times when returns won’t be acceptable. That’s fine. There will be good days and there will be bad days. But what’s important is for you to stick around.

So now you have a clear idea about how much to save to have Rs 1 crore in 20 years. And as is clearly evident, it’s not difficult to become a mutual fund SIP crorepati as you have already heard in so many mutual fund SIP success stories.

But what if you are a conservative investor and don’t want to invest too much in equity?

If that’s the case, then you can still become a crorepati using PPF (Public Provident Fund).

You can try out this FREE PPF calculator (Download here) to do your own analysis or read this detailed post on How to save Rs 1 crore using PPF or How to become crorepati by investing in PPF. It will answer all your PPF crorepati related questions in detail.

But let’s come back to mutual funds.

It’s possible that people have other financial goals and do not have that much surplus every month to save Rs 1 crore in 20 years.

If that’s the case, then how do we get around that?

The answer lies in the scenario of Increasing SIP – Starting out with a much smaller SIP amount, investors can slowly increase monthly investments (as per their increasing income and comfort level) to achieve Rs 1 crore in 20 years at a much comfortable pace.

Here is what I am trying to say. You start small and invest more and more with each passing year.

Assuming the investment delivers 12% average returns, let us assume that you are able to increase your SIP by 5% every year.

So, in the first year you will have an SIP of Rs 7500 per month instead of Rs 10-11,000 for the fixed non-increasing SIP. In the second year, the Rs 7500 SIP will have to be increased by 5%, i.e. to about Rs 7900 and so on every year till the 20th year.

To summarize, if your investments earn 12% return and you have 20 years to save Rs 1 crore, you can take either of two options:

  • Invest Rs 10-11,000 every month continuously for 20 years via SIP
  • Start investing Rs 7500 every month in first year and increase this amount by 5% every year.

So as you have witnessed above, it’s not very difficult to accumulate Rs 1 Crore by investing properly in mutual funds via SIP.

The table shared earlier also acts as your crorepati calculator and tells the exact amount you need to invest per month to become Crorepati in 20 years. So hopefully, now you have some useful and actionable information regarding questions like:

  • How to get 1 Crore after 20 years?
  • Investing to create a corpus of Rs 1 crore in 20 years
  • Can I make a corpus of Rs 1 crore in 20 years?
  • How much should I invest in mutual funds to get Rs 1 Crore?

I have already mentioned that the best approach here is to take the equity route for this. Investing in mutual funds is a great way to build wealth. And the earlier you start the better it is. Here is a super proof for the same.

But I must say that picking the right mutual funds for portfolio is very important.

If you can do fund selection properly without being influenced by the wrong people or blindly following mutual fund star rating (which is wrong), then its fine. But if you genuinely need help and aren’t sure whether your investment plan is right or not, it is much better to get in touch with an investment advisor to help you with good recommended equity mutual fund portfolios that are based on your risk appetite and feasible SIP amounts.

To many, Rs. 1 crore may still look like a big scary figure which may also look unachievable. But don’t worry. You can reach that figure if you aim for that and invest sensibly towards it.

Can I reach Rs 1 Crore faster?

Yes you can.

Its possible if you do any or all of the following 3 things:

  • Invest higher amounts in SIP (see the impact in these examples)
  • Invest early and as soon as possible (Super example of starting early)
  • Invest and hope that the choice of your mutual fund schemes is such that it delivers higher than average (or benchmark beating) returns.

Or here is more help at hand for specific questions:

  • How to reach Rs 1 crore in 15 years
  • How to reach Rs 1 crore in 10 years
  • How to reach Rs 1 crore in 5 years

I know you want to run faster. You want to become a SIP crorepathi really fast. You even secretly search online for how to become crorepati calculator. I know it. 🙂

But let us be realistic.

If you wish to know answer to questions like how to become crorepati in 1 year, how to become crorepati in 2 years OR how to become crorepati in 3 years, then you either need to have a decently large amount to invest upfront or you need to be ready to invest a large amount regularly every month for next 1-3 years and hope for good sequence of returns in next few years. There is no other way to it.

But having said that, you should also understand that anything less than 5 years is not much suitable for equity investing.

So chances of achieving average equity returns (of 12-15%) may be lesser for such short period than those of longer periods like 10, 15 and 20 years.

What if your target is lower than Rs 1 Crore?

Perfectly fine.

Many of you may have questions like, how to make Rs 50 lakh in 10 years, how to make Rs 20 lakh in 5 years, etc. Here is more help at hand for specific questions:

  • How to reach Rs 50 lakh in 10 years
  • How to reach Rs 50 lakh in 5 years
  • How to reach Rs 25 lakh in 10 years
  • How to reach Rs 25 lakh in 5 years
  • How to reach Rs 20 lakh in 10 years
  • How to reach Rs 20 lakh in 5 years

Or if you wish to know how much money you can save up by investing a fixed amount every month, then you can use the links below:

Depending on the monthly SIP you choose, it will take you different durations to reach Rs 1 crore with various monthly SIP amount in chosen mutual funds.

And here is how much time it takes to save Rs 1 crore for different SIP investment amounts and different returns:

This image (shows approx. no. of years) and tells how much to invest in SIP to have Rs 1 crore in Mutual Funds.

What will be the Value of Rs 1 crore after 20 years?

Yes. This is indeed a very important question that all people looking to save Rs 1 crore should be asking.

Rs 1 crore may seem like a big amount today.

But after 20 years, it won’t be that big.

The value of 1 crore after 20 years will not be same as today. Rs 1 crore today IS NOT EQUAL TO Rs 1 crore after 20 years.

And that is obviously due to inflation. The value of money does not stay same forever.

And if you are a retirement saver who is asking ‘How much money is enough to retire in India?’ please understand that Rs 1 crore will be insufficient for your retirement. That won’t happen unless you have a very frugal lifestyle and you assume very low inflation levels in future. And Rs 1 crore will not last for very long.

To give you some perspective, here is the value of Rs 1 crore after 20 years of different inflation:

  • At 4% inflation – Value of Rs 1 crore today will be Rs 45 lakh then
  • At 6% inflation – Value of Rs 1 crore today will be Rs 31 lakh then
  • At 8% inflation – Value of Rs 1 crore today will be Rs 21 lakh then

So looking to how to become crorepati by SIP is fine. But just being a crorepati in future won’t be enough.

Inflation can screw up long term financial planning of people. So never ignore the impact of inflation when saving for your real financial goals.

You don’t want to miss out your goals because of it. So when tackling long-term goals like retirement planning, children’s education, etc., always factor in inflation.

For example – suppose the higher education for your son costs Rs 25 lakh today. But your son is just 2 years old today. So he would begin his higher studies when he turns 17-18, i.e. about 15 years later. But the cost of the course would not remain stable at Rs 25 lakh after 15 years. It will obviously increase. So if you begin saving for the goal of son’s higher education, better to target a inflation-adjusted figure for future.

I guess now you have all your answers to the question of how to become a crorepati in 20 years.

But I would still say one thing – when it comes to investing, it is best to focus on your financial goals and do Goal-based Financial Planning. Just randomly aiming for some figure like Rs 1 crore in 20 years or Rs 1 crore in 10 years or SIP for 1 crore may not help. That’s because you never know whether Rs 1 crore would be sufficient for you or not. And this problem is solved easily if goal-based investing route is taken.

I have been quite vocal about the idea of goal based investing for years now. For most people, it makes sense to identify their real financial goals and invest towards them properly.

So go ahead and please find out your financial goals first (use this Free Excel sheet for Goal Planning), understand how much you need to invest for those goals and then do it.

This is the best and highest probability way to achieve your financial goals.

But nevertheless if you aren’t a conservative saver who wishes to just become a crorepati by investing in PPF and rather want to become a mutual fund SIP crorepati and target some fixed figure – then now you have the answer to your question of How to save Rs 1 crore using mutual funds in 20 years OR How much to invest in mutual funds every month to accumulate Rs 1 crore in 20 years?

So go on and do what is needed. Don’t wait too much.

I pray that you all become crorepati and SIP crorepati and more importantly, aim and achieve your full financial freedom in future or even earlier via Early Retirement and not just have Rs 1 crore in 20 years.

Do you even have the ‘Right Mutual Funds’ in your portfolio?

 

Best Mutual Fund Portfolio

You have been investing in mutual funds for some time now.

But in last few months, 3 big changes took place. And all those changes can and will impact all mutual fund investors in big ways.

You remember the 3 changes…don’t you?

  • Introduction of Long-Term Capital Gains Tax on equity
  • Changes in existing Mutual Funds attributes due to SEBI’s categorization and rationalization push
  • Shift to TRI for performance benchmarking, which will reduce the so-called over-performance of the funds

I repeat. These are big changes.

Why?

I have already explained it in detail in the post titled MF Investors and 3 Big Changes that will Impact their Portfolio and Returns and here and here. So won’t repeat it here. But if you haven’t read these posts, please do so for your own good.

I am writing this post to bring in front some questions that need to be asked by all mutual fund investors NOW!

This ofcourse is not a comprehensive list.

But it will help you get started in the right direction. So here it is:

  • All future profits from the sale of mutual funds will attract LTCG tax. This means that you need to be careful so as to reduce the impact of this tax and allow more money to remain invested for longer (for compounding). This also means that you should be investing in funds, in which you can ‘ideally’ remain invested for long without much need of selling. So do you have such funds in your portfolio?
  • Have you been investing in flavor-of-the-season funds (or last year’s top equity fund) till now which required you to enter and exit every 1-2 years? If yes, then do you realize that this strategy may not work very well in future due to the impact of LTCG tax on each reshuffling of funds?
  • Do you understand that due to the two above-mentioned points, your portfolio should now be curated strategically to have funds that need comparatively less maintenance and can survive various market scenarios?
  • Do you know how to find such funds that fit into the above criteria (which have become more relevant now than ever before)?
  • After SEBI’s recent categorization & rationalization exercise, several funds have changed their mandates, categories, etc. This means that these funds will not be doing what they were doing till now (atleast to an extent). This also means that the returns delivered by these funds till now may not be possible in future. Do you know if these are the very funds that are still part of your portfolio?
  • Do you understand that not all funds have changed their mandates and categories in the SEBI-pushed rejig? So even though some funds may have to be kicked out of your portfolio, it is possible that many are still good enough to remain invested in. Do you know which funds?
  • Do you understand that some of the funds that you are holding may not remain in line with the asset allocation that you had initially bought them for? For example: Suppose you bought a fund that earlier was a multi-cap fund. But after the re-categorization, it has become a mid-cap fund. So going forward, about 60% of your money would be invested in mid-caps. This is not exactly what you bought the fund for. Isn’t it? Remember you bought it for its multi-cap(ness). So there will be a need to change the funds. Do you know which all of your existing funds have changed so much that they should be exited from?
  • Some of the funds, despite changing name and attributes and categories, may still be inherently doing what they were doing earlier. Therefore, no point exiting such funds. This is all the more important as exiting also means paying exit loads and additional taxes. So do you know which funds you hold are still the same even after getting their new clothes?
  • Do you know that after the change in benchmarking for mutual funds, it will be more difficult for the funds to beat their benchmarks like earlier? Fund managers will now have to work extra hard to deliver benchmark-beating returns. This will be difficult for them to manage on a consistent basis. So do you have funds that have been able to beat new TRI-based benchmarks in past? Do you even understand what I am talking about??
  • Do you understand that the two changes in combination, namely i) using TRI for benchmarking and, ii) limited universe of stocks available for fund managers to invest as per SEBI’s new guidelines, hints to the fact that more and more large-cap funds will find it difficult to beat their benchmarks? This also means that there is a case for investing in index funds for a subset of investors now. Do you realize why this might make sense for you too?

Thought provoking… Isn’t it?

Even I have reviewed my personal mutual fund portfolio in last few months and made changes where necessary.

It goes without saying that proper review of your existing mutual fund portfolio is now more necessary than ever before.

Chances are high that you may want (or have) to weed out unwanted schemes from your mutual fund portfolio as soon as possible.

I understand that you might be worried about exit loads and taxes. But these are short-term pains and frictional costs that must be borne for long-term course correction.

In fact, take it as a forced blessing-in-disguise. You are being forced to think properly about how to build a robust, all-weather mutual fund portfolio that is worth remaining invested in for several years.

So go on… identify funds that should be exited from your portfolio. Find out funds that are worth bringing in to your portfolio based on proper fund selection and above discussed questions.

Also ensure that your final fund portfolio (after all the changes) – maintains proper asset allocation, is reasonably diversified among various caps and fund houses, has funds that can be held for several years, doesn’t have adventurous funds which may cause regret in future, and most importantly is built on common-sense.

This is an opportune time for you to build a mutual fund portfolio wisely and safely and that is well-positioned to create wealth and achieve your financial goals.