Retirement is one such
inevitability which is seldom systematically planned. More often than not, it
is left either to
- luck—we’ll manage somehow; or to
- 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 THINKING
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”.
YOUR ACTIONS
- 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
|
Dec-2009
|
1,00,000
|
2,39,527.00
|
1,52,730
|
|
Birla Tax
Relief’96
|
March 1996
|
1,00,000
|
78,39,830(*)
|
4,59,333
|
|
Franklin
India Tax shield
|
April 1999
|
1,00,000
|
33,35,657
|
3,56,265
|
|
HDFC Tax Saver
|
March 1996
|
1,00,000
|
35,80,590
|
4,59,333
|
|
Reliance Tax
Saver
|
Sept 2005
|
1,00,000
|
3,84,882
|
2,14,320
|
|
SBI magnum
tax gain
|
March 1993
|
1,00,000
|
9,63,046
|
5,92,219
|
(*) 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.
