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 lumpsum and prefer SIP 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.

How to use PPF to save Rs 1 Crore – Be PPF Crorepati

Rs 1 crore is still not a small amount. But whether it is sufficient or not depends on why you actually need it.

So for example, if you were to ask me whether Rs 1 crore is enough for retirement? In most cases, the answer would be a No. Retirement planning is a nasty problem and you can’t just ahead with random numbers for your retirement corpus.

But still, there is a psychological attraction to this figure of Rs 1 crore and becoming a crorepati that us Indians can relate to.

PPF is a beautiful debt product. I have already written about it earlier too (link).

And even though investing in equity is a necessity and highly advisable for the long term, a product like the PPF can still be a part of the overall portfolio. And I am sure the term PPF crorepati in the title would have already captured your interest by now. 🙂

However, PPF is not a short term investment option as it has a lock-in period of 15 years. But still, you can make partial withdrawal after few years. And You can even extend the maturity by a block of 5 years for multiple times. It currently falls under the ‘EEE’ category, which means that PPF contribution, interest earned on PPF and PPF maturity proceeds are exempted from tax.

Interestingly, a few days back I got a mail from a self-confessed conservative investor.

He said that he was slowly increasing his equity investments. But still he felt that he cannot part ways with something as sure-shot and as risk-free as a PPF account. And he wanted to know how long would it take to accumulate Rs 1 crore in PPF?

I felt that this question might interest others as well.

So this post is about finding out:

How to accumulate Rs 1 Crore in PPF (Public Provident Fund)?

And if you are low-risk conservative investor who wishes to accumulate Rs 1 Crore, then PPF is a decent option.

Let me try to answer this from various perspectives:

  • If you contribute Rs 1.5 lac every year for a period of 15 years, your PPF balance will be about Rs 43.9 lac at the end of 15 years (assuming a stable interest rate of 8.0% per annum).
  • If you contribute Rs 1.5 lac every year for a period of 15 years and then don’t liquidate your holding for another 15 years, then your PPF balance will be about Rs 1.39 crore at the end of 30 years (assuming a stable interest rate of 8.0% per annum). You will achieve the target of Rs 1 crore around the 27th year.
  • If you contribute Rs 1.5 lac every year for a period of 15+5+5+5=30 years, then your PPF balance will be about Rs 1.83 crore at the end of 30 years (assuming a stable PPF interest rate of 8.0% per annum). And you will reach Rs 1 crore during the 24th year itself.

But what if you are unable to invest Rs 1.5 lac every year (the full PPF annual limit), then obviously your target of reaching Rs 1 crore in PPF will be delayed accordingly.

Also, if the interest rates go down in years to come, then once again your target of reaching Rs 1 crore in PPF will be delayed to that extent.

So to sum it up, you can become a crorepati if you put Rs 1.5 lac every year in PPF then you can accumulate a corpus of Rs 1.08 crore by the end of the 24th year (assuming that 8% return)

But as you know, neither the PPF limit remains same nor PPF interest rates remain unchanged over the long term.

So let’s try a hypothetical scenario which might actually play out in the near future:

Suppose you begin saving full Rs 1.5 lac in PPF today. Government increases the annual PPF investment limit by Rs 50,000 every 5 years. It is assumed you will continue to invest as much as is needed to fully utilize the annual investment limit of PPF every year. The interest rates also reduce by an average 0.5% every 3 years or so.

What will be the result then?

At the end of 15th year, your total investment of Rs 30 lac would have become about Rs 49.4 lac.

If you continue investing (after extending your PPF account with contribution) for another 5+5+5=15 years, then at the end of 30th year, your total investment of Rs 82.5 lac would have become about Rs 2.02 crore.

Here is the tabular depiction of the excel:

As you might have observed by you, it is only after the initial few years that the actual compounding of the PPF investments becomes visible. And it is for this very reason that you should try not to disturb (withdraw from) your PPF account for as long as possible and try to extend its tenure after the first 15 years lock-in period.

Do you want to try some different scenarios of your own?

You can do so.

You can download this FREE Excel PPF Calculator and play around with inputs. If the previous link doesn’t work, use the link below:

Excel PPF Calculator (2019-20) Free Download

You can even check out historical PPF interest rate and how things have changed in the past when it comes to PPF.

Now, the current limit for PPF is Rs 1.5 lakh per year.

But what if you want to invest more?

Obviously, you need to respect the limit.

But if both husband and wife can contribute to PPF, then things can get fastened a bit.

Save Rs 1 crore Quickly using Husband PPF + Wife PPF

What needs to be done is that a PPF account needs to be opened for both you and your spouse.

Since both the husband and the wife can deposit Rs 1.5 lakh per annum, it means you can contribute Rs 3 lakh every year in PPF. And you will get interest in both these PPF accounts for the entire period of 15 years or more if extended.

So how much do you end up with if both you and spouse contribute Rs 1.5 lakh every year for 15 years?

The answer is Rs 43.9 lakh each, i.e. a total of Rs 87.8 lakh.

So if both of you save diligently, you can achieve Rs 1 Crore in about 17 years. Here is a sample depiction of PPF Husband Wife calculation:

So if you are a conservative investor, who isn’t much interested in volatile investment options, then PPF can be helpful. PPF can help you become a crorepati in a safe way.

  • If you put Rs 1.5 lakh every year in PPF, then you can accumulate a corpus of Rs 1 crore by the end of the 24th year.
  • If both you and your spouse put Rs 1.5 lakh each every year in individual PPFs, then you both accumulate a corpus of Rs 1 crore by the 17th year itself.

And if somehow you manage to continue investing for the 30 years (i.e. 15 years original and 3 extensions of 5 years each), then you will be able to accumulate a really big corpus.

So before I close, let me list down some facts about the PPF for your ready reference:

  • PPF Interest Rate – 8% (check PPF interest rate history)
  • PPF Duration – 15 years
  • Extension of PPF Account – After the maturity period of the original 15 years, it can be extended in blocks of 5 years each multiple times
  • Minimum deposit amount (per year):  Rs 500
  • Maximum deposit amount (per year) :  Rs 1,50,000
  • Number of installments every year: 1 (min) to 12 (max)
  • Number of accounts an individual can open: Only 1. If there is a 2nd PPF account, it is treated as invalid and doesn’t earn any interest.
  • Tax Savings – EEE status, i.e. the annual contribution (up to Rs 1.5 lakh) provides tax benefit under Section 80C. Interest earned and the maturity amount is fully exempted from taxes.
  • Interest on PPF is calculated on the minimum balance in the account between 5th and the last day of each month. So if you invest monthly, then it makes sense to do it before 5th every month.
  • You can further maximize your returns in PPF by investing the full amount at the beginning of the financial year itself. Ofcourse this is not easy for everyone. But if you do so, the full amount earns interest every month of the year.

Here is the link to download the free excel-based PPF Calculator again:

Excel PPF Calculator (2019-20) Free Download

Use the above excel with your own inputs and you can use it as a PPF crorepati calculator.

And before you accuse me of being too gung-ho about PPF, I repeat that equity is the best asset to create long-term wealth. You can become a crorepati by investing in mutual funds too. Here is How much to invest every month in mutual funds to get Rs 1 crore in 20 years.

Also, read how Rs 1 lakh invested every year for 20 years can create a Rs 90+ lakh portfolio without any problem

But let me tell you something.

Investing in equity does come with its own share of ups and downs in the near term. But if you look at the average annual returns of Indian Stock Market, then it will show how you can create some serious wealth from equity. The idea of this post was to tell how a comparatively safe and risk-free savings option like PPF can be used to accumulate a large corpus of PPF Rs 1 crore.

For most people, its advisable to have a balance between equity and debt when investing for long.

But if you aren’t sure whether you are saving and investing properly, do get in touch with an investment advisor soon (how?).


Nifty Annual Returns – Historical Analysis (Updated 2019-2020)

[Updated – January 2019]

What have been Nifty annual returns?

What has been Nifty 50 annual returns?

What have been Sensex annual returns?

What have been stock markets annual return given in last 1 year?

What have been Nifty returns since inception?

What have been Nifty returns in last 20 years?

What have been Nifty returns in last 10 years?

What has been Nifty CAGR or the average Nifty returns till now?

These are some questions that gain popularity as the year comes to an end.

During this time, we all have this uncontrollable urge to ‘know’ how markets have done in last one year. And how it compares to annual returns of the last few years.

Ofcourse, one should be interested more in how their portfolio is performing and whether they are on track to achieve the returns (%) required to achieve their financial goals.

But still, we do get attracted to annual return figures. Isn’t it?

So as we have completed another year, I have decided to analyse annual returns of widely tracked market index Nifty50 – a widely tracked index of the Indian stock markets, which is made up of shares of 50 largest Indian companies.

Nifty50 closed 2018 with gains of about 3.2%.

After a lot of upheavals and volatility, 2018 did not turn out to be a very great year for the markets. But this comes on the back of a good 2017 – which was the best since 2014 and second best since 2009!

How does this compare with the averages?

Nifty has a CAGR of 13.4% in the last 20 years (since 1998) and 13.89% in the last 10 years (since 2008).

But that is the nature of markets. The average figures will not be achieved every year. Also for SIP investors, it is important to understand that these returns will be different from your rolling SIP returns (but we will discuss that some other day).

So below is the Nifty historical chart showing annual Nifty returns since 1996 (i.e. 2+ decades):

Nifty Annual Yearly Returns 2018 2019

To see this from another perspective, have a look at the table below. It gives you the current value of Rs 1 lac invested in Nifty50 every year since 1995-96:

Nifty Annual Performance 2018 2019

As already mentioned, looking at average figures has its own pitfalls. An average of 12% annual returns might sound great on paper. But it requires you to witness -30%, +20%, 5%, -15%, 13%, etc. for few years. You won’t get that 12% fixed returns, no matter how much you want it. 🙂

So obviously, the 2-decade long journey has been a volatile one. In the last 22 years, we have had:

  • 16 years with positive returns
  • 7 years with negative returns

You might draw out the conclusion that more often than not, markets will give positive returns.

That is true. But how much of that return will be captured in your portfolio is another matter.

So if you had invested somewhere in 2002-2003, the annual index returns after that have been 3.3%, 71.9%, 10.7%, 36.3%, 39.8%, 54.8%. And this is not normal. This was unprecedented and chances are high that such a sequence of high positive returns, might not get repeated again for many years if not decades. So do not have such expectations of multi-year high returns from stock markets.

Infact, we should be ready to face ugly years like 2008-2009 – when index itself fell by more than 50% and individual stocks crashed by 80-90%. I have said countless times that one should invest more in market crashes or when everyone else is giving your reasons to not invest. But that is easier said than done. When a crisis like the one in 2008-2009 comes, it is not easy to combine your cash with courage.

Suggested Reading:

But that is what separates poor investors from good ones and, good ones from great ones.

Now we have seen Nifty’s historical annual returns for last 20+ years. But that gives us only 23 data points to look at (even though it covers Nifty returns since inception). And that is not sufficient to draw out any meaningful conclusions.

Ofcourse it is interesting to look at annual return figures. These give us a benchmark to compare our own portfolio’s performance.

But it is very important to understand what these annual figures won’t tell you. We can pick and choose data to prove almost anything – as it has been rightly said – “Torture numbers, and they’ll confess to anything.”

You might find people telling you that markets can give you 15-20% returns. And they might even show you data to prove it. But just picking one particular Nifty 5 year return period or even a 10-year period will never give you the complete picture. You need to see how markets have behaved in ‘all’ such 5-year and 10-year periods.

So when talking about annual returns, lets not just evaluate year-end figures. Instead, let’s analyse rolling 1-year returns. That will give us a better picture.

Nifty historical data is available starting from July 1990. So that is where we start.

Now to calculate one-year rolling returns, we pick every possible 1-year period between July 1990 and Dec-2017 (on a daily basis).

So we have the following:

  • 3rd-July-1990 to 3rd-July-1991 – 1st one-year period
  • 5th-July-1990 to 5th-July-1991 – 2nd one-year period
  • 29th-Dec-2017 to 31st-Dec-2018 – Last one-year period

In all, there were about 6641 rolling one-year periods.

And this is what Nifty did in these several thousands of one-year periods:

Nifty Rolling 1 Year Returns 2018

And here is the graph of these returns (since 1997):

Nifty Rolling 1 Year performance 2018

If you study the graph carefully, you will find interesting things. Some 1-year periods have seen returns of more than 100%. But there are also periods of major cuts (like the early 2000s and 2008-2009).

Now one obvious thing to note here is that when rolling returns are low for some time, then chances are high that rolling returns will increase in near future (as can be seen in sharp up moves after low returns in the above graph).

You might see it from the PE-lens of investing more at lower PEs or investing more when Nifty performance in last few years has not been good.

I leave it up to you to draw out your own conclusions.

Another important point to note here is that these graphs and tables are based on Nifty50 index levels. It does not reflect the impact of dividend reinvestments.

The index that captures ‘dividend reinvestments’ is called the Total Returns Index (TRI). So basically, Total Returns Index or TRI is Nifty including Dividends.

I won’t be doing the detailed annual or rolling annual return analysis of TRI here.

But to give you a perspective of how dividend reinvestment can impact your returns, I will compare the regular Nifty50 with TRI here:

Nifty Total Return Index 2018

As you can see, there is a decent difference in index levels (with and without dividend reinvestments). It is for this reason that one should try to reinvest the dividends as much as possible.

Now 2018 didn’t turn out to be a very good year for most market participants (after 2017 being a really good one).

But for long-term investors, a year of low returns would bring in a lot of opportunities if we are observant enough. And I am not just talking about index levels here. Even individual stocks offer various opportunities by oscillating between their 52-week highs and lows.

As for 2019, there is no point in predicting what will happen.

So let’s not rush and instead, wait for another 365 days to see how next year’s Nifty 50 annual returns turn out to be.

Note – If you want a similar analysis for Sensex annual returns, then do check out Sensex Annual Returns Analysis (20+ years).

Nifty Monthly Returns (updated 2017)

Updated – Nifty monthly returns data updated till October 2017.

Many people want to know the monthly returns generated by stock markets. Though these monthly returns don’t matter much to the long-term investors, it still makes for an interesting data point. Just like annual Nifty return numbers.

So if you too wish to know more about the Nifty monthly returns and how it compares with historical monthly returns data, then this post will be of interest to you.

Using publically available index data of Nifty returns since inception, you can easily find out historical monthly returns of Nifty. So below is a color-coded heat map based on Nifty’s monthly historical index data:

 

Nifty Monthly Returns Historical Data

nifty monthly returns

So that was about returns generated by Nifty in each calendar month since 1990. But should you really care about monthly returns of the indices?

Index performance is something that many people use to know how to compare their own performances with index returns. And no doubt it’s interesting. But I think that people who are not involved in the day-to-day market movements are better off managing their money by targeting their real life financial goals and investing regularly. Keeping track of annual Nifty returns is still fine. But monthly tracking may not be of much help for most people.

But nevertheless, some people love to know things. 🙂

And just to complete the data set, I have also calculated rolling quarterly, half yearly and annual returns for Nifty too:

Nifty Quarterly Returns Historical Data

Nifty Historical Quarterly Returns

Nifty Half Yearly Returns Historical Data

Nifty Half Yearly Returns

Nifty Yearly Returns Historical Data

Nifty Annual Yearly Returns

If you are more interested in Annual or yearly returns of Nifty 50, or Nifty’s performance in last 5 years or Nifty’s performance in last 10 years, then please check this post on Nifty Annual Returns.

Note – I will be updating this Nifty monthly returns post every few months.


PPF Maturity Excel Calculator (2019-20) – FREE Download

(PPF Interest Maturity Calculator – Updated 2019-2020)

PPF Calculator Excel Worksheet Download

Are you looking for a PPF Calculator that uses latest PPF interest rates (2019-20) to calculate the interest earned on PPF investments?

And you also want to know the answer to the big question – what will be PPF maturity amount?

If the answer to above questions is yes, then here is something that you will find useful.

I have created a comprehensive Excel-based PPF calculator that calculates the maturity amount and interest earned depending upon the type of investment you make (fixed or variable) in your PPF account. It also shows you the interest earned every year in the PPF account.

PPF (or Public Provident Fund) needs no introduction.

It is one of the most popular investment-cum-tax saving option among Indian savers.

It’s a tax-deductible investment option that offers reasonable tax-free returns to savers. And it is among the very few risk-free tax saving investment option for us Indian taxpayers (as it provides tax benefits under the Section 80C).

Many people ensure that they utilize the full investment limit of their PPF accounts every year. So naturally, they are concerned about the rate of interest on their PPF accounts and also about estimating the final PPF maturity amount.

I have created this excel based PPF calculator that can be useful if you wish to estimate how much money can be accumulated using your PPF account.

Using this calculator, you will easily find answers to questions like how much you can invest in PPF? How much interest is earned by PPF account? How will the investment grow over the years? The final PPF maturity amount?

And since you can control the investment as well as maturity tenure in the excel sheet, it can be your goto option if you are searching for:

  • PPF calculator for 15 years, or
  • PPF calculator for 20 years, or
  • PPF calculator for 25 years, or even
  • PPF calculator for 30 years

All you have to do is to provide few inputs and this PPF excel sheet will tell you everything you need to know about your PPF investments.

Decide your PPF investment frequency (Monthly, Quarterly, Half Yearly, Annual)

PPF Investment Frequency

Decide till when you wish to keep investing in PPF (15, 20, 25 or 30 years)

PPF Investment Tenure

Decide when you finally wish to withdraw money from PPF (end of 15th, 20th, 25th or 30th year)

PPF Withdrawals maturity

PPF accounts are opened for an initial term of 15 years and once the lock in period of 15 years is over, the subscriber can withdraw the full amount at the time of maturity.

PPF account withdrawal rules allow for partial withdrawals even before the 15-year lock-in is over. But we will ignore that scenario as we are concerned about estimating the maturity amount of an undisturbed and a fully funded PPF account.

Luckily, PPF rules allow that the account can be extended in blocks of 5 years.

PPF Subscribers can choose whether they want to extend with contributions or without contributions. So if you decide, you can continue investing even after the 15th year.

So using the two inputs of your investment period and maturity/withdrawal year in the calculator, you can figure out the final maturity amounts for the following combinations:

  • Invest in PPF for 15 years. Withdraw at end of 15th year
  • Invest in PPF for 15 years. Withdraw at end of 20th year
  • Invest in PPF for 15 years. Withdraw at end of 25th year
  • Invest in PPF for 15 years. Withdraw at end of 30th year
  • Invest in PPF for 20 years. Withdraw at end of 20th year
  • Invest in PPF for 20 years. Withdraw at end of 25th year
  • Invest in PPF for 20 years. Withdraw at end of 30th year
  • Invest in PPF for 25 years. Withdraw at end of 25th year
  • Invest in PPF for 25 years. Withdraw at end of 30th year
  • Invest in PPF for 30 years. Withdraw at end of 30th year

Apart from this, the calculator also gives the option of setting the annual investment limits and interest rates (yellow cells) for each year separately.

PPF Investment Limit Interest

Both the PPF account interest rate and annual investment limits can be varied for each financial year.

This is useful as the government is known to increase the maximum annual limit of PPF deposit every few years.

Currently, the maximum PPF investment limit per year is Rs 1.5 lakh. You can try out scenarios where this annual PPF limit is increased by say Rs 50,000 every 3-4 years.

Note – The calculator assumes that you would invest the full amount as prescribed by the limit. But you can play around with the excel sheet and bypass this restriction yourself.

The PPF interest rates too don’t remain same forever.

But the rate of interest in PPF account in post offices, banks or anywhere else is same at a given point of time. The calculator shows it at 8% for all years 1 to 30. In reality, this will not happen.

The current PPF interest rate is 8% (in 2019-2020). But as per current PPF account rules, the government has the option of changing PPF rates every quarter now.

The PPF interest rates in last 10 years are as follows:

  • PPF Interest Rate Mar-2003 to Nov-2011 – 8.0%
  • PPF Interest Rate Dec-2011 to Mar-2012 – 8.6%
  • PPF Interest Rate 2012-2013 – 8.8%
  • PPF Interest Rate 2013-2014 – 8.7%
  • PPF Interest Rate 2014-2015 – 8.7%
  • PPF Interest Rate 2015-2016 – 8.7%
  • PPF Interest Rate 2016-17 (April 2016 – September 2016) – 8.1%
  • PPF Interest Rate 2016-17 (October 2016 – March 2017) – 8.0%
  • PPF Interest Rate 2017-18 (April 2017 – June 2017) – 7.9%
  • PPF Interest Rate 2017-18 (July 2017 – December 2017) – 7.8%
  • PPF Interest Rate 2018-19 (January 2018 – September 2018) – 7.6%
  • PPF Interest Rate 2018-19 (October 2018 onwards) – 8.0%

For more information, you can have a look at the historical PPF Interest Rates to get an idea about rate fluctuations and changes in PPF rules in the past.

Note – The interest on PPF investments is calculated on a monthly basis. So all your monthly PPF contributions count. However, the total yearly interest is added to the PPF account at the end of the financial year. This should be remembered when doing PPF interest rate calculation or looking how to calculate PF amount at end of the year. The calculator provided in this post has embedded PF calculation formula in excel which you can download freely.

Realistic PPF Investment Scenario Testing

You can test out various PPF interest rate and investment limit related scenario using this tool.

Using a combination of increasing annual limits and falling rates (rates are expected to go down gradually as the Indian economy matures), you can try out various scenarios yourself. One such hypothetical scenario can be:

  • Year 1-5: PPF annual investment limit Rs 1.5 lakh: PPF rate 8.0%
  • Year 5-10: PPF annual investment limit Rs 2.0 lakh: PPF rate 7.5%
  • Year 10-15: PPF annual investment limit Rs 2.5 lakh: PPF rate 7.0%
  • Year 15-20: PPF annual investment limit Rs 3.0 lakh: PPF rate 6.5%
  • Year 20-25: PPF annual investment limit Rs 3.5 lakh: PPF rate 6.0%
  • Year 25-30: PPF annual investment limit Rs 4 lakh: PPF rate 5.5%

It will be interesting to see how these changes play out and impact the final maturity amount.

So finally,

Here is the link to download the PPF calculator excel sheet:

Download PPF Account Excel Calculator (2019-20)

 

And to get you going, here are some examples of the calculations of maturity amounts. Don’t miss the 3rd example:

Example – 1

Annual Investment (in April) – Rs 1.5 lakh lumpsum

PPF Annual Fixed Investment

Rate of Interest – 8.0%

Investment Period – 15 years

Maturity Amount (at the end of 15th year) ~ Rs 44 lakh

Maturity Amount (at the end of 25th year) ~ Rs 95 lakh

As you can see, this example illustrates how you can use this tool as a PPF Fixed Annual Investment Calculator.

Example – 2

Monthly Investment – Rs 12,500 per month (Rs 1.5 lakh annually)

PPF Monthly Fixed Investment

Rate of Interest – 8.0%

Investment Period – 20 years

Maturity Amount (at the end of 20th year) ~ Rs 71 lakh

Maturity Amount (at the end of 30th year) ~ Rs 1.54 crore

This is an example of using this excel based calculator for estimating maturity amount when monthly investments/contributions are made in your PPF account. 

Example – 3 (Realistic)

Annual Investment – Rs 1.5 lakh (years 1-5); Rs 2.0 lakh (yrs 5-10); Rs 2.5 lakh (yrs 10-15)

Rate of Interest – 8% (yrs 1-5); 7% (yrs 5-10); 6% (yrs 10-15); 5% (yrs 15-25)

Investment Period – 15 years

Maturity Amount (at the end of 25th year) ~ Rs 85 lakh

As you see, you can create your own unique scenario basis your views / estimates about the future investment limits and rate of interest on PPF accounts.

So go ahead and play with this calculator to calculate PPF Maturity Value for 15 to 30 years with detailed annual timeline that displays month-wise (or other periodicity-wise) contribution and interest calculation every year in line with applicable PPF interest rates.

Here is the link again:

Download FREE PPF Excel Calculator 2019-20

 

I hope you find this Excel PPF interest and maturity calculator useful.

Once you use this PPF Calculator, you will know how to calculate interest on your PPF investment and get an idea about the estimated PPF maturity amount.

You can use it as a PPF maturity calculator for 15 years, 20 years, 25 years or even 30 years. You can even run the numbers to find out How to save Rs 1 crore using PPF and become a PPF crorepati.

Using an online or excel based PPF interest calculator to estimate your maturity amount is fine. But if you are investing for long term financial goals, PPF or other debt instruments might not be enough. You need to have more exposure to equity (why?).

So go on… use this PPF calculator excel xlsx xls sheet and see if you are actually using your provident fund investments (PPF or others) to create wealth or not.

PPF calculator is a very easy way to calculate PPF interest and PPF maturity amount.

And PPF is a solid debt-based savings product that can be used to save some serious money. Don’t ignore it and use it judiciously.

9-Point Investment Plan + 209 words Financial Plan

Short Financial Plan

Do you want a simple investment plan?

Here is a rock solid 9-point plan suggested by Scott Adams, the creator of Dilbert comic series (source). It’s written for US investors. But it’s still good to read.

Inspired by this, I will share my own’ short plan’ later in this post.So read this one first:

So read this one first:

Dilbert 9 Point Investment Plan

Now let me get inspired… 🙂

Here is a 209-word financial plan that is more relevant in the Indian context.

209 Word Financial Plan

  1. Buy term insurance. Never buy endowment / moneyback policies.
  2. Buy health insurance for you & family; even if employer-provided. Or atleast get a top-up cover.
  3. Build up an emergency fund equal to 3-6 months’ expenses. Use savings account, liquid funds and FDs.
  4. Buy a house if staying for long and affordable. Don’t go overboard with loan. Keep regular EMIs below 30% of your income.
  5. Prepay the loan as soon as you can.
  6. Make a will.
  7. Don’t delay retirement savings. Divide your periodic investments 70% equity and 30% debt.
  8. If mandatory debt investment like EPF doesn’t amount to 30%, use PPF and debt funds.
  9. Rebalance annually to keep allocation at 70-30 (Equity-Debt).
  10. Use major chunk of annual incentives to prepay loans.
  11. Increase investments with salary hikes.
  12. Keep a credit card. Pay it on time and in full. If you can’t, then dump it.
  13. Teach your dependents about money and how insurance works and who to contact if need be.
  14. If you have special goals (retirement, children’s education planning, etc.) or all this confuses you, hire a trustworthy + competent financial advisor. Few important pieces of financial advice can offset many years of fee charged by advisors.

That’s not as concise as Scott Adams’ plan but I think it covers most of the important aspects.

Hopefully, it was helpful. 🙂

And here are links to other articles that address few of the above-mentioned points:

Life Insurance:

Health insurance:

House Buying:

Home Loans:

Retirement Savings:

Finance Advice:



Section 80C and How Salaried Young Indians can Save Tax & Grow Rich?

save-tax-section-80c-grow-rich

In India, most investment decisions are taken keeping ‘tax-savings’ in mind.

Saving taxes is important.. but it’s not enough.

I have myself realized this quite late (but luckily, not very late).

No doubt you should try to maximize your tax savings using various sections of income tax laws (like Section 80C, 24B, etc.), as it puts more money in your pocket to do whatever you want to do with it.

And why not? After all it’s your hard earned money.

But more often than not, tax-saving investments tend to happen without much thought. People generally start asking about how to save taxes using Section 80C, at the last minute.

And that is not smart.

The result is that people give priority to saving tax alone instead of selecting the right financial product as per their financial goals. And that is where they step on the wrong financial path.

If you want to get rich or want to achieve some important financial goals, then tax saving will neither make you rich nor help you achieve those goals. For that, you need proper planning and more importantly, discipline to stick to the plan.

Tax saving will always be a side effect of a proper financial plan. It should never be ‘the’ plan in itself.

Now I have already written in detail about why Tax saving is not sufficient and why you need to do proper investment planning. So I won’t go down that line again…

Instead, what triggered me into writing this post is that I get several mails from young readers who want to know the best strategy to save taxes. Their queries range from asking for tax saving tips for salaried employees to wanting to know the best tax saving options for their age groups.

They are rightly worried about saving taxes and I am glad that they know it is important. They are technologically smart enough to use income tax calculators to do online efiling of taxes themselves, if need be. But many of them don’t realize the gravity of the fact that various tax-saving products do more than just tax savings – They invest your money for future returns too.

So it is very important to not be on a lookout for just the best tax saving strategy.

Instead, being young these people should focus on choosing the right investment products based on their goals, horizon and risk appetite. Tax saving comes later.

Always remember that that investing properly in right assets has a far greater role to play in your get-rich plans. Saving taxes alone won’t make you rich.

If you are Young, You are Lucky!

The best thing about being young is that one can make financial mistakes and still get back on the right track – as one has several years (or decades) in front of them.

So if someone starts working at the age of 21-22 and is mismanaging their money till say 30, then they still have another 25-30 years left to get it right.

On the other hand, if someone is bullshitting with their money till 45-48, then there is not much time left (only about 12-15 years). It is very difficult to correct the mistakes of past so many years.

So being young has an inherent advantage, even when the earnings during that time are low (and here is the big proof).

So coming back to the young earners, what is it that they can do to invest wisely as well as save taxes

Section 80C to your Rescue

The Section 80C offers various investment-cum-savings options to people – which not only generate returns but can also be claimed as deduction while calculating taxable income.

Currently, the total maximum deduction under Section 80C is Rs 1.5 lac.

This means that you can reduce your taxable income by up to Rs 1.5 lac every year, if the amount is invested or spent on any of the options that are covered under the Section.

Depending on your tax bracket, this can mean a saving of Rs 15,450 or Rs 30,900 or Rs 46,350 for tax brackets of 10%, 20% and 30% respectively.

So what are various options under Section 80C for young earners?

There are several:

  • EPF (Employee Provident Fund) – Generally, the salary is automatically deducted for contribution towards EPF.
  • VPF (Voluntary Provident Fund) – Any additional contribution you make above the required EPF contribution is taken as VPF.
  • PPF (Public Provident Fund) – use this FREE Excel-based PPF calculator to see how much you can save using PPF alone (or read How to save Rs 1 crore using PPF?)
  • ELSS Funds
  • Life Insurance Premiums (Avoid Endowment & Moneyback Insurance Policies. Choose plan Term Plans)
  • 5-year bank FDs
  • NSC
  • Principal Repayment on a housing loan
  • NPS (National Pension Scheme) – You can invest up to Rs 50,000 in NPS for additional tax benefit under Section 80CCD (1B). So total tax benefit can go up to Rs 2 lacs.

Too many options!

And I haven’t even listed all of them. I have just mentioned those that are more suitable for young people.

So how do we shortlist from these options?

The first step is to cut out the noise and focus on young people’s goals and asset allocation.

So ideally, these people are those whose retirement is almost 30 years away. For such a time horizon, one should invest a major chunk of investible money in equity or equity-linked products.

Why equity?

Equity is the clear winner when it comes to generating best post-tax returns in the long term. More importantly, equity can beat inflation comfortably and that is what you want to do.

What Should Young Earners Do?

The answer is – Keep it Simple.

One should maintain a reasonable diversification among Section 80C investments. But no need to invest in too many products.

So if you are young and want to invest money towards your retirement (or better still, early retirement and financial independence), then following two products are sufficient from investment + tax saving perspective:

  • ELSS (Equity Linked Saving Scheme) – (Asset Class – Equity)
  • PPF (+ EPF if you have that) – (Asset Class – Debt)

ELSS are tax saving mutual funds that have a lock-in of 3 years.

Some of the best mutual funds have given 15-18% average annual returns since inception. So that is no brainer when it comes to returns.

To bring stability and diversification, debt has to be a part of long term portfolio. EPF + PPF do that job very well. EPF is mandatory for most salaried people. If your EPF deductions are not sufficient, you can go for PPF (or VPF in your organization).

financial planning young salaried

Now you may ask how much to invest in each of these two assets.

The answer ideally depends on one’s risk appetite. So if you don’t like to take risk, then invest more in EPF/PPF/VPF. If you are comfortable taking risk, invest more in ELSS.

But is this approach really correct?

Now you may want to take lower risk (being very conservative) even though the time horizon here (30+ years) is very long and suitable for taking bigger exposure to higher risk products.

So there will always be some difference between what is right and what you are comfortable doing.

But at the end of the day, its an individual’s call.

To give some broad percentages around how much to invest where, one can follow this depending on their risk appetite:

  • Highly Aggressive: 80% Equity + 20% Debt
  • Aggressive: 60-70% Equity + 30-40% Debt
  • Balanced: 50% Equity + 50% Debt
  • Conservative: 20-40% Equity + 60-80% Debt

Asset Allocation Aggressive Balanced Conservative

For the record, I belong to the highly aggressive or aggressive category – for most of the times.

Now you may not want to invest so much in equity.

That is fine.

But you need to understand that for really long term investments, it’s better to have a higher equity component in your investments, even if you are a conservative investor (ofcourse not at the expenses of spending sleepless nights).

As for the other options within Section 80C, there is no clear-cut categorization of what is good and what isn’t. But I think that one should keep their personal finances clean and clutter-free.

That means being ruthless about not investing in unnecessary products.

Some of the products like NPS, NSC, Ulips, etc. are not suitable for most young people. Traditional life insurance plans that offer dual advantage of investments and insurance are bullshit.

Sidenote –

If you have already taken a home loan, then the principal repayments made during the year will qualify for Section 80C benefits too. In that case, it’s possible that your entire exemption limit under Section 80C (of Rs 1.5 lac) is utilized by EPF, Insurance Premiums and Home Loan Principal. But that doesn’t mean that you should not be saving for your retirement goal. Ofcourse you can delay saving for your retirement and focus on clearing the loan first. But that again, is an individual’s decision about prioritizing one goal over the other. Both approaches have their merits.

As for Section 80C’s deduction limit of Rs 1.5 lac, I personally think that it is time for the government to increase the limit from Rs 1.5 lac to maybe Rs 3.5 lac. For many taxpayers, this deduction is quickly exhausted. So it is time to revise it.

Or better still, link the limit to a person’s individual income. Higher the income, higher will be the limit under Section 80C.

But that is me loud thinking. I am sure my voice won’t reach the government. 😉

Coming back to young earners…

I would say that you can try out things with your money for few years and see what works and what doesn’t. It is a good and useful learning and helps in the long term.

But sooner you understand the realities of investments and the fact that tax-saving is not enough, you will be in a position to create the correct financial path for yourself. And this path can take you where you want to go – financial freedom or even becoming the richest person your family has ever had. And that is a good target. Isn’t it?

So with couple of months left to save taxes in this year, think and decide what approach you want to take.

Just do remember that tax saving alone is not enough. Those who tell you that will never be rich.

Financial goal based investment plan should always precede your tax planning. And if the investment plan is properly created, it will ensure maximum tax efficiency too.

So become a smart investor and try to find the right balance between your financial goals and tax savings. And please do not invest just to save taxes.