Life Stage based Tax Saving Portfolio

It is mid february and everyone in the salaried class is scrambling to save tax. There are various investment options available in the market that help you save tax. Investing 1 lac every year to save tax is something most of us do but in most cases we just take insurance policies. Though these policies give you decent returns, the returns they give you are far less than what you could earn by planning your tax saving invetsments.

Investing such an amount every year is a significant decision and must be carefully done in order to reap the best benefits out of it. This investment can be based on the stage of life you are in right now. Let us consider the below cases:

1. Single - Young and energetic
2. Just Married - Settling down with a new family
3. Expanding your family - Becoming a parent
4. Matured Individual - Children are grown up
5. Nearing Retirement - Old and wise

Here we are going to consider the below investment options:

1. Equity Linked Saving Schemes - ELSS
2. Public Provident Fund - PPF & Bank Fixed Deposits - FD's
3. Life Insurance

Let us go ahead...

Single - Young and energetic - Mid 20's

As a single individual, you have no dependents and hence this is the time to take the most risk on your investments. Remember, the earlier you start investing, the better returns you get because the money you invest grows every year and the returns when compounded end up at a huge number. So the suggested portfolio allocation would be:

ELSS - 80%
Life Insurance - 20%

Here I have given a 20% allocation to Life Insurance because when you take policies at a young age, the premium amount is lesser and you stand to gain in this aspect as well. The 80% allocation to ELSS schemes ensures that your money is invested in the stock market and grows at a solid pace outpacing the inflation rates.

We do not have any exposure to PPF or FD's because at this age, you can manage some losses in the stock market and do not need to worry much about safety of investment.

Just Married - Settling down with a new family - Late 20's to Early 30's

As a newly married individual, you have just begun your life. You have a dependent (wife) who has just joined your life. In this situation it is better to start having exposure to debt instruments because if at all you suffer losses, you have a life partner who will get affected as well. So, the suggested allocation would be:

ELSS - 50%
PPF & FD's - 20%
Life Insurance - 30%

Here I have reduced the ELSS allocation and introduced exposure to debt instruments. This gives the much needed safety and stability to your investment. Also the component on Life Insurance is increased because your dependent would have to lead her life comfortably in the unfortunate event of your demise. God forbid such a situation, but it is always better to be prepared.

Expanding your family - Becoming a parent - Mid 30's

As a parent, your responsibilites have increased significantly. You need to include one more person as your dependant and also plan for the childs education and welfare. The investments you make going forward and the losses you incur out of them would have a multifold impact and hence it is better to take a cautious approach. So, the suggested allocation would be:

ELSS - 40%
PPF & FD's - 30%
Life Insurance - 30%

Here I have reduced the ELSS allocation by another 10% but still retained a solid % of investment on ELSS schemes because saving up money for the child's future education, marriage etc requires a large corpus and without exposure to the stock market managing such a corpus is very difficult.

Matured Individual - Children are grown up - Mid 40's

Now you are a matured individual and your children are grown up. You have been investing religiosly for the past decade or so and have saved up a decent corpus. It is suggested to continue with the same allocation as when you beacme a new parent.

Certain individuals who do not wise to continue with 40% of their corpus in equities can opt to reduce 10% from equities and increase the debt component but this is not required because we still have 60% of our portfolio in debt instruments.

Nearing Retirement - Old and wise = 50+

Now you are nearing retirement and have probably a few years left until retirement. Your children have grown up and maybe are settled down in their jobs and can take care of their own. At this age, safety of investment is of most importance because losses in the equity markets would affect your corpus badly. Hence it is suggested to reduce exposure to ELSS as little as possible. So, the suggested allocation would be:

ELSS - 10% or lesser
PPF & FD's - 70% or more
Life Insurance - 20%

Here i have reduced life insurance by 10% as well because you are sitting on a solid corpus and it is not required to continue paying such huge premium amounts every year. Reduce it and increase allocation to debt instruments.


Managing your investments:

As every year goes by, the total amount you have invested is going to increase. Let us talk about how to manage your investment.

Let us say you start investing when you are 25 years old and have invested a total of 5 lacs in the last 5 years. Now you are 30 and recently married and plan to shift to the next stage. Your current corpus could be like this:

ELSS - Rs. 6 lacs
Insurance - Rs. 1.5 lacs

Your investment of 5 lacs has grown to 7.5 lacs now. This year you are going to add another 1 lac and hence your total investment portfolio would be Rs. 8.5 lacs. Your suggested allocation is

ELSS - 50%
PPF & FD's - 20%
Life Insurance - 30%

So, this year you would put Rs. 30,000/- into life insurance increasing insurance to Rs. 1.8 lacs. Your debt allocation should be 20% and should be around Rs. 1.5 lacs or more. Since you do not have any debt exposure till now, it is better to put Rs. 50,000/- this year in PPF or FD and invest only Rs. 20,000/- in ELSS. This way you must manage your investments year on year to keep your investment portfolio as close as possible to the suggested %'s.

Maintaining these %'s when you have just moved from one stage to another is very difficult and can be achieved only in a period of 2 or 3 years.

Note: The above %'s are only indicative and not strict guidelines. It may or may not suit all individuals in each life stage.

Happy Investing!!!

Monthly Income Plans - MIPs

Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20% of the assets are allocated to equity stocks. But the very name – monthly income plan – is a bit misleading, as these funds do not guarantee a monthly income. Like any other mutual fund, the returns of this fund are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation. The fund house may opt to skip a month without a dividend depending on the market performance.

MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation.

Suitability

MIPs are suitable for conservative investors who want to earn marginally better returns than a debt-only portfolio. Conservative investors generally remain invested in fixed income instruments, but sometimes they need returns that are above the inflation by a few points. Obviously, equity exposure is the best way to provide this meaningful return over the inflation. A MIP typically invests bulk of its assets in debt, while a small equity exposure is maintained to earn something extra.

Example:

Let us consider a typical example where investor A invests Rs. 1,00,000/- in a Bank FD and investor B invests the same amount in a MIP.

Assumptions:

Returns on Bank Deposits: 8% per annum
Returns on Debt Instruments: 8% per annum
Returns on Equity Market Instruments: 15% per annum
Allocation Ratio of MIP: 80% Debt and 20% Equities

Returns:

Investor A:

Interest = Rs. 8,000/-

Total value of investment at the end of 1 year = 1,08,000/-

Investor B:

Interest on Debt Instruments (Rs. 80,000) : Rs. 6,400/-
Capital Appreciation on Equity Instruments (Rs. 20,000) : Rs. 3,000/-

Net Gains: Rs. 9400/-

Total value of investment at the end of 1 year = 1,09,400/-

Clearly the 20% exposure to equities is the reason for the extra appreciation of investment in MIP's which gives the investor an extra earning with the safety of debt instruments because a bulk of the investment (around 80% or more) is invested in them and hence the capital the investor invests is safe and the chances of loss of all the investment is very minimal.

Happy Investing!!!