GENERAL-Liquid Funds/Tax Savings
India & International
INDIA
i) Keep an Emergency Fund of one year in a Liquid Fund for easy liquidity and tax efficiency.
ii) Section 80C/80CCD (1B) Savings: Under Section 80C of the Income Tax Act of India, besides PPF/EPF, NPS, NSC, Sukanya Samridhhi Scheme (SSS) etc. consider most profitable ELSS Tax Saver Nifty 50 Index Funds (Average 5 years return- 19%) (Equity Linked saving Scheme Funds, see under Equity Funds) with lock-in period of only 3 years but stay for the long-term for good returns.
Returns on Tax Saving options (as on 07.03.2022): NSC- 6.8%, PPF- 7.1%, NPS (Conservative- 9%, Moderate- 9.5% & Aggressive- 9.9%), & 360 ONE ELSS Nifty 50 Tax Saver Index Fund (Average Return- 13.90% since January 1, 1999). Last 12 months inflation is 6%.
See returns in HDFC Compound Interest Calculator:
Compound Interest Calculator – Calculate Compound Interest Online (hdfclife.com)
Minimum investment required is only Rs 100/500/1000.
Instead of 360 ONE ELSS Nifty 50 Tax Saver Fund given above, invest in a much better new ELSS Index Fund- Zerodha ELSS Tax Saver Nifty Large Midcap 250 Index Fund launched in November’2023. See portfolio of the fund in the link below:
(See Holdings/See All)
Nifty 500/BSE 500 indices are equivalent to the US S&P 500 index. May invest up to 20% in international index funds whichever is available as per SEBI regulations.
After a lock-in period of 3 years shift your ELSS Index Fund corpus to Edelweiss Nifty 500 Multicap Momentum Quality 50 Index Fund (constitute diversified top 500 Large/Mid/Small Cap companies ranked 1 to 500 of in Nifty 500 Index/represents the whole Indian stock market, Index CAGR since 2004: 23% as of November 30, 2024) tactically to avoid/minimize LTCG tax, for higher returns in the long term.
(See Holdings/See All)
Minimum Investment required in Index Funds is only Rs 100/500/1000
– Detail description of above Index Funds is given under “Equity Funds & Conclusions”
-Also, under Section80CCD (1B) an additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS (National Pension System) subscribers (where maximum contribution up to 10% of employee’s salary/14% in case of central government employee is allowed in a financial year). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. NPS offers two types of accounts, namely Tier 1 and Tier 2. Tier 1 is a mandatory account for all government employees and is open to other individuals as well. Tier 2 is a voluntary account that allows investors to withdraw their funds at any time.
There are several benefits associated with the NPS. One, the employer’s contribution to your NPS account of up to 10 per cent of the salary (basic + dearness allowance) is not considered taxable income even in the new tax regime where most of the other deductions are not available. Second is its ultra-low investment management fee of 0.09 per cent. Additionally, it provides automatic annual asset rebalancing and provides the flexibility to change your pension fund manager at zero cost without any tax implications.
Besides, money invested in the NPS Tier I account gets virtually locked till the age of 60. It can be redeemed before the age of 60 only in certain situations and after fulfilling certain conditions. While this may look like a drawback to many, it is an advantage for someone who lacks the discipline of investing for retirement. This ensures that the money meant for retirement is used only on retirement and not elsewhere.
Home is where your heart is: Buying a home with the help of a home loan is probably the biggest financial decision made by you. So, always make sure that you borrow the amount that you will be able to repay. Here a simple thumb rule is that the EMI of your home loan should not exceed 30 per cent of your monthly income.
INTERNATIONAL
Compiled on 26.03.2022.
RETIREMENT PLANNING FUNDS
Book titled “If You Can: How Millennials Can Get Rich Slowly” by Williams J. Bernstein (2014)
Would you like to believe if I told you that there is an investment strategy that a seven-year-old could understand, will take 15 minutes of work per year, and outperform 90% of finance professionals in the long run, and make you a millionaire over time?
Well, it is true. Start by saving 15% of your salary at age 25 years into 401 (K) plan, an IRA (Individual Retirement Account) or a taxable account (or all three). Put equal amount of that 15% into just 3 different mutual funds: i) A US Total Market Index Fund ii) An International Total Stock Market Index Fund & iii) A US Total Bond Market Index Fund i.e., 2/3 risky assets + 1/3 riskless asset (Government Bonds).
The 30-year US Treasury bonds yield around 3.6%. The treasury also offers a 30-year inflation protected security TIPS (Treasury Inflation Protected Securities) that currently has a 1.4% yield and return of real principal, both of which rise over time with inflation. So, the expected real return of the 30-Year bond is 1.4%.
However, as on March 15, 2022, Schwab US TIPS ETF/SCHP offers investors a comparatively strong 4.8% yield and is an effective inflation hedge. On the other hand, the fund should underperform once inflation normalizes. In my opinion, SCHP’s risks and drawbacks outweigh its benefits.
(Note: TIPS are available for a term of 5, 10, or 30 years. As the name implies, TIPS are set up to protect you against inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term. When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount. TIPS pay a fixed rate of interest every six months until they mature. As TIPS pay interest on the adjusted principal, the amount of interest payment also varies. You can hold a TIPS until it matures or sell it before it matures).
If your 401 (K) is lucky enough to have Vanguard Funds, look for, respectively, the (US) Total Stock Market Index Fund, Total International Stock Index Fund and either Short-Term Bond Index or Total Bond Market Index Fund. Fidelity Spartan Series is also excellent- the Total Market Index, International Index and US Bond Index (or Short-Term Treasury Bond Index) Funds.
Over time, the three funds will grow at different rates, so once per year you will adjust their amounts so that they are again equal (That’s the 15 minutes per year, assuming you have enrolled in an automatic saving plan).
That’s it: if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors. More importantly, you will likely accumulate enough savings to retire comfortably.
-See returns in HDFC Compound Interest Calculator:
Compound Interest Calculator – Calculate Compound Interest Online (hdfclife.com