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In the recent years 2018 & 2019, we have seen fatal air accidents involving Boeing 737 and as per the past records of the aviation industry, there were many accidents in the past so many years involving Boeing 737.

The Boeing 737 series is the best-selling commercial jetliner in history, with the first unit having first entered airline service in February 1968 and the 10,000th unit entering service in March 2018.  

  • The first accident involving a 737 was on July 19, 1970, when a 737-200 was damaged beyond repair during an aborted take-off, with no fatalities;
  • the first fatal accident occurred on December 8, 1972, when United Airlines Flight 553 crashed while attempting to land, with 45 (43 onboard plus 2 on the ground) fatalities;
  • and, as of May 2019, the largest loss of life was an accident on October 29, 2018, when Lion Air Flight 610, a 737 MAX 8, crashed into the Java Sea shortly after take-off, with 189 fatalities.
  • The most recent crash was on March 10, 2019, when Ethiopian Airlines Flight 302, another 737 MAX 8, also crashed shortly after take-off, prompting a worldwide grounding of all 737 MAX aircraft.

On getting to know such news of accidents, immediately, what comes to our mind is fear for air travel. Despite the fear, we all continue to do air travel. Aren’t we? The reason is we do not have alternative time effective travel options. While we understand the risk involved in air travel, we still use this mode of transport.

Similarly, the real estate industry has its own share of false promises, undelivered projects, disappeared builders, scams, etc.  There has been the innumerable number of frauds/scams that have been happing in this industry and many innocent home buyers have lost lots of money.  Despite knowing that there are many grey areas in real estate industry, most of us still prefer real estate as one of the preferred and safest investments for the long term. We continue to invest in it, knowing the risk. 

In both above examples, because of the failure/frauds, the regulators of the respective industries have brought in risk-mitigating rules/regulations.  These changes will eventually help us in lowering our risk. Grounding boeing 737 is one such change, Bringing in RERA in Real Estate is another measure.

The reason of highlighting these two industry’s challenges/risks here in this article is to give you an analogy and help you know and accept risks involved in your wealth creation journey & how to mitigate them. 

Coming to wealth creation journey, as I always mention, asset allocation is the key at any point in time.

Before I reiterate the importance of asset allocation, let me highlight the recent fiascos happened in the financial industry.   You may have been hearing/reading about them and wondering are Mutual funds safe to invest? Should I stick to my traditional way of Fixed deposits and/or Insurance policies?

1 ) Infrastructure Leasing & Financial Services (IL&FS), an unlisted infrastructure lending giant with over 150 subsidiaries, has been making headlines for all the wrong reasons. The company’s debt was downgraded over the past few weeks for default of interest to its bondholders.

2) DHFL slumped after a news portal reported at the end of January that it gave loans amounting to Rs.31,000 crore to “dubious” entities linked to the promoters, who were said to be the ultimate beneficiaries. Reports of a probe by the ministry of corporate affairs added to the pressure. 

The company has faced a liquidity crunch since the second quarter of the last financial year and has been trying to raise finances to keep afloat.

3) Jet Airways, once was a top-notch running airline in India, today fighting for its existence.

4)Then there are few more fiascos that have happened in the past like Zee, Essar, Nirav Modi, etc.

5) In the past, there were so many bubbles happened in different economies.

  • The Tulip Mania – Year 1637
  • The South Sea Bubble – Year 1720
  • The UK Rail Road Mania – Year 1850
  • The Great Depression – Year 1929
  • The Nifty Fifty Era, US – Year 1973
  • The Nikkei Bubble – Year 1989
  • The Dot Com Bubble – Year 2000
  • The US Housing Bubble – Year 2008
  • India’s Bull Markets – Year 1992, Year 2000 & Year 2007
  • The current scenario – Year 2008 -2018

All these events indicate that your investments which are either in these direct stocks or in mutual funds, will have / would have impacted. So, now what do we do? Should we entirely stay away from these financial instruments?

The answer to this is No. We should not entirely stay away from these asset classes.  The regulator here too, will always work towards risk mitigating mechanisms. They have been implementing rules/regulations. They will continue to do so at all times.

Just relate back to the examples mentioned above i.e, of airline crashes & real estate fiascos. We do still fly by air, we do still buy real estate despite the fact that they do carry risk.

In life, everything comes with an element of risk. We all must know to understand the intensity of risk and learn to reduce it as much as possible.

In wealth creation journey, the only way to reach your goals is to stick to asset allocation with a clear understanding of the time frame of these goals. This helps to participate in Risk alongside Safety.

Key points to keep in mind always while in your wealth creation journey are, To have  :

  • Emergency funds – At any point of time, have 12-18 months of your monthly expenses as Emergency funds, invested either in Bank Fixed deposits or in Liquid / Ultrashort term Mutual funds
  • Short Term Goals (1-3yrs) – Any requirement of money in the next three years, should be either in Bank FDs/Short Term Debt funds.
  • Medium Term Goals (3-5yrs) – Any requirement of money in next 3-5years, should be in Medium Term Debt Funds with the high-quality rating.
  • Long Term Goals ( > 5 yrs) – Any requirement of money after 5 years should be equity mutual funds as per your risk profile.

Risk is inevitable but how we deal with is in our hands. Risk can be your friend if you understand it correctly and do the right asset allocation of your money.

Please remember,  the current situation / the current conditions of the market, is of least importance to you in five years from now.

Happy  & Safe Investing !!

If you find this article useful, please like & share it with your friends & family.

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Key to financial Independence by Shasirekha Raghavan - 1M ago

Are you one of those aspiring to retire early and explore your hobbies or go on vacations? OR Are you one of those thinking that there is still a long way to go to retire??  If yes to any one of these questions, this article will be an eye-opener for you.  Take out next few minutes and hold your breath, go on to reading this article.

Thanks to an improved standard of living, better quality food, and better health care, Life expectancy, in general, has increased considerably. We can see many senior citizens around us in the age group of 85-90.

This means that many of these senior citizens would have been surviving on their Retirement funds for the last 25 years, with an assumption that they were retired at the age of 60. Do you know how much retirement money is required to survive next 25-30 years with the same standard of living?

There is an interesting article published in Bloomberg, which states that America’s elderly are twice as likely to work now than in 1985. In the United States, for the first time in 57 years, the participation rate in the labor force of retirement-age workers has doubled to 20 percent mark, according to a new report from money manager United Income.

The article link is given below :

https://www.bloomberg.com/news/articles/2019-04-22/america-s-elderly-are-twice-as-likely-to-work-now-than-in-1985?cmpid=BBD042219_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190422&utm_campaign=bloombergdaily

These statistics are startling. It means that many of these senior citizens, unfortunately, couldn’t estimate the quantum of retirement funds required. They also would have missed counting the bigger demon – inflation.

I am sure, most of us have many aspirations such as retire early, travel across the world, take up hobbies etc but there is no or minimal preparation to reach these aspirations.

Here is the table which indicates the quantum of retirement funds required to maintain the same standard of living.

Current Age 50 40 35 30 25
Estimated time left to retire at 60 10 20 25 30 35
Current monthly Expenses 1 Lac 1 Lac 1 Lac 1 Lac 1 Lac
Current yearly Expenses 12 lakhs 12 lakhs 12 lakhs 12 lakhs 12 lakhs
Inflation adjusted expenses at the age of 60 21 lakhs 38 lakhs 52 lakhs 69 lakhs 92 lakhs
Inflation adjusted expenses at the age of 85 92 lakhs 1.65 cr 2.21 cr 2.96 cr 3.96 cr
At 8% withdrawl rate, retirement value required now 1.5 Crs 1.5 Crs 1.5 Crs 1.5 Crs 1.5 Crs
At 8% withdrawl rate, retirement value required at age 60 2.69 cr 4.81 cr 6.44 cr 8.62 cr 11.53 cr
At 8% withdrawl rate, retirement value required at age 85 (in Crs) 11.53 20.65 27.63 36.98 49.48
SIP required from now to reach the retirement value at 60     1,31,137     63,351      48,520    38,112      30,367
Value of retirement money at the age of 85          29.10       52.12        69.75      93.34      124.91
( @10% growth rate ) in crs
Note : Inflation considered at 6% & Inflation adjusted investment growth rate at10%

Looking at the above table a 25-year-old to maintain the same standard of living require around 11.53 Crs of retirement money at the age of 60. In order to accumulate this money, he/she needs to do a SIP of 30k every month from today. The assumption in this calculation is at the time of retirement, 8% pa is withdrawn to meet expenses and the remaining amount stays invested to grow at a rate of 10% pa.  This 11.53 Crs will grow to 124.91 Crs at an estimated growth rate of 10%pa.

So, Are you investing sufficiently to meet your retirement needs? These calculations are for a person to retire at the age of 60. Assume if you want to retire early, the numbers are way different and high.

Should you need assistance in planning your financial goals, please do reach out to me at shasirekha@gmail.com or arthabodhi@gmail.com

If you like this article, please like, share and subscribe to the blog and leave your feedback in the comments section.

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Whether we believe it or not, human beings are not rational at all times. A lot of pre-conceived notions /opinions play on our mind while taking any decision. We always try to search for evidence to prove our intuitions/opinions.  In short, this is what is called confirmation bias.

 Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one’s pre-existing beliefs or hypotheses.

The 2-4-6 experiment that was developed by Peter Wason was one of the experiments that proved that humans suffered from this bias trying to support their own theory, instead of completely and rationally evaluating their theory.

The participants were told that these numbers conform with a certain rule, and the experimenter had a certain rule in mind that was true in case of three sets of numbers, and to find examples that adhere to this rule. The experimenter had a very simple rule in mind: numbers in ascending order. However, the participants took complicated theories and did not test whether the theory is false for these numbers.

Thus, when you formulate hypotheses, you look for clues that confirm it, rather than find information that will criticize it. Thus, when a researcher formulates an opinion, instead of critically evaluating it, he will be in the pursuit of finding theories that support it.

In real life we have many examples where unknowingly we fall prey to the confirmation bias, such examples are :

  • Many of us who are Cricket fans have this belief that if Sachin Tendulkar hits a century, India will lose the match. Because of this belief, we end up searching for a past history of such matches lost and form a hypothesis.
  • We have been for ages hearing Cancer as a deadly disease and end up believing it that it is not curable and survival is very low. This belief is so strong that we end up finding failure cases rather than checking for advanced improvement in medical facilities which has helped many patients survive cancer.
  • Celebrities such as Ratan Tata, Mahatma Gandhi, Mother Teresa, Sachin Tendulkar, Big B, Rajnikant, Barack Obama are left-handers. Most of us do end up believing that all the successful celebrities are left-handers.
  • A low carb diet helps to lose weight. If this is what is on your mind, everywhere your mind will end up finding evidence to prove this theory.

There are many such real-life examples, where confirmation bias plays a role in our perceptions and decisions. Now, how does this confirmation bias affect our investment decisions?

  • Online websites, print media, etc keep publishing performances of various mutual funds and promote few mutual funds in the name of returns. This information creates a bias towards a fund and we all intuitively hunt for information to support the information and start investing.
  • Similarly, in the case of bear phase / falling market phase, there is a lot of information about negativity or issues with the various investment products. Intuitively again we hunt for the information to establish evidence to it.

This is one of the reason, why many investors have not made returns while on paper Sensex had delivered returns in the long run.  The philosophy of Buy low, Sell High didn’t happen because, confirmation bias pushed us to do the opposite i.e, Buy High, Sell Low.

How do we protect ourselves from such biases overpowering our investment decisions?

The only way out / solution to stay away from this bias is as follows :

  • Establish & write down your financial goals
  • Create an asset allocation plan and stick to it
  • Every time a piece of news/information hits you, find out both sides of the information and rationally evaluate if that information affects your financial goal. If yes, take a decision else stick to your asset allocation

Remember in the long run, only patience, asset allocation and disciplined investing help you reach your financial goals.

Unfortunately, we all have confirmation bias. Even if you believe you are very open-minded and only observe the facts before coming to conclusions, it’s very likely that some bias will shape your opinion in the end. It’s very difficult to combat this natural tendency.

If we know about confirmation bias and accept the fact that it does exist, we can make an effort to recognize it by working to be curious about opposing views and really listening to what others have to say and why. This can help us better see issues and beliefs from another perspective, though we still need to be very conscious of wading past our confirmation bias.

Happy Investing !!

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Why do we fall prey to these Discount sales? What drives our mind to feel that we are getting the best price at discounts? The initial price information plays an important role in choosing that product or choosing any other product of the same category. This is because the initial price starts playing as an anchor in our mind. A lot of our day to day decisions are driven by this anchoring bias.

What is Anchoring?

Anchoring is when an individual relies heavily on an initial piece of information while making decisions. For example, when you are looking to buy a particular item, people around you would have informed you that this type of stuff would cost you X amount. Immediately your mind has anchored this cost to the product.

Once the value of this anchor is set, all future negotiations, arguments, estimates, etc. are discussed in relation to the anchor. This bias occurs when interpreting future information using this anchor.

In 1974, Amos Tversky and Daniel Kahneman conducted a study asking a question to the participants in each group. They asked people to estimate how many African countries were part of the United Nations, but first, they spun a wheel of fortune. The wheel was painted with numbers from 0 to 100 but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel. Next, they asked people to estimate what they thought was the actual percentage. They that found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent. The subjects had been locked in place by a psychological phenomenon known as the anchoring effect.

The trick here is no one really knew the true answer. They had to guess, yet it didn’t feel like a guess. As far as they knew, the wheel was a random number generator, but it produced something concrete to work from. When they adjusted their estimates, they couldn’t avoid the anchor.

I will share another most common anchoring used by brand owners to sell their products. Outside their outlet, they will post Big Sale, 70% off on products, Mega sale, etc. These posts attract customers to the store and anchor them to a particular discount rate. Once you as a customer enter the store, the most liked products are neither on sale nor have the maximum discounts.  Since your mind is anchored to a particular price band, even if the product is not worth the value, most of us end up buying it thinking it is the best deal.

How does this anchoring bias affect our investment decisions?

For example, the whole media, newspaper, television channels & people around you say it is the best time to be in equities and everyone are making lots of money  OR everyone is in deep fear and exiting from the stock market, automatically your mind is anchored you to like / dislike the asset class or take action on your portfolio.  So the most natural decision to make is to go ahead and invest into / exit that asset class irrespective whether it suits your goals/risk appetite.

In almost every article that I write, I keep repeating only one point ie. your investment decisions will have to depend only on your goals, time horizon and your risk taking capacity. Everything else should not impact your decisions. Here I am repeating the same point.

I am leaving you with this thought, are these numbers relevant in the long run? Are these anchors relevant in the long run for your investments to grow?

 

Sensex Closing

Month 2015-16 2016-17  2017-18 2018-19
Apr   27,011.31   25,606.62   29,918.40   35,160.36
May   27,828.44   26,667.96   31,145.80   35,322.38
Jun   27,780.83   26,999.72   30,921.61   35,423.48
Jul   28,114.56   28,051.86   32,514.94   37,606.58
Aug   26,283.09   28,452.17   31,730.49   38,645.07
Sep   26,154.83   27,865.96   31,283.72   36,227.14
Oct   26,656.83   27,930.21   33,213.13   34,442.05
Nov   26,145.67   26,652.81   33,149.35   36,194.30
Dec   26,117.54   26,626.46   34,056.83   36,068.33
Jan   24,870.69   27,655.96   35,965.02   36,256.69
Feb   23,002.00   28,743.32   34,184.04   35,867.44
Mar   25,341.86   29,620.50   32,968.68   38,672.91

Assume you invested in  May’15 @27828 Sensex and 15 months later still your investments are at the same level. Obviously, if you anchor the entry-level and keep measuring the returns in the short run it will be very difficult to stick to the investments.

Anchor yourself to the goal and time in hand rather than the entry-level or price movements.   Equity investments will grow with patience and time.

The way it takes time for a kid to grow an adult, a plant to become a tree, a career to grow,  so are our investments. There is no shortcut to investments.

Don’t Let these anchors determine the fate of your investments. Take charge and be patient.

See you next Monday with a new bias and its impact on your investments.

Hope you are enjoying reading these posts. If you like these posts, please like and share them with your friends/relatives. Share your feedback in the comments section below.

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Social Proof is described as a psychological and social phenomenon wherein people copy the actions of others in an attempt to undertake behavior in a given situation.

Social proof is considered prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior and is driven by the assumption that the surrounding people possess more knowledge about the current situation.

Social proof is one type of conformity. When a person is in a situation where they are unsure of the correct way to behave, they will often look to others for clues concerning the correct behavior.  In times of ambiguity and confusion, we go by what others are doing in a similar situation and go with them.

Psychologically, this decision-making process makes us feel better.  Since many of us are doing the same thing, we end up feeling it should be right.

Every manufacturer and service provider uses Social proof to market their products/services. That is the reason you see many celebrities/influencers endorsing a product/service.

As per Nielsen’s reports, 83% of consumers across 60 countries say they trust these recommendations/endorsements in choosing the products/services.  This is the power of influence people around us create in making our decisions.

To give a few examples from our daily lives where we make decisions based on what the people around us use/recommend :

  • Restaurants to eat food
  • Hotels to stay on vacation
  • Schools/colleges our kids to study
  • Brands to buy clothes, jewelry, etc
  • Doctors for health consultations
  • Mobile/wi-fi networks to use and last but not the least
  • Options to invest our savings.

Does this behavior of taking investment decisions based on social proof actually affect our investments?  If yes, how?

Many of us, take our investment decisions based on influencers around us. For some, Warren Buffett is the influencer, for some Ramdeo Agrawal is an influencer, for some, Rakesh Jhunjhunwala is the influencer.  For few, their parents or friends or siblings are the influencers.  Now every individual or a group of people have their own thought process and different style of investing. Every individual comes with different expectations and time horizons.

Not everyone ends up with the same outcome from their investments. The reason being, every individual’s goals, time horizons, risk taking capacity and the time at which they are investing are different.

To give you an example, there are two investors A & B invest in the same fund of a mutual fund house. Both of them were recommended to this fund by someone well known to them.  However, both of them have a different goal and time frame for this investment. Here is their experience with their investment.

Investor Time Horizon Returns
A 1 -35.42%
B 5 15.60%

Now both of them have different expectations with their investments.  They went by the decision to choose this fund because of social proof or recommendation by someone whom they think is knowledgeable.

Investor A fell to the social proof and chose the fund that was not suitable to him.

How to avoid this trap of falling to social proof while making our investment decisions.

  • Clearly identify the goals and time in hand to reach these goals
  • Understand the risks involved in investing any product keeping in mind of your time frame
  • Don’t just go by what others are doing/suggesting, they might have Plan B if this doesn’t work out.
  • Review all options and seek expert’s advice if need be by letting them aware of your goals, timelines, risk-taking capacity, etc.

Goals ( created thru emotions) turn into reality only with an apt financial plan executed without emotions.

Happy Investing and Don’t be a victim of Social Proof Bias.

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Key to financial Independence by Shasirekha Raghavan - 2M ago
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In our every day’s lives we have biases in various forms. Biases basically are originated out of our past experiences and its outcomes. Every decision we make is more or less the outcome of our past experiences. These experiences have created a bias in our mind.

These biases are so inherent within us, that we use them intuitively in every walk of life.

Biases actually mean, our perceptions, which lead us take certain decisions in our lives. These decisions are influenced either by people around us or their behaviour or our own psyche.

Few types of biases that we frequently use are as below :

  • Confirmation Bias
  • Social Proof
  • Anchoring Bias
  • Self Serving Bias
  • Loss aversion Bias
  • Framing Bias

There are many more biases that are widely used by all of us, without even knowing that we are victims of these biases.

There are plenty of examples from our day to day lives, where these biases play on our mind and force us to take certain decisions / actions.

  • Standing in the longest queue even if the other counter is open with no public
  • Looking up to the sky on a busy street, when suddenly everyone around are looking up.
  • Picking up a bottle of food, when its content is labelled as 92% fat free and not when it says it contains 8% fat.
  • Feeling cheap / ideal price to buy when priced at 999/- and not at 1000/-. ( General tactic used by most of the retailers to increase the sales)

Think it over, don’t we do all these actions without realising that these biases are pushing us to form perceptions and take decisions.   Now, does these biases play role in our investment / wealth creation journey?

Watch out for the next series of articles that I am going to write about these biases and how it affects our investment decisions and how can we avoid falling for these biases while making our investment decisions.

Have a pleasant week ahead!!

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In my June, 2018 & Oct’2018 articles titled Tough & Testing times ahead – QE se QT tak dated 28-Jun-18 and Q(e) se Q(t) tak-continuation dated 11-Oct-2018, I had mentioned what is quantitative easing and quantitative tightening and how it impacts the economies across the globe.

I had also mentioned the status on Quantitative tightening by US Government and its possible impact on emerging markets like India.

It has been nine months now from the date of those articles. I thought that it will be good if we review the developments since then. This is what has happened since June:

 Jun’18Oct’18  Feb’19 (till 25th Feb)
Sensex35,42334,144           36,213
NSE Midcap 100 Index18,18116,277           16,601
NSE Smallcap 100 Index7,4965,989             5,923
US – S&P 500 index2,7162,785             2,796
US – Nasdaq index7,5037,422             7,554
INR-US Dollar68.4674.11                  71
Crude Oil ($ per bbl)79.4482.14             55.45
Indian 10 year G Sec yield7.90%8.01%7.58%
US Treasury 10 year G Sec yield2.86%3.16%2.65%
FIIs flow in Indian Equity Markets (From 1stJune till 26th Feb)(-)21505 Crs
FII Flows in Indian Debt Markets (From 1stJune till 26th Feb)(-) 21399 Crs

What does this data talk about?

If you look at overall picture, markets were weakening for few months, particularly in India and then started to rebound. However there is sharp volatility in the markets. In US, the interest rates, as represented by US 10 Year Gov. Security yields has gone up from 2.86% to 3.16% initially and now they are coming back to its previous levels.

Indian Equity Markets, Debt Markets as well as Currency markets have witnessed significant corrections.   Small & Midcap indices have taken hit in this correction.

FIIs are selling from emerging markets and we are part of that selling spree.  

Quantitative tightening is one of the main reasons of these market reactions. Trade war between US and China and pressure tactics of US on other countries are also adding to the market weakness. In recent past, we have been hearing from US Fed, on stopping the quantitative tightening soon and if this happens, it is a good sign for emerging markets such as India.

Along with these issues, the liquidity challenges in India for the NBFC sectors is making it more nervous. Also few more reasons for such volatility is upcoming elections and the recent attack on CRPF in J&K, subsequent surgical strike by India.

Now the dilemma for investors like us is what’s the future of our investments?  

Few points to reiterate before we try to understand what is the future.

  • RBI and Central Government are always well aware of the challenges and they keep intervening and take corrective actions.
  • The trade war between countries / liquidity challenges eventually has to settle with time.
  • If you observe these 9 months, we had numerous news and data points justifying the reasons for fall / rise of the markets.  This correction / rise / fall is never predictable.

Now answering what will happen to our investments and what is the future ahead for us?

  • We will have to go through the turbulent weather i.e, volatility, hence be cautious with your spending patterns, improve your saving capacity as much as possible.
  • Try to maximise the returns by investing in volatile times. Please recollect the famous quote by Warren Buffett “ Be fearful when others are greedy, Be greedy when others are fearful”. Make use of these opportunities coming your way from time to time by investing via SIP (systematic investment plan) mode.
  • Continue the asset allocation plan unless the goals have changed.
  • Returns on equity markets eventually depend on what stocks (businesses) you own and not on how markets react in the short term, hence do not write off any particular asset class on the basis of near term volatility. However point to note is in such turbulent phases most likely the returns will be very low or your time horizon to stay invested may increase. Hence be ready for it.
  • If you have any adhoc investments to be made other than the pre-determined asset allocation plan, stay in Liquid funds for time being and shift to equities over a period of 9-12 months.
  • Keep reminding yourself that equity investments are meant for long term i.e beyond 5 years at-least.  Any goal which is within these 5 years, invest in safe instruments.

Please do consult your financial advisor, before your fear drives you to react and take decisions on your investments.

Remember, this is a turbulent phase for all of us with respect to our investments, the only way to handle this phase is to stay calm, continue with the asset allocation plan and keep sufficient emergency fund to handle any unexpected expense.

This below data point is to help you overcome your fears when facing such volatility and helps you stick to your asset allocation.

This is an example showing 1 lakh each invested in Sensex, two Equity Mutual Funds of reputed fund houses of India on 01-Jan-2005 and stayed invested till 31-Dec-2018, which is 14 years. These numbers are actual valuations on the basis of NAV / Sensex.  These 14 years have seen many volatile phases, yet the investments have made decent returns.

 Amount Invested on 01-Jan-05Value as on 31-Dec-18CAGR
Mutual Fund – Equity Fund 1       1,00,000  10,75,78118%
Mutual Fund – Equity Fund 2        1,00,000    8,84,05617%
Sensex       1,00,000    5,50,16313%

Happy & Safe Investing !!!

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In my article,Tax Savings Season – All you want to know about NPS (National pension system), I had mentioned the features, benefits, challenges of NPS and also when to choose NPS as investment option.

This article will help you take an informed decision while choosing right product for your retirement planning.   With advancement in medical field and also with increase in awareness about fitness and healthy living, life expectancy in India has gone up to 70 years and as you see around, there are many old people living into their late 80s. 

This essentially means that, all of us will have to plan for our 20 years of expenses post retirement to come from our Retirement funds.

This below illustration explains NPS or SIP for retirement planning. Referring to my previous article,  There are few assumptions for this illustration :

  1. A salaried individual contributing 50,000 + 130,000/- pa under NPS to claim Income tax deductions. Even for SIP the same amount is considered as investment per annum.

  2. Under NPS, the amount is invested in 50-50 Equity – Debt asset class and in SIP, a multi-cap equity fund is selected for investment.

  3. Under NPS, returns are expected at 10% pa and under SIP, returns are expected at 15% pa over 25 year period.

  4. Please note past returns are only indicative and not guaranteed and equity investments will have to be done with a minimum time horizon of 7 + years.

  5. Inflation is considered @ 7% pa on an average.

Age                    35  
Retirement Age                   60  
Time to retire                   25  
   NPS   SIP 
Yearly Contribution         1,80,000  
Monthly Contribution            15,000     15,000
Total Amount Contributed in 25 years  60 lakhs   45 lakhs 
Value of NPS @10% return and SIP @15% return at the end of 25 years in Crs ₹1.99 ₹4.87
5000/- p.m. tax saved invested as SIP in a multicap fund in Crs ₹1.62 0
Total Amount at the time of retirement in Crs ₹3.61 ₹4.87

Assume at the time of retirement, if you wish to take pension from NPS account and 10% pa withdrawal from the investment made with the tax savings, you would end up getting monthly amount of 2.90 lakhs.  The calculation is as detailed below :

At the time of retirement 60% can be withdrawn at once tax free (*Lumpsum)

                           1.19 Crs

40% is taxable & to be used for compulsory annuity 

                                  0.80 Crs

Pension at 7% pa from annuity corpus

                              56,267

Withdrawal at 10% pa from Lumpsum converted into balanced mutual funds

                              99,513

Withdrawal at 10% pa from SIP Accumulation from Tax Savings

                           1,35,147

Total monthly income

                           2,90,926

However, if you are in SIP mode instead of NPS, the retirement kitty you would have made is 4.87 Crs and if you take 10% pa for your expenses, you would get monthly 4.05 lakhs.   This corpus is entirely in your control and despite paying taxes on it, you would end up making more money.

Even if this retirement kitty grows at 7% pa for next 20 years, you will easily be able to live through your retired life financially easily. 

In my personal opinion, retirement planning requires a lot more discipline and patience to stay invested for the entire time and not to react emotionally with the volatile valuations during the accumulation phase.

Should you need any clarity on NPS / Retirement planning do reach out to me at arthabodhi@gmail.com. I would be happy to help you.

Wish you successful retirement planning!!















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Time of the year, most of us are either planning for upcoming year’s tax savings under Sec 80( C ) of Income Tax or submitting investment proof for this year.

There is always last minute hunt for the right tax saving instrument and many of us usually end up picking up an option which is most easy to get through this HR requirement.

This article aims at providing you with details of all the options available under section 80(C) of Income Tax Act.

Current options available under section 80( C ) are as detailed below with a maximum limit of Rs.150,000/- every year.

  1. Provident Fund Contribution
  2. Children Education expenses upto 15,000/-p.a
  3. Insurance premium paid on life insurance cover. Includes ULIP premium also.
  4. Principal payment on housing loan
  5. NSC (National Savings Certificates issued by Post Office)
  6. Bank Fixed Deposit ( of 5 year Tenure)
  7. EPF (Employee Provident Fund)
  8. PPF (Public Provident Fund)
  9. Sukanya Samriddhi Yojana for girl child
  10. ELSS funds of Mutual Funds
  11. NPS (National Pension System)

While for many, PF contribution, Insurance Premiums, Principal payment and Children education expenses add upto 1,50,000/- limit, few have to invest in other instruments to take the complete benefit of the Section 80( C ) limit.

In the recent past, I have been receiving a number of queries on NPS (National Pension System) and its benefits.

This article aims to provide understanding on what is NPS, its benefits and when to choose NPS as investment option.

NPS is National Pension Scheme launched by Government of India, aiming to provide financial security to retired people. With this scheme, every individual can invest a portion of savings into NPS, so that at the time of retirement, they can get pension.

Features :

  1. Any individual / NRI between 18-60 years of age can open NPS account
  2. Most of the banks are allowed to open NPS account.
  3. There are two types of account ie Tier-1 & Tier-2.
  4. Tier 1 is compulsory and Tier 2 is voluntary.
  5. Tier 1 has Section 80(C) benefits while Tier 2 do not have any tax benefits.
  6. Every account holder will have option of choosing investment type i.e, Auto or Active. Under Auto, depending on the age of the account holder, investments into Equity / Debt will be rebalanced. In case of Active, the account holder chooses the proportion of equity / debt investments.
  7. 60% of the accumulated money can be withdrawn at the time of retirement and this amount is tax free. 40% of the remaining amount has to be compulsorily invested into buying annuities.

Currently the annuity service providers registered by PFRDA are   :

  1. Life Insurance Corporation of India
    2. SBI Life Insurance
    3. ICICI Prudential Life Insurance
    4. Bajaj Allianz Life Insurance
    5. Star Union Dai-ichi Life Insurance
    6. Reliance Life Insurance
    7. HDFC Standard Life Insurance

Benefits :

  1. Obvious benefit being Tax Saving under Section 80( C ).
  2. Apart from benefits under 80 (C), tax benefit can be claimed by investing to NPS under Section 80 CCD (1) upto maximum of Rs.50,000/-pa
  3. Additionally, if your employer is participating under corporate plan, upto 10% of basic + da without maximum amount limit can also be contributed into NPS which is available for tax deduction under Sec 80 CCD(2).
  4. Automatic & Disciplined investments for Retirement.
  5. Lumpsum Withdrawal of 60% of the investment amount at the end of 60 years is tax free.

Challenges :

  1. Investments are locked in till the age of 60.
  2. Entire amount at the time of retirement cannot be withdrawn. 40% of the corpus must be invested into buy annuity which provides monthly pension.
  3. Every year minimum of 6000/- to be invested and there is penalty if not invested.
  4. Under Equity option also maximum 75%* can be invested into Equity under NPS. (* Upto age of 50 only)
  5. If you are young and can take more equity exposure, it is still not allowed under NPS.

Having understood the features, benefits, challenges, here is a simple illustration to show the tax benefit  This illustration will help you decide whether to invest in NPS or not.

The below illustration is indicative. For example an individual with Basic salary of 13 lakhs pa and Gross salary of 22 lakhs pa, this is the calculation of Tax benefit on investing into NPS and not investing into NPS.

Description  With NPS  Without NPS & home loan
Basic              13,00,000        13,00,000
Total Gross Salary              22,00,000        22,00,000
Chapter VI-A deductions (Sec 80©)                1,50,000          1,50,000
Sec 80(D) mediclaim                   25,000             25,000
Sec 80CCD (1) NPS                   50,000
Sec 80CCD (2) NPS – upto 10% of basic                1,30,000
Interest payment on Housing loan                           –                     –
Net Taxable Income              18,45,000        20,25,000
Tax                3,66,000          4,20,000
Surcharge                   14,640             16,800
Net Tax                3,80,640          4,36,800
Tax Saving per annum                   56,160
Tax Saving per month                     4,680

In the above example, the individual is contributing into NPS every year around 180,000 ( ie 50k+1.3Lac) in order to get a tax benefit of 4,680/- per month.   Now these are the few questions you need to ask yourself  before jumping into NPS as an avenue of tax saving.

  1. How much do I save / invest for my other goals apart from retirement?
  2. Are these contribution to NPS  is the only investments I have?
  3. Do I have emergency funds ready  ( Refer to my earlier articles where I had mentioned that depending on your risk profiling at-least 12-18 months expenses have to be reserved as emergency kitty)?
  4. Am I willing to retire at the age of 60 or aiming to retire sooner than that?
  5. Are there any retirement options with flexibility of liquidity in case of early retirement / or any other major emergency?
  6. Is only tax saving is important to me while choosing NPS or creating a corpus for retirement?

Depending on the answers to these questions, you may decide to choose NPS as a tax saving option cum retirement planning.

In the next article, will cover on NPS vs SIP in a diversified equity Mutual Fund for retirement fund.

In case, you have any further queries on NPS or any other investment options, do reach out to me at arthabodhi@gmail.com. Will be happy to help your queries answered.

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