Wednesday, July 30, 2014

YOU can make or break your Retirement

Retirement is one such inevitability which is seldom systematically planned. More often than not, it is left either to
  1. luck—we’ll manage somehow; or to
  2. hope —children will take care.

Retirement planning is nothing but working out the numbers to figure out how much I need to accumulate over n years in order to live X amount of years at Y rupees per year. Too many probable to work out.
It is human nature to postpone decisions involving uncertainty on to a future date—retirement being one of it.   Postponing the planning only reduces the kitty. For example a monthly sip of Rs. 5000/-for 25 years @ 10% CAGR will result in a corpus of roughly Rs. 66 lacs. A delay of just 5 years will yield a corpus of only Rs. 38 lacs—a reduction of whopping 40%.

Have you ever wondered what is it that can make or break your retirement?
The answer strangely enough is YOU--

  •          Your thinking; and
  •          Your actions


Your thoughts lead to actions. Factors like too much information flow, peer pressure, atmosphere that we live in etc. shape our thought processes.

  • Market levels rather than fundamentals guide your investments decisions. 
It is said and proved time & again that best investments are those that are made in bad times. Unfortunately, it doesn't so happen due to various factors like too much negative news flow in pink papers & business channels etc. Investments invariably happen during the bullish phase as is brought out by level of inflows. For example the mutual fund industry mopped up roughly Rs. 22,000 crores during the bullish fervor of 2001 while the collections during the bearish phase of 2003 were only Rs. 118 crores.

  • Affinity to fixed income products 

Have you ever realized that by investing in fixed income products, you are getting poorer with every passing day? Inflation and taxation eat away a big chunk of your interest. According to a study Rs. 1 lac invested in a bank fixed deposit in 1979-1980 will be worth only Rs.1,07,452/-in 2013-2014(adjusting for inflation). Annualized return of bank FD during this period was 8.41%, while annualized inflation during the same period was 7.57%. So effectively an investor made only 0.84% annualized return---subject to tax. On the other hand Rs. 1,00,000 invested in Sensex would have been worth a whopping Rs.2,23,86,000—annualized return of 16.70%--TAX FREE. It has been wisely commented that “remaining fixed will not get you anywhere”.

  • Putting loved ones at risk 

Recently we witnessed an operations executive at a leading Mutual Fund buy a Rs. 2 lac endowment policy for his daughter. This person and many like him still believe in buying a children plan from an insurance company for securing their child’s future—little realizing that it is they who are their child’s future. Despite increased awareness about financial literacy, term plans are still considered as wasteful expenditure.

  • Avoiding ELSS as tax saving instruments:- 

Section 80C provides for and deduction of Rs. 1 lac per year from the taxable income. We have observed that this limit of Rs. 1 lac is exhausted preferably through PPF (for non-salaried assesses). The lure of 8% tax free interest is too powerful to ignore. Compare this with the return that ELSS funds have given:-

Inception date
Amount invested
Value of Rs. 1 lac
(as on 25/07/2014)
Value of PPF deposit
Axis Long Term Equity fund
Birla Tax Relief’96
March 1996
Franklin India Tax shield
April 1999
HDFC Tax Saver
March 1996
Reliance Tax Saver
Sept 2005
SBI magnum tax gain
March 1993
                   (*) as on 30/06/2014

  • Short term outlook for investments 

We as investors are obsessed with immediate returns to qualify as good investment. Domestic investors have been cashing out their holdings at every rise while FIIs have been steadily increasing their stake in the Indian capital market. For instance, FIIs owned roughly 13% of the stocks as on 31/03/2003. The said figure stood at 21% as on 31/03/2013. Does this mean that foreigners are more confident about our market than us Indians?

Alternatively, consider this:-Rs. 1 lac invested in Reliance Growth Fund at its inception in October 1995 is now worth Rs. 65 lacs—an annualized growth of 25%. All you had to do was buy right and sit tight—through all the wars, famines and other upheavals in the Indian economy. How many investors have you heard of making such a killing on the stock market?

In conclusion we would only say that returns from equity are certain. It’s only the timing that is uncertain. All you've got to give is time and shut out the noise. After all, to make equities your 2nd. earning member of your family, time is essence.