A friend of mine asked for some good investment ideas, but he put the condition that I give him just three options. He didn’t want an information overload and certainly didn’t want to deal with any more jargon than he had to.
With that in mind, these are the three things I told him to buy and I thought it would make an interesting post here too, so here goes.
Tax Free Bonds
For people in the 30% tax bracket – tax free bonds are an attractive debt option because many of these have interest rates of close to 8% and if you don’t have to pay tax on that then that becomes a very good post tax yield.
I’m not putting a number to the after tax yield because that is open to debate and if you haven’t seen the post on the comparison between SBI fixed deposits and tax free bonds, then that will be a useful read.
Fixed Maturity Plans
FMPs are more tax efficient than fixed deposits and these can also be used as part of your fixed income portfolio to enhance your returns, especially if you are in the higher tax brackets.
These will be shorter term than the tax free bonds, and will only be available for investment during their NFO period as they are close ended funds.
ELSS Funds
Anyone reading this blog for any length of time will know that I’m biased towards equities and there is no way that I can talk about investments without talking about equities. However, for someone who has never been in equities, it is important to understand the volatility and the lack of guarantee that comes along with it.
I told my friend that the 80C part of his investments can go in a ELSS fund and that’s a good way to get started in equities.
Are three options enough?
He wanted three and I gave him three keeping in mind his high tax bracket and an inclination to keep things simple, but I honestly don’t think three options are enough.
I’m fairly sure he’s not going to take this advice and I find it hard to see how anyone else can implement this plan either especially if you are reading this blog and know the many many other investing options available.
That being said, if you could invest in just three things – what would those be?
AFAIK, after 15 years, you can keep extending your PPF account for 5 more years with contribution. Even if you dont extend the money in the PPF account continue to earn interest as usual. You can close it anytime you want and take the money.
I was keen on keeping my PPF account as a retirement account – just like in EPF. I hope to never withdraw from it until I retire. Is that possible?
What happens to the money in a PPF account after 15 years? Does it continue to give tax free interest, or does it lie idle in the account since its term is complete?
Assuming, I have deposited Rs. 70,000 every year since the year 2000. Can I retain the entire amount in the PPF account in 2016? Can I deposit Rs. 100,000 more in 2016 or will I be restricted to deposit only Rs. 30,000 (cosidering that I have not withdrawn the Rs. 70,000 deposited in the year 2000)?
Yes deepak, you can keep PPF a/c till your retirement . After completing first 15 years, you can extend this a/c any number of times for a block of 5 years, and you will continue to earn tax free interest.
While extending the period, you have to inform the bank/post office of your intention to continue with or without furthur contribution. If it is with contribution then you may continue with any amount of deposit upto Rs 1 lakh per FY, and if it is without contribution, then your money will keep on earning the taxfree interest.
http://goodmoneying.com/financial-planning/ppf-public-provident-fund
Today I had an interesting conversation which I thought of tying to investing.
A friend calls up and asks “Which color tie should I wear today?”
We would ask for : which color shirt, pant he is wearing, what are the color of ties he has? what kind of function is he attending (official or casual) etc?
When for such a simple question we need more information then suggesting options for investing would need more information like:
1) Can he afford to invest( what if he has a loan? Has he taken insurance)
2) For how long he wants to invest – 1 year, 2 year, 3 years…
3) How much can he afford to loose or the risk tolerance ?
4) Does he want assured returns?
5) Is it for saving taxes?
6)Would at any time he wants to withdraw?
When we sit in taxi or auto the first question driver asks is where to?
Investing is a confusing topic for it means different things to different people..like 5 blind people on an elephant. Tried to capture this in infographic Why Is Investing Confusing?An infographic
Investing is not a product but a plan and that too a very personal plan. If a person needs money in 2-3 years then PPF option would not suit him but if he wants to save for his children or retirement some 20 years then PPF is a great option.
As a friend you might have more information about his finances and hence these suggestions.
I prefer the following 3
1. PPF for long term investment. Say fund needed after retirement.
2. Diversified and Large Cap MFs for 10-15 year investment. Say kids education. I dont think folks in 30% tax slab need any ELSS funds, since their EPF contribution, insurance premiums and home loan principal payment might take care of the 1L limit.
3. FDs/FMPs for the short to medium term investments.
Does it make sense? 🙂
Btw last 6 months, the best investment I found was Liquid funds, giving me 10% p.a.pre tax (7.5% post tax yield after DDT). However, since interest rate cycle is on a decline, these returns will suffer. Hence, longer duration bonds (like NHAI, PFC tax free), will give maximum capital gains. Logically every 1% decline in yield should result in % increase in bond price equal to its residual duration (10% increase for a 10 year bond). Therefore, I would recommend high credit quality bonds or bond funds to take advantage of interest rate risk.
Which liquid funds did you invest in?
I invested in Quantum and ICICI Pru Liq fund. The peak of the cycle post tax returns were phenomenal at over 8% annualised post tax (for Quantum), but slowly it declined and now its 7% annualised post tax. I made the shift into Ultra short term funds, where the lower tax allowed around 8.5% annualised post tax over last 2-3 months. But now with repo and CRR cuts expected, these returns will fall further.
Interesting Ankur – thanks for sharing.
One option I would recommend is to buy a couple of consumer oriented stocks like HUL, ITC, Godrej Consumber, Dabur, Tata Global, etc.
The best way to start is to invest gradually by adding a few stocks when prices go down and accumulating it over a longer period. These are established players with lower downside.
Although people argue that these are boring and slow in terms of returns, they are known to provide steady returns and solid appreciation overtime. Sometimes they can become multibaggers – if you dont believe me just pick up a top 500 capital markets or company digest and look at their dividend payout, ROCE, ROE, etc and you will know why several analysts and funds still invest in these biggies.
Curious to know how much these have returned over the last 5 or 6 years?
1) PPF will definitely be on the top for several reasons: 1) You get tax deduction upfront 2) Money grows tax free 3) Withdrawals are tax free. Anybody in 30% tax bracket can easily sock away 1 lac/year. It is also the safest.
2) SIP in a good equity fund like HDFC top 200
3) Raw land
If I have three options to invest. I would choose : PPF, Equity or Balanced Mutual Funds and Tax Free Bonds.
Yes, but rightly said by you these three options are not enough as I will not like to get fixed to them. Jugling your investment is also a key as market and economics change
Looks like PPF is a popular option that I missed out!
I have few questions/comments:
There are many types of debt funds and their tax treatments are different, this confuses me a lot. I understand the following regarding FMP
1. If the duration is less than 1 year, it is better to opt for Dividend-Payout option.
2. If it is more than 1 year, it is better to go for Growth option.
3. It is preferable to invest in FMPs during March which has a maturity date in April of next year.
Please comment on my understanding on FMPs. 🙂
Thanks, Amlan
The DTC was meant to remove the double benefit from investing in FMPs that mature next April but since that hasn’t been implemented yet I’m not sure if it still makes sense to buy those or not. Let me check that with someone unless somebody else already knows the answer, in which case please do leave a comment.
1. Yes, for less then 1 year debt investmnt dividend payout would be suitable option. But it doesn’t make sense for those who comes under the lowest tax bracket, as the DDT itself is at 13.519%.
2. Yes, growth option is better for more than 1 year investmnt as it will help in getting indexation benefit, which many a times has made the returns tax free.
3. Very true. In march, many AMCs comes up with 13 months FMP plans, which helps in getting double indexation benefit, so it a.lways helps in reducing the tax outgo. But as manshu said that DTC will remove this double benefit from such products as it is proposed to change the definition of Long and short term in DTC
Thank you Manikaran for your detail and valuable input.
Thanks Manikaran – very useful info – I’ll share it on the FB feed also. Thanks!
You have given your friend varied options. I am keen to know what did he choose and why?
How I wish investing was so simple? Any investment product should be bought with following things in mind: Liquidity, Safety, Returns and Taxation. as I discussed in my article Investing:Think about Liquidity,Safety,Returns,Risk,Tax
Fairly sure he’s not going to do anything, not before the tax season anyway, then he will probably do what’s easiest 🙂
Hi Manhsu,
PPF and 10 year NSC are also good option, considering you avail the tax benefit.Nevertheless, tax free maturity makes PPF a good investment option.10 year NSC has also prove to be a good option for someone in higher tax bracket.
If have to make a choice then will go with PPF due to its higher yield.
http://www.moneycontrol.com/news/fixed-income-company-deposits/howchangessmall-savings-schemes-benefits-investors_710631.html
Thanks for these two options Jitendra. I thought about PPF but then ruled it out due to the lock in period. Didn’t think of NSC which can be a good option as well. Thanks!
FMPs also dont guarantee returns and you are clueless what will be returns till the maturity.Also risk appetite of individual matters.
Yeah, those are valid points and when I wrote about FMPs I mentioned them myself as well. So what would you replace FMPs with?
Looking at today’s situation nothing beats FD in a nationalized bank. Don’t feel confident about private banks also now. Wonder how many are hiding NPA’s, after all if GDP is down at least some SME’s should have gone bust and SB’s defaulted.
I like to think that we are investing for the next 10 to 15 years but I get what you’re saying 🙂