Investment Objectives & Advice

What to chose between EPF, PPF & ELSS for 80C savings?

As the tax season kicks off this month with firms starting to ask for investment proof under Section 80C. Most of us get this benefit and it has always been exploited by various sales people from insurance, MF or banks etc. The problem mostly lies with us (Investors) as some of us fail to plan and i know so many people who want to use 80C on March 30 every year using whatever option available and end up buying the Tax saving Bank FDs. There are various investment options available under Section 80C investments, though today’s blog is less about the available options and more about How to personalize it.

Most people want to know the universal answer for their investment needs and always want to ask for the best way or best instrument etc. let me re-iterate like a broken record, it is personal finance so please personalize it. Personalizing the 80C investments as any other options should be based on below parameters:

  1. Post tax returns
  2. Lock in period/ liquidity of investments
  3. Asset Allocation to minimize risk
  4. Goal mapping
  5. Mitigating contingency risks

Therefore, all the debates about which investment option is best between SSY, EPF, PPF, ELSS, insurance etc are of no use. The right question is what should you opt for. Let’s try to understand them with few examples scenarios:

Case : Sumit has recently started his first job at he age of 22. He stays with his parent, who have funded his education and in turn have accumulated only a smaller corpus for their retirement and will primarily depend on him for funding their final years. He is currently single and plan to get married in 5-7 yrs later and save for his Post graduation. He can save up to 1-1.2 lacs in a year and post this savings under 80C he will be in nil tax bracket. where should he invest?

Sumit is starting his investment journey and If he gets into the debate of best tax saving option and end up being all in ELSS or PPF etc, that would not solve his needs. He need to think of his expenses and most of those will be in short run. And, if this is his only savings then all the 80C investments will be locked in for at the least 3yrs (in ELSS) to 15yrs in case of PPF etc. He should start with below approach:

  1. Get a life insurance term plan with coverage of at least equivalent to the amount needed as corpus for parents retirement
  2. Check for the EPF contribution he is making which will be part of 80C deductions and if that is above & beyond the saving capacity of 1.2 lacs then he can use that amount as emergency corpus saved as Fixed deposits/ liquid funds
  3. Apply for a credit card only to be used in case of emergency expenditure else use it in prudent fashion only on the needs and what can be repaid monthly
  4. Also check if the medical insurance by the employer covers you as well as parents as this is an unforeseeable risk and a common condition like Dengue can make a dent in your savings. Best is to take a basic cover for medical expenses up to 3-5 lacs and append it with Super Top-up.
  5. For the remaining money (1.2 lacs – EPF Contribution – Insurance premium – medical insurance premium), he need it to be more liquid and accessible within 5 yrs so only two main options he have in hand are Tax Saving deposits & ELSS. While ELSS is market linked and volatile, Tax saving deposits will have tax on interest earned. He can split his money 50-50 across categories or as per risk appetite.

Therefore, even when most people will rate the tax saving fixed deposits as the worst of the lot for 80C investments, It is beneficial for some due to goal based requirement. There is no one instrument which is the best for everyone in all circumstances.

Next to come, Category review ELSS funds. Keep following us and write to us in case of any queries/ suggestions. Happy Investing!


Investment Objectives & Advice

Retirement Planning 4.0: Core & Satellite Portfolio Investing

Last post on the Path of financial freedom (Investment required calculator: Link) triggered the question by many about how their portfolio should be? Most of them take high risk synonymous to higher returns and build portfolio heavy on Small/Mid-cap funds etc. Though building a core portfolio is like building your physique. You do not join gym and do only biceps or squats alone, It has to start with strengthening the core and then build the holistic physique. Similarly While exercising with heavy weights you need to protect your core by using the waist belts etc, same way you need to protect your core portfolio as well from sudden risks.

Core & Satallite Portfolio

How to build core portfolio?

Core portfolio should be followed with discipline of investing regularly and should have limited volatility with sufficient growth to beat inflation and should not be tapped into unless extremely critical. This will provide you the stability needed to build sustained wealth over time. This is given with healthy mix of Debt and Equity.

For employed people, Employee Provident Fund (EPF) is a great investment avenue and still least talked about. It gives good stable returns as well as disciplined investing of 12% of basic salary (additional 12% added by employer). The 24% of basic salary is getting invested automatically as well as for long term build a great corpus together. If you are not not employed, you can chose options like PPFs, Sukanya Samridi, FDs or Debt Mutual funds etc. (To know how to build your debt portfolio: Link)

On the strength of the Debt portfolio, you should top it up with equity investments of similar amount to help you beat the inflation by good margin. My suggestion will be to Large-cap mutual funds or Index funds/ ETFs. Though if you are risk averse you can use a Hybrid Equity/ Balanced advantage fund and if you are aggressive, you can opt for multi-cap funds. In any scenario, you should not get Mid or small cap funds in core portfolio.

How much money to invest in your core portfolio?

For employed people roughly 45-50% of the basic salary or you can check the amount required for your financial freedom. If you are self employed or a business person, you should aim to invest 30-40% of the net monthly income (Monthly Income – EMIs/House rent – insurance premiums) into core portfolio.

How to protect your core portfolio?

Your core portfolio is not only to provide for your retirement years but also to take care of your dependents.  There are two main risks to your core portfolio, health risk and mortality risk. Most of us feel uncomfortable buying health or pure term plans as in case of no event the premium paid is lost. We do not feel the same for buying the bike/car insurance as it is mandatory. We should consider the health and pure term cover as mandatory only for healthy and happy life.

This basic construction of portfolio will help you get a great foundation to build your overall wealth. (Check the Portfolio built using Cor portfolio: Link) If and when you can save more, then only you should create satellites in your portfolio in form of Small, Mid-caps, Direct Stocks, Futures & options, PMS, real estate, gold and other options.

Happy Investing!