Financial Planning for a late starter

POSTED BY Prats ON July 11, 2012 10:36 am COMMENTS (26)

Hi,
I am a 31 year old married male. I am not sure how to go about my financial planning. I know its kinda late for me to plan up now but i thats why i need some guidance even more urgently.
Till now i only have the following investments-

LIC policy of Rs 10000 premium per annum and SA of 25 Lakhs of 25 years tenure.

Bank FDs to the tune of 1.5 lakhs.

cash in savings account 4 lakhs. I am depositing every month 20K in my savings a/c to buy a flat in next 1 year. flat would not be of mroe than 30-35 K and would be for investment purpose only to get rental and capital gains.

Apart from this i can spare 25K every month for long and short investments. My queries are as follows.

I want to invest in gold. What is the best way- coins, bullion, ETFs, Gold Funds.. which one is best?

I want to also invest in a low risk long term instrument with the tenure of 15 years or more for my retirement. Which is a best way to do this- PPF, NPS, pension plans of LIC, SIPs in MFs or any other way??

I also want to invest in short and medium term instruments with high returns (medium to high risk). What is the best way to do this- directly in equity, or through MFs (of what kind) or through any other way.

Kindly guide me with my financial planning.

regards,
Prats

26 replies on this article “Financial Planning for a late starter”

  1. Dear Prats & Annu707in, for PPF, please try to understand the basis of dear Ramesh’s thinking. He is merely sharing his own opinion that PPF should not be the primary retirement saving vehicle.

    Thanks

    Ashal

  2. Prats says:

    Hi Ramesh,

    About PPF, premature withdrawal facility is available in this. IN PPF accounts you are allowed to make partial withdrawals in times of financial crises. You are allowed to withdraw seventh year onwards and that too once a year. Such withdrawal figure must not exceed 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is less.

    Let’s suppose your account was opened on 8th August 1993 i.e. in FY 1993-94.
    First withdrawal date: Add 6 to the financial year end => 1994 + 6 = 2000. It shows that seventh financial year would be 1999-2000.

    Amount of first withdrawal: The 4th preceding year will be 2000 – 4 = 1996 (FY 95-96) and preceding year 2000 – 1 = 1999 (FY 98-99). Amount withdraw able in the 7th year, FY 1999-2000 is 50% of the balance to the credit as on March 31, 1996 or March 31, 1999, whichever is lower.

    Also you have Loan on PPF (Just for information sake i am mentioning this, no intention of saying its a good or bad investment)

    Loans could be taken from the third year onwards till the sixth year. Let’s suppose you opened your PPF account in December 2011 (in the FY 2011-12), you can avail a loan only in FY 2013-2014 (2012+2 = 2014) till FY 2016-2017 (2012+5=2017).

    You can avail a loan amount of up to a maximum of 25% of the balance in your account at the end of the second year immediately preceding the year in which the loan is applied for.

    If you apply for a loan in November 2013 (FY 2013-2014), you would get 25% of the amount that existed at the end of March 2012 (2014-2 = 2012).

    Rate of interest charged for this loan would be 2% higher than the PPF rate. Previously this was 1% only.

    1. Ramesh says:

      I know all these things.

      But just think about this,

      1. You have a restricted amount of withdrawal limit of Your OWN money.

      2. Loan against your OWN money. Is that considered an advantage? Really.

      Ramesh

      1. Prats says:

        ya i think you have a point.. Ok, How about the following as one of the retirement planning option??
        invest in a growth equity fund for next 12-13 years.. and then at the age of 44-45 start a PPF till 58-60.. Provided that PPF still remains a viable option and there is no catastrophic damage to it as an investment instrument till then.
        Whats your opinion on this…

        Jus thinking aloud…

        Regards,
        Prats

        1. Ramesh says:

          I agree to that. But I would try to slowly transfer the money from equity fund to PPF. Gradual portfolio rebalancing towards more debt, but never completely.

          Also, after 12 years in an equity growth fund, I do not really think, you will want to go into pure debt. 😉

  3. annu707in says:

    Hello Ramesh and Ashal ji – Can you please tell me what is the difference between:

    debt: ultra short term fund
    debt: short term fund
    debt: Income fund
    debt: Liquid fund

    Why should one prefer and invest in these debt funds over investmenting in one’s PPF account?

    I mean why is it advisable to invest in these debt funds? If yes, please suggest a couple of them in which investment can be made from long term perspective.

    Also Ramesh ji I am scared with word “risky” in your comment “PPF is an illiquid, pure debt, risky instrument for a person in early thirties”. Please elaborate why you think its a risky instrument as I was thinking till date that its the best and safe instrument ( and hence started going for full tank of 1 Lac Rs. by 5th April this year ).

    Many thanks in advance and Regards,
    Anurag

    1. Ramesh says:

      Regarding your query about the various types of debt funds, they are classified according to the nature of debt instruments which the fund has. Goto valueresearchonline / morningstar.in and check out the holdings of various representative funds from each category. If you still do not understand, ask again, but first try it yourself (it is not rocket science!)

      Regarding PPF’s comments of mine:
      1. Illiquid= 15 year lock-in and you cannot withdraw like you can do with so many others.
      2. Pure debt – no need to elaborate on this.
      3. Risk:
      – By the definition of Risk = Uncertainity in the amount of value. Two parts- 1. Looking at the past trend, the rate of interest on PPF has been steadily decreasing and depends entirely on the whims of the government. 2. And recently, the rate of interest of PPF has been linked with the long-term GSec (govt securities) rates. So the Rate of Interest is UNCERTAIN for future.
      – By the definition of Risk = Chances of Loss. Though it is a debt instrument and has a sovereign guarantee. But the status of India govt is BBB- (just a notch above Junk status=lowest investment grade). In 1991, the govt was on brink of a default. What says that it cannot do so in the future (despite all hoopla about the great Indian story, which has been demystified in the last 1-2 years, etc). Because of illiquidity, that is a problem.
      Also, as with any debt instrument, there is risk of inflation which decreases the buying power of the invested money. Over long term, the rate of inflation nearly always exceeds the earning of bonds.

      In my opinion, you should have a PPF account only at an age of Retirement – 15.

      Think about this, analyse and take a proper informed decision.

      Ramesh

      1. annu707in says:

        Many thanks Ramesh Sir for your response. I will dig in VROL and try to find out difference between different types of Debt funds 🙁

        However in this space a Debt: Income fund named – BSL Dynamic Bond Ret – G seems to be a super star. Do you also like this one?

        Your comments on PPF are eye-opener and thanks once again for that.

        Regards,
        Anurag

        1. Ramesh says:

          I like BSL Dynamic Bond fund.

          Also, any of the Franklin’s debt funds namely Income Opportunities, Short term income, low duration fund, Income builder and Corporate Bond Opportunities.

      2. Prats says:

        Hi Ramesh,

        About the risk associated with PPF that you mentioned, ur take is that govt rating is BBB- and could go to junk also.. and what if like 1991 the govt comes close to defaults or maybe even defaults…
        in case the GOI defaults do you think the equity market wont crash.. they’ll crash taking along all your investments as well..well in that case i dont think even equity market is going to give good returns.. infact a good equity returns is always on the back of sound and stable political and economic situation of the country..
        We only have to look to europe today to realise what happens to equity market in case the country’s economic system collapses.. whats the equity return in greek market i am not sure its any good..
        Infact the high risk high return concept is very much applicable here.. since equity carried higher risk it gives you higher return. The govt bonds/debs/funds are less risky and hence give lesser return..
        perhaps this is the reason that people put atleast a part of their investment in instruments like PPF.. but yes, it cannot be the center point of any investment portfolio.. it cannot be a main option for either long or short term planning…

        Just my thoughts..

        Regards,
        Pratyush
        And in case the financial setup crashes equity investments loss would be more.

        1. Ramesh says:

          Correct.

          Risk is never neutralised is what I want to say. So saying PPF is a risk-free instrument is not true, and I have given the reasons for that.

          I have not said that equities are risk-free or less risky than PPF. But the liquidity of equities ensures you have an escape route.

          Also, think about diversifying across countries so that you do not get busted on the basis of economic collapse of a single country (even if that is what you are living in).

          PPF has a role, but in my opinion, not at all when you are in early (or even late) thirties.

          People used to think about US-64 being govt backed and providing a ‘risk-free’ good return, but so many people suffered because of mis-management of that scheme.
          Also go through this old link. http://www.expressindia.com/fe/daily/19981004/27755274.html

          Ramesh

  4. Jig says:

    KISS,

    Buy term plan
    Keep emergency fund
    Keep ready Medical insurance
    Buy seperate or with term plan the Accident policy & CI cover
    For above all are must. Now its your turn to search that How much enough, for how long, which product those answers only depends on your current situations . So analyse yourself.

    Simple thing google it or search on this forum.. you will find loads of info on each . Use some other sites like moneycontrol where step by step you can do your planning own.

    AFter completing above things , think about investment.
    Again apply KISS. you are 31.
    Keep 70 % of your amount in equity. remaining Debt/Gold/REal estate.
    ( All past data proved that equity is the best instrument for long term investment)

    now again its your turn to selection of product. Large Cap/ Mid Cap/ MultiCap.
    I like the choice of dear Ramesh about Quantum Long term equity. REason for selection is lowest FMC, only the Direct investor AMC & online.

    Discl: I am investing in HDFC T200, Franklin BCF,QLTEF.

    Hope i have not confused you more…. 🙂

    Njoy. Keep sharing..

    Jig

  5. Prats says:

    Hi Ramesh and Ashal,
    Even i am confused with so many options n scenarios.
    I guess i will have to start from scratch. Can we clean the slate and start afresh please? Lets say i have no investment planning, In that case what would you suggest. How and where Should i start? Currently i hold the following-

    NMI 1.1L

    LIC policy of Rs 10000 premium per annum and SA of 25 Lakhs of 25 years tenure.

    Bank FDs to the tune of 1.5 lakhs.

    cash in savings account 4 lakhs.

    I have monthly investable surplus of 45K

    Help me draw up a simple investment plan and portfolio.

    Regards,
    Prats

    1. Dear Prats, in my opinion, you should go for a paid financial planning services if you really want to improve your situation. Please contact dear Manish or any other of your choice.

      Thanks

      ashal

    2. Ramesh says:

      Actually, I did that for you. But you will have to fill up the numbers for yourself.

      Also, in reply to above, I will say, start from even before that.

      1. Start from zero.
      2. Complete Medical and Life insurance things. Are they ok? Do you need any modifications?
      3. What is the status of the Emergency / Contingency fund? Is that sufficient? How have you gone to complete that requirement?
      4. Any Near-term goals/requirements? Are they Need/Luxury? Have you sufficient money for them?
      5. Investments
      – Money for real-estate.
      – Investment for other short term goals. eg. money for child’s schooling, in case there is one. Otherwise, money for pregnancy, delivery and early child care, etc.
      – Investment for other long term goals, which are too many and too far.

  6. Prats says:

    Hi Ashal,
    Currently i am in a rental house with a total rent of 20K PM
    The loan term i am thinking of is 20 years. As per the cacluations shown to me by the banks the EMI is amounting to 28K.
    i am expecting the flat to be worth around 75-80L in next 10-12 years if not more..

    my total household income from me and my wife is 1.1L PM.
    Currently i am not carrying any loans.

    Thanks
    Prats

    1. Ramesh says:

      How much do you think will be the return on that amount?

      35 lakhs input and 75-80 lakhs output in 10-12 years, means around 8-9% CAGR.
      The only benefit is because of the leveraging (and you have ignored the downside risks of leveraging) and tax benefits.

      As always, I remain confused with so many complicated scenarios.

      Ramesh

    2. Dear Prats, for the given situation that you are paying 20K rent & ‘ll earn 8-10K rent, is it justified to you? As both of you are salaried, my take ‘ll be to go for a joint loan & co-ownership only if you want to go for self consumption. Regarding investment purpose, please calculate on your own, @ 28K mly investment, after 10Y, what ‘ll be your corpus value from an Eq. fund?

      Thanks

      Ashal

  7. Prats says:

    Hi Ashal,

    As of now i am considering a couple of options for the flat. Both are around 33-35 lakhs inclusive of all the costs like registration and taxes. One of them is ready to occupy (35 Lakhs) and the other one would be ready by this year end.
    I have been thinking of either shifting myself into the flat or put it on rent. The current rental income expected is about 8-10 K per month.
    I am planning to put 7 lakhs (for downpayment, registration, taxes etc) and take loan of about 28 L.
    I plan to book profit in next 8-10 years.

    1. Dear Prats, if you move into the new property, what ‘ll be the status of your old property & how much loan you are running on this property, if any?

      For that 28L Rs. loan, what ‘ll be your loan term? As you said, you want to keep EMI @ 40% of NMI, are you running any other loan? What’s your NMI? What price you are visualizing after 8-10 years from this property?

      Thanks

      Ashal

  8. Ramesh says:

    In my opinion, you are going Exactly the opposite way from my thought process.

    Examples:

    1. Flat for investment purposes.
    2. Investing in gold.
    3. Long term instruments with low risk. Consider inflation.
    4. Short and medium term instruments with high risk.

    Please go through various threads in this forum. That is the only thing I can say.

    1. Prats says:

      Thanks Ramesh,

      Thats exactly the reason i am looking for advice on my financial planning.
      I am groping in the dark and trying to balance between risky and safe investments, trying to find best way to beat inflation keeping in mind my long and short term goals.

      I have been going through the posts and threads and i must admit i am getting even more confused. Also, I think i put it wrongly. Let me put it this way.

      I want to invest in a small flat where my EMI outlay should not be more than 40% of my income. This would be with a 10 year horizon.

      For gold, i believe that it is one of the strongest instrument to beat inflation in long term. but i am unsure about which form to take. gold funds? gold coins? or ETFs- i think they can be redeemed for real gold but i am not sure about this.

      Long term insurance with low risk is something for my retirement planning and for my late year liabilities- something like PPF.. Again i am not sure if PPF is the best way or are there any other better ways..

      In case you believe that my whole idea is flawed then please help me rectify it.

      Regards,
      Prats

      1. Ramesh says:

        Question everything and then go about finding the reasons for choosing which is a correct thing.

        Eg. why do you consider gold to be the strongest instrument to beat inflation in long term. What data do you have? In what horizon. By whom have you been influenced. Belief is not a good thing, unless it is backed by strong objective reasons.

        Over a long term period, debt instruments (your low-risk instruments) fail to beat inflation. They have never done it in any country ever in the history.

        Over a short term period, high risk instruments are by definition very risky and you can lose your confidence in them in a very short time. But over a long period of time, they have good chances (not perfect, not always) of beating inflation.

        PPF is an illiquid, pure debt, risky instrument for a person in early thirties (and I am sure, I am the only one who has this view on this forum!).

        Identify all the risks, and see how can you minimize them. You cannot eliminate them completely.

        1. Prats says:

          Ramesh, from your comments and what I read around the forums it seems like I need to stay away from all low risk instruments like PPF/NPS/Govt Bonds. Also, gold is not being taken as a good option.. Should i only invest in equities either directly or thru MFs??

          I am even more confused now.

          Seems like i need to start from scratch about my investment planning.
          Let me simplify my doubts like this-

          What should the spread of my investment portfolio- what percentage into which instruments? If i go only for MFs then what kind of MFs should i consider?

          What about my tax saving investment which i have to compulsorily do every year.. which instruments should i go for?

          Apart from the tax savings which are the instruments i should consider..?

          I have thought of the following (but not sure about the percentage allocation)-

          20 K per month (which i saving for a flat) for now should go into MIPs / SHORT TERM BOND FUND / RD

          For the surplus investment amount of 25K i have thought of the following-

          regular contribution to an equity linked retirement plans / Money back plans- which would also take care of my tax uner 80c

          SIPs into the following
          Large cap MFs
          Mid Cap MFs
          Thematic / sectoral MFs
          debt Funds..

          Hope now i am making some sense with my planning..

          1. Dear Prats, You & dear Ramesh are discussing nicely. Let me too jump into the boat. First I want to discuss that flat for investment thing.

            @ 35L Rs., is it final price including all expenses or ‘ll there be more? The property ‘ll be ready possession or under construction? What rental income are you expecting from this property? How much you ‘ll put in from your own pocket as Down Payment & how much Loan? After how many years, you intend to book profits?

            Please clarify.

            We ‘ll discuss all other things also later.

            Thanks

            Ashal

          2. Ramesh says:

            Keep things very simple (KISS)

            1. Debt for short term requirements (within 2-3 years things). So your requirement for real-estate comes into this. Go for simple short-term bond fund or even RD (but RD are less tax-friendly, if you are in high income group).

            2. For very long term goals (like retirement, etc), go with equity funds. If you are new, go with equity oriented balanced funds or decent equity funds. As far as possible, go with ELSS till they are allowed. Opt for a similar kind of ELSS as your normal equity fund of choice.

            3. Emergency / Contingency funds (by nature short-term)- short-term bond funds / FD / cash in savings account. Everyone has a different opinion about the amount of this. Choose as per your convenience.

            4. Regarding equity linked retirement plans- if you do not have, don’t buy them now. Money back plans are just plain unnecessary, opaque and hazardous for financial health.

            For my side:
            good debt fund- Templeton Short term income fund (9 months is the date of early redemption penalty). Templeton Low Duration Fund – (3months is the corresponding time).

            good equity fund- Franklin Prima Plus / Quantum Long Term Equity / DSPBR Equity / HDFC Equity. Choose any one of the these and later on as per your knowledge and experience, you can indulge in more and manage accordingly.

            Keep learning and investing.

            Ramesh

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