FD gives 15 lacs as assured income at the end of the year but capital gain after 1 year is not gauranteed. It could very well be loss for 5 years in row so what if it gains hundreds of times in the 6th year. There is big risk of damaging the original capital.
That is why I am thinking of playing safe and simplify the life.
About logic – all I meant was even when prices were less back in the time, there were people who earned even less and yet survived back then as well. Similarly in future when inflation brings down value of today’s amt, ppl will still find ways to manage. One example when I was young there was only Doordarshan (and not everybody had a TV set) and once a week one hindi movie on it. In those time folks did not consider themselves less fortunate if they were not able to see movies 24 by 7 on gazzilion channels. The quality of life was not that bad. Not everybody went to watch movie in the theater and some used to see movies only matinee show, as ticket rates were low. Basically inflation is being used as a tool to scare ppl to invest more in more risky instruments and insure more. I agree education and medical costs are of big concern, rest not so much me thinks.
I agree that price and value has its own meaning over the time. I just wanted to say even when there is corpus of 2.5 crore and interest income of yearly 15 lacs the Inflation still continues to be the ever so powerful Boogyman? By same logic poor folks and middle class folks still manage to thrive back then with min income and no reason why they should not in the future. The only difference I see is getting caught in the “lifestyle”
Anyway point taken, the part of 15 lacs generated by the FD interest should be put in the equity basket.
I would just want to correct the last line.
Think what exactly are you doing.
You are putting money in Debt > Interest money and pay tax > and then put in equity.
Why not just put into equity directly > and keep the capital gains (after 1 year of course) as tax free.
Think more and simplify things.
Your logic fails because poor and middle class folks dont have 2.5 crores. Also, the thiving families are those, who manage to increase their income beyond the inflation levels, rest do not. Overall, we still are a poor country.
Dear Invest, Everybody, has tried to offer you a bit. I’m slightly differing. I’m asking you a plain thing.
Cost of Colgate Toothpaste in 2003, 2008, 2013
Cost of Petrol 2003, 2008, 2013
Cost of Parle G biscuit………..
Cost of wheat flour………..
Cost of Dal………..
Cost of X-ray………
Cost of your doctor……….
Dear JGMM , Noted. I understand that inflation has a big impact on our normal routine expenses.
About big ticket items like heart surgeries with medical policy I doubt one has to fork out all those 8 lacs and premium won’t be in the tune of 5 lacs/year type either
In these days of cable tv and home theater system all movies are kinda free anyway.
But I agree with these types of examples , one is surely afraid of inflation.
I was thinking the 15 lacs per month generated on the original 2.5 crore shd be diverted to such most imp items like medical policy , term insurance etc so that it will generate / take care of big events.
2.5 crores does not reduce to 1.25 crores but the value of 2.5 crores 7 to 8 years from now is 1.25 crores in today’s terms. Confusing?
Even some 15 years back the balcony ticket in a theater was Rs.15. A Pop Corn was Rs. 5 and drinking aerated drinks in a theater unheard of! So for a family of 4 the cost of 1 movie was less than Rs.100 (excluding travel!). 1 movie a month ==> INR 1200 annual cost for 12 movies!!
Today a premier ticket in a good multiplex costs ‘atleast’ 200 and a Popcorn and coke added for everyone is another Rs. 100 at a minimum so for a family of 4 the movie cost is ~ 1200 per movie.
So for the same INR 1200 a family enjoyed 12 movies in a year versus 1 movie in a year today. This is what inflation does to the Rs. 1200.
Heart surgeries were in the range of 2 lacs a decade back and is now not less than 8-10 lacs in even medicore hospitals.
Inflation thus ‘erodes’ your purchasing power. Dont underestimate inflation.
Long term solution to invest 2.5 cr is to definitely include some 20-30% equity (or more if you have appetite) and divide bulk of the rest between short term bond fund and long term FDs. Given the corpus size I would also recommend some exposure 5-8% in MIPs in SIP mode. Although MIPs have Equity + Debt their long term returns are sure superior than FDs while having better tax treatment (Inflation indexed).
>2.5 crores as cash, their purchasing power after 7 years will be 1.25 crores in today’s terms
Oh man! Ramesh I guess your last name is Ramse 🙂 You are scaring me man…
Frankly in 15 lacs (return) any good medical policy, good term insurance is possible right? Plus I know one relative retired in 2005 and whatever money he received is intact, There is no such difference 2.5 crore now 1.25. Plus FD rates have been about same. So I am really now puzzled why you say inflation is so dangerous and when in reality I did not see any such drastic drop in his networth value.
The important thing to answer first is what and how much % of your portfolio is this 2.5 Cr. The answer will differ based on the %. Also what is your age matters and makes a difference!
unfortunately you are wrong about inflation. House would need maintenance repairs, household items need to be replaced, car needs to replaced repaired, petrol!
If you are not dead already you are going to grow old, Medical costs skyrocket
Insurance premium will increase
Anything that money can buy is influenced by inflation. Not by the same extent but definitely influenced.
15 lac is your annual expense now. Suppose you assume an inflation of 6% which is very modest and want an annual payout which increases each year at 6%
then for 9% return on corpus the money will last 22 years
10% 25 years
11% 30 years
12% 40 years
At the end of this the corpus will be zero since the payout increases the principal starts to decrease
So depending on your age, spouses age, whether you want some left to them after you die to if it is okay to go to zero you could choose the investment statergy
Thanks for the suggestions. Yeah if the interest come down after few years (to tackle the inflation) one will have to think in this direction but until then :-)..
BTW funny thing about inflation, now I am not saying economists are wrong but whatever inflation rate is given is not always applicable to common person especially if that person already has house, car and some major provisions like higher education and wedding expenses of kids is already taken care of. I believe in that situation the actual inflation in that common man’s life is not as much as published by various agencies.
You are correct in saying “the actual inflation in that common man’s life is not as much as published by various agencies.” But the direction of error is wrong from your perception. It is way way higher than what is published.
By the way, all those provisions’ (higher education, and wedding expenses) amounts should also be in inflation-beating instruments. Otherwise, you will start feeling the pinch within 5-7-10 years. A 10% actual inflation rate (I presume, if govt data says 6-7%, then it is atleast 10%+) over 7 years will decrease your purchasing power by half. Which just means, without any tax or consumption, if you will keep your 2.5 crores as cash, their purchasing power after 7 years will be 1.25 crores in today’s terms.
Whether economists say or not, inflation is a big threat to the common man. Mostly, economists will never make it a big enough deal.
Take simple examples which do not appear to be major. I remember, the price of bread to be about 1-1.25 20 years ago, now it is 25, which means a 20 fold increase in 20 years (equivalent to 16% inflation rate). Check the same with other normal day-to-day things like milk, pulses, etc. Price doubling in 5 years means 14-15% inflation rate.
What will you do when the interest rates bottom out? or the FD period ends, after 8-10 years?
The principal protection scheming will not help you when the erosive effect of inflation will kick in after a few years. You need to think about those things too.
My idea will be:
1. Decide on a max limit of equity exposure. Say 20-40%. Put the rest of money into two bond funds – 1 a short-term bond fund and other an income fund. I would suggest, 30% in Equity fund, 40% in Income fund and 30% in Short-term bond fund.
2. Every year, withdraw whatever amount is required (15L this year, maybe a little more next year and so on) from the short-term bond fund, and let the rest remain within the respective funds.
3. Every year, see if the asset allocation between the 3 funds is not very different from the original 30,40,30 and accordingly shift from one to another. You can even do this every 2 years or so.
Forgot about the tax free bonds! You will get about less than 8% tax free each year.
The only problem is it maybe a risk to put the entire amount in these instruments.
You could spread it bet FDs and these and reduce your tax outgo depending on your comfort level.
Of course the principle will be locked for a few years (check individual bond details) if you don’t mind this you can consider it.
You could choose more than one company to spread out the risk further.
Thank you dear FFC for the reply. However is there no escaping that math / tax formula above? I mean @ 9% = Rs 22.5 lacs will have to give out 30.9% tax around 6 to 7 lacs?
Any other way of investing and reducing the tax burden and get more in hand than about 16 lacs?
If an instrument earns 9% interest, for someone in the 30% tax bracket this will give a net return of about 6% which is enough to get 15 lakhs per year
Just park your in money in a FD giving 9% or more
debt funds are an option but they are risky and not all of them will give 9% guaranteed return each year.
I am not sure why the original post is invisible. So here it is
Hi
Situation : You have 2.5 crores. Earn decent return without too much risk & min taxes. Suggest how to invest. Need about 15 lacs annually for various expenses.
Main idea is to explore safest investment option which gives maximum returns and min possible taxes on the annual returns without reducing/risking the original capital 2.5 crore
Thanks & Regards
Dear Ramesh
FD gives 15 lacs as assured income at the end of the year but capital gain after 1 year is not gauranteed. It could very well be loss for 5 years in row so what if it gains hundreds of times in the 6th year. There is big risk of damaging the original capital.
That is why I am thinking of playing safe and simplify the life.
About logic – all I meant was even when prices were less back in the time, there were people who earned even less and yet survived back then as well. Similarly in future when inflation brings down value of today’s amt, ppl will still find ways to manage. One example when I was young there was only Doordarshan (and not everybody had a TV set) and once a week one hindi movie on it. In those time folks did not consider themselves less fortunate if they were not able to see movies 24 by 7 on gazzilion channels. The quality of life was not that bad. Not everybody went to watch movie in the theater and some used to see movies only matinee show, as ticket rates were low. Basically inflation is being used as a tool to scare ppl to invest more in more risky instruments and insure more. I agree education and medical costs are of big concern, rest not so much me thinks.
Dear Ashal
I agree that price and value has its own meaning over the time. I just wanted to say even when there is corpus of 2.5 crore and interest income of yearly 15 lacs the Inflation still continues to be the ever so powerful Boogyman? By same logic poor folks and middle class folks still manage to thrive back then with min income and no reason why they should not in the future. The only difference I see is getting caught in the “lifestyle”
Anyway point taken, the part of 15 lacs generated by the FD interest should be put in the equity basket.
I would just want to correct the last line.
Think what exactly are you doing.
You are putting money in Debt > Interest money and pay tax > and then put in equity.
Why not just put into equity directly > and keep the capital gains (after 1 year of course) as tax free.
Think more and simplify things.
Your logic fails because poor and middle class folks dont have 2.5 crores. Also, the thiving families are those, who manage to increase their income beyond the inflation levels, rest do not. Overall, we still are a poor country.
Dear Invest, Everybody, has tried to offer you a bit. I’m slightly differing. I’m asking you a plain thing.
Cost of Colgate Toothpaste in 2003, 2008, 2013
Cost of Petrol 2003, 2008, 2013
Cost of Parle G biscuit………..
Cost of wheat flour………..
Cost of Dal………..
Cost of X-ray………
Cost of your doctor……….
Please answer.
thanks
Ashal
sorry I meant 15 lacs per year.. in the last para.
Dear JGMM , Noted. I understand that inflation has a big impact on our normal routine expenses.
About big ticket items like heart surgeries with medical policy I doubt one has to fork out all those 8 lacs and premium won’t be in the tune of 5 lacs/year type either
In these days of cable tv and home theater system all movies are kinda free anyway.
But I agree with these types of examples , one is surely afraid of inflation.
I was thinking the 15 lacs per month generated on the original 2.5 crore shd be diverted to such most imp items like medical policy , term insurance etc so that it will generate / take care of big events.
2.5 crores does not reduce to 1.25 crores but the value of 2.5 crores 7 to 8 years from now is 1.25 crores in today’s terms. Confusing?
Even some 15 years back the balcony ticket in a theater was Rs.15. A Pop Corn was Rs. 5 and drinking aerated drinks in a theater unheard of! So for a family of 4 the cost of 1 movie was less than Rs.100 (excluding travel!). 1 movie a month ==> INR 1200 annual cost for 12 movies!!
Today a premier ticket in a good multiplex costs ‘atleast’ 200 and a Popcorn and coke added for everyone is another Rs. 100 at a minimum so for a family of 4 the movie cost is ~ 1200 per movie.
So for the same INR 1200 a family enjoyed 12 movies in a year versus 1 movie in a year today. This is what inflation does to the Rs. 1200.
Heart surgeries were in the range of 2 lacs a decade back and is now not less than 8-10 lacs in even medicore hospitals.
Inflation thus ‘erodes’ your purchasing power. Dont underestimate inflation.
Long term solution to invest 2.5 cr is to definitely include some 20-30% equity (or more if you have appetite) and divide bulk of the rest between short term bond fund and long term FDs. Given the corpus size I would also recommend some exposure 5-8% in MIPs in SIP mode. Although MIPs have Equity + Debt their long term returns are sure superior than FDs while having better tax treatment (Inflation indexed).
Nor have I see this retired person’s annual expense shot up drastically. It was and is about the same.
>2.5 crores as cash, their purchasing power after 7 years will be 1.25 crores in today’s terms
Oh man! Ramesh I guess your last name is Ramse 🙂 You are scaring me man…
Frankly in 15 lacs (return) any good medical policy, good term insurance is possible right? Plus I know one relative retired in 2005 and whatever money he received is intact, There is no such difference 2.5 crore now 1.25. Plus FD rates have been about same. So I am really now puzzled why you say inflation is so dangerous and when in reality I did not see any such drastic drop in his networth value.
The important thing to answer first is what and how much % of your portfolio is this 2.5 Cr. The answer will differ based on the %. Also what is your age matters and makes a difference!
Sorry. I meant
whether you want some money left to children or anyone else or if it is okay for the money to go to zero
unfortunately you are wrong about inflation. House would need maintenance repairs, household items need to be replaced, car needs to replaced repaired, petrol!
If you are not dead already you are going to grow old, Medical costs skyrocket
Insurance premium will increase
Anything that money can buy is influenced by inflation. Not by the same extent but definitely influenced.
15 lac is your annual expense now. Suppose you assume an inflation of 6% which is very modest and want an annual payout which increases each year at 6%
then for 9% return on corpus the money will last 22 years
10% 25 years
11% 30 years
12% 40 years
At the end of this the corpus will be zero since the payout increases the principal starts to decrease
So depending on your age, spouses age, whether you want some left to them after you die to if it is okay to go to zero you could choose the investment statergy
Dear Ramesh
Thanks for the suggestions. Yeah if the interest come down after few years (to tackle the inflation) one will have to think in this direction but until then :-)..
BTW funny thing about inflation, now I am not saying economists are wrong but whatever inflation rate is given is not always applicable to common person especially if that person already has house, car and some major provisions like higher education and wedding expenses of kids is already taken care of. I believe in that situation the actual inflation in that common man’s life is not as much as published by various agencies.
Somebody please correct me if I am wrong.
Whoops.
You are correct in saying “the actual inflation in that common man’s life is not as much as published by various agencies.” But the direction of error is wrong from your perception. It is way way higher than what is published.
By the way, all those provisions’ (higher education, and wedding expenses) amounts should also be in inflation-beating instruments. Otherwise, you will start feeling the pinch within 5-7-10 years. A 10% actual inflation rate (I presume, if govt data says 6-7%, then it is atleast 10%+) over 7 years will decrease your purchasing power by half. Which just means, without any tax or consumption, if you will keep your 2.5 crores as cash, their purchasing power after 7 years will be 1.25 crores in today’s terms.
Whether economists say or not, inflation is a big threat to the common man. Mostly, economists will never make it a big enough deal.
Take simple examples which do not appear to be major. I remember, the price of bread to be about 1-1.25 20 years ago, now it is 25, which means a 20 fold increase in 20 years (equivalent to 16% inflation rate). Check the same with other normal day-to-day things like milk, pulses, etc. Price doubling in 5 years means 14-15% inflation rate.
Thanks FFC. Will explore that option.
Regards
What will you do when the interest rates bottom out? or the FD period ends, after 8-10 years?
The principal protection scheming will not help you when the erosive effect of inflation will kick in after a few years. You need to think about those things too.
My idea will be:
1. Decide on a max limit of equity exposure. Say 20-40%. Put the rest of money into two bond funds – 1 a short-term bond fund and other an income fund. I would suggest, 30% in Equity fund, 40% in Income fund and 30% in Short-term bond fund.
2. Every year, withdraw whatever amount is required (15L this year, maybe a little more next year and so on) from the short-term bond fund, and let the rest remain within the respective funds.
3. Every year, see if the asset allocation between the 3 funds is not very different from the original 30,40,30 and accordingly shift from one to another. You can even do this every 2 years or so.
think about this method.
Forgot about the tax free bonds! You will get about less than 8% tax free each year.
The only problem is it maybe a risk to put the entire amount in these instruments.
You could spread it bet FDs and these and reduce your tax outgo depending on your comfort level.
Of course the principle will be locked for a few years (check individual bond details) if you don’t mind this you can consider it.
You could choose more than one company to spread out the risk further.
There debt fund options which have a lower tax outgo but are risky
You could read more about them here
http://businesstoday.intoday.in/story/rbi-interest-rate-cut-long-term-debt-funds/1/22659.html
Thank you dear FFC for the reply. However is there no escaping that math / tax formula above? I mean @ 9% = Rs 22.5 lacs will have to give out 30.9% tax around 6 to 7 lacs?
Any other way of investing and reducing the tax burden and get more in hand than about 16 lacs?
If an instrument earns 9% interest, for someone in the 30% tax bracket this will give a net return of about 6% which is enough to get 15 lakhs per year
Just park your in money in a FD giving 9% or more
debt funds are an option but they are risky and not all of them will give 9% guaranteed return each year.
If you are interested in the math:
tax adjusted return = return(1-tax)
tax = 30% + 3% cess = 30.9%
return = 9%
so tax adjusted return = 6.22%
I am not sure why the original post is invisible. So here it is
Hi
Situation : You have 2.5 crores. Earn decent return without too much risk & min taxes. Suggest how to invest. Need about 15 lacs annually for various expenses.
Main idea is to explore safest investment option which gives maximum returns and min possible taxes on the annual returns without reducing/risking the original capital 2.5 crore
Thanks & Regards