This post is about a simple solution to setup your investments. I call it “The 88% Solution”. Why 88%? Because it works for 88% people. It works 88% of the time! This is the third and the final part.
Part 1: The Background & Part 2: The thought process.
There are more than 300 life insurance schemes, numerous health insurance schemes, over 1000 Mutual Fund schemes, 2500+ stock scrips to choose from. Then there are 100+ deposit schemes with Banks, Corporates and the Government itself.
Wouldn’t it be a good idea to bring down the choice galore to a maximum of 20 products to choose from? Can’t this group of 20 products be the best in class and stands validated through a reasonable thought process?
The answer, to my mind, is yes! Read the following 7 points that gives you the a set of 20 products to choose from for your investments.
Before we go on to investing our money, it’s a good idea to take a bit of cover. Let’s start with the emergency fund.
1. Emergency Fund: Keep an amount of three times your monthly expenses in your Bank in a Savings Account.
2. Insurance: Many of you who are just started having an income, are single wouldn’t really need insurance now. But some of you who have started a family need to get a cover. Trying to find how much insurance do you need from the internet will throw multiple calculations and options. Each one of them have their own logic. A simple thumb rule for me is to get insurance worth 60 times your monthly expenses. Not 60 times your gross monthly salary, mind you. Insurance is for taking cover, not profiting out of it. Two products that I would recommend choosing from is LIC’s Anmol Jeevan and Religare’s iTerm. The first one a trusted name in Insurance and the other one is the cheapest one available.
You also need to get health insurance. A group health insurance privided by your company should be enough. If not, start with a mediclaim policy with one of the General Insurers.
To start investing, you need to first exhaust your tax planning options.
3. Tax Savers: Apart from the PF that might be deducted from your salary, getting a PPF account is a good idea. Plus you might go for equity linked tax saver Mutual Fund schemes. HDFC Tax Saver, SBI Magnum Taxgain, Sundaram BNP Paribas Tax Saver, Franklin India Tax shield and Sahara Tax Gain have given a return of 20%+ over the last 5 years.
From the money left after taking a cover and exhausting your tax planning options is available for investment.
4. New Pension Scheme (NPS): NPS is THE best & effective tool that covers capital protection and also provides growth for your retirement plans. With its lowest charges, it also is the cheapest way to get an exposure to the market. Despite being such a fabulous product, there’s not much sales to boast. This is because there’s no commission for an agent there.
Infact getting a PRAN (Permanent Retirement Account Number) under NPS is not easy. I’ll do a detailed post later.
5. ETFs: This Pdf will tell you why ETFs are the best. Nifty Index ETFs which benchmark the Nifty that are available in India are NiftyBEES, KotakNifty, UTISunder, .QNifty
6. Debt Index/ Balanced Mutual Funds At a young age, you can take more risks and I will not ask you to invest in debt funds. But to get a bit of diversification in your portfolio, I will recommend investing in a few balanced funds. Balanced funds have exposure to both equity and debt and their fund managers take a call on when to focus on equity or debt. HDFC Prudence, DSP Blackrock Balanced, Birla Sunlife 95, Tata Balanced are balanced funds which have done well. In fact some of them are at par with Equity Funds!
7. Gold ETF: Gold has been outperforming the equities for the last decade!. Looks like it’s on a dream run. For diversification purpose, investing 5-10% of your money in Gold ETF isn’t a bad idea. Gold ETF is seeing the highest turnover these days and there are a lot of players which are offering Gold ETF these days.
So the 88% solution has shortlisted a set of 20 odd products out of 5000+ financial products. Does it help you get started?
Advantages of the 88% solution:
It tunes out the noise of the market place which is worse than the fish market.
It takes care of Diversification, Rupee Cost Averaging, Asset Allocation principles, Magic of Compounding and all principles and theory of investing.
It also gets you real bang for every Rupee at a very low cost.
And once you set it up, you can forget about it and focus your life on more happening things!
Disadvantages: It’s boring and non-happening. More like a Cricket Test match when it’s the age of Twenty-20.
But the question is, do you need an audience for your finances? Or do you need to perform infront/for the benefit of others? Remember, it’s “personal” finance.
I’ll wait for your questions and your views on the 88% solution. Thanks.
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I definitely think a couple of Equity Diversified Mutual Funds should form a part of your core portfolio. Especially for young investors. Like HDFC Top 200 or DSPBR Top 100.
Very Nice article… want to know y u put emergency fund which is three times of my monthly expenses.
–>Not able to see ur ETF pdf….
Plz gimme some other link….
hEY rANJAN!
You live Live by it!!!!
Simple, Amazing and Right on dot.
I loved the simplicity in telling and describing.
If I would have been a little more younger, I wouldn’t have seen the other way. Sounds boring but fashionable is more of a passe.
Ranjan, keep the good work going on, 88%way…….
@Naresh Thanks. Maybe you can help spread the word!
@Gowri Agree partially. When u compare them with ETFs, they are at par or maybe better. But the cost considerations matter too.
Moreover, this is the “88%” solution. To more informed investors like you, HDFC Top 200 would definitely be a part of the portfolio. Because only informed people will be able to spot the best mutual funds. What do you think?
@Praveen Thanks. Hope it helps. Emergency fund is for unforeseen short term expenses. Experts recommend keeping some amount ranging from 3 months expenses to 6 month expenses.
The pdf link is working fine here. Let me know if you want it on yr email. Thanks.
actually you made it very simplified that is more importent ( hats of to you)
people need to understand what they are doing in terms of Investment and Finance. life is so fast every day you will see new Investment schemes ADs in Tv.
all got confused and ask to his financial advisor. it is recommended to make self analysis in terms of what is (1) long term plan (2) Sefty net (Emergency Fund)
@Mitul Thanks. Tuning out the noise from TV and advertisements was one important motive of writing the post.
Hi Ranjan, nice Blog u have. . I was told by some one about ULIPs. . What is your take on ulips?
@Savvy Thanks. U might want to read up on my posts on ULIPs http://ranjanvarma.com/category/insurance/ulip/ . In short, ULIPs are conceptually a good product but is unattractive because of it’s heavy front loaded charges. Let me know if u hv a specific question about ULIPs.
Ok. . I checked out ur post about selling ULIP to unsuspecting clients. . . Still wot bout Ulips of other companies? Would love to know ur opinion
Thanks!!
Ranjan this is a gr8 post..Simplyfying things while not diluting the essence of it. One question i have is how do you plan for medical emergencies? though lot of medical insurance plans are available bt not necessarily cover old parents well.Frm personal experience,its the untimely medical care expenses which can make a big dent on one’s investment plan. Any suggestions ?
@Dhruv Thanks. Regarding medical insurance, I need to bit more research before I recommend anything. I am happy with what my company provides by way of Group Mediclaim. Generally, if you have old parents to cover too, the public sector general insurers are more flexible.
Btw, insurance/health insurance shd be part of your expenses and not investments, I feel.
@Savvy As I said earlier, ULIPs are conceptually a good product but is unattractive because of it’s heavy front loaded charges. If you ask my personal opinion, I would not recommend a ULIP.
Ranjan Ji
Very nice and short and sweet. We will just concentrate on these avenue. You are losing a lot by not taking any fees for the service.
Regards
Das
Ranjan Ji
Just to clarify one point you have mentioned. You suggest that first one should exhaust tax planning options. But these products have long lock-in periods. Shortest one is ELSS. For these reason, it may hampers other investment options like diversified equity, ETF, gold. Further i would like to make downpayment for purchasing an apartment at the age of 40. So, if the all money are locked for such a long period, it will be difficult to achieve the purpose. I think it is better to pay some tax and achieve other goals. Wait for your comments, Please.
Regards
Das
@Sankha Deepa Das. Your comments is fees enough! Though I will start a paid workshop very shortly.
ELSS would be a better option if you have a financial goal @40 and want to use some of yr ELSS for the down payment.
The idea is to get started with the 88% solution. You can tweak it along the way to make it 100% right for you!
Hi Ranjan ,
What i meant was in medical situations , one ay have to redeem investments( lets say for 5-6 lakh expense) and all the compounding effect is lost . So what could be a solution to prevent one redeeming investments spec long term ones ? Maybe an article on this aspect would help throw more light.
@DM That’s why u need a medical insurance! In future, medical and pensions will outsell life insurance. As the risk of living too long will overshadow the risk of dying early!
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Good article. Also think that Equity diversified funds should be in the list and NPS not on it (Dislike NPS due to EET treatment as well as the non flexibility of not being able to get all of my money back on maturity. Annuities that NPS will give will have bad rate of returns if you consider hte rate of returns the annuity/pension plans these days give)
@Sanjay. The reason I like NPS is because of the low cost and that it takes care of your asset allocation needs and also locks up your money for your retirement. So if it doesn’t give you all the money back at maturity, it’s for a valid reason. The tax treatment is at too distant a future to affect our decisions, IMHO. Who knows what tax treatment will we have for our other investments in the future. If you look at their cost structure, it looks better than ETFs too!!
Equity diversified funds is highly recommended. But after you get your feet in the water and learn some swimming!! You need to identify the right equity fund, that suits your investment objective and has a decent fund manager. It’s not that easy
Thanks for sharing your insights, Sanjay
I think you should have taken explained the 88% solution with some kind of numbers. For example, lets start with a a person with a monthly salary of Rs 100,000, which post TDS should leave you with about 80,000. Net of expenses, one would be left with aboout 50,000 of investible surplus. The split then could be:
PF – 6000 (8.5% tax free)
PPF – 6000 (8% tax free)
Term Insurance – 1000/-
Index Fund – 10000/-
GoldBees – 5000
Diversified MF (2 nos) – 10000
Balance fund – 5000
NPS – 3000/ etc…
Regards
I agree with your views on NPS. I can also vouch for fact that it is almost impossible to get a PRAN without your application being rejected at least once…
@Venkat. That’s an interesting combination.
But everybody has different income levels, expenses, needs and the plan needs to be flexible enough for personal decisions, I feel.
Thanks,
Ranjan,
Very well explained theory of effective Financial planning. The pdf on ETF’s also was very good and easy to understand…Worth reading!!
Noise compared to fish market was funny but true. Timing the market is impossible but i feel that self investing in stocks also should be followed as that will help to know the market and the fluctuations providing valuable info on financial decisions..wat say???
DAJ also has been working for quite sometime now to help people invest in improving their Financial IQ…Visit http://nobleconsultants.blogspot.com/ for providing your valuable comments
you said about New Pension Scheme (NPS) being a very good instrument , i just have one question to all people who say this , “Have you invested in NPS” and answer has always been a NO , what about your answer
Hi Ranjan,
Brilliant article !!. After nearly 7 years of reading and writing about investment and personal finance, I also reached the exact same conclusions as you. Keeping it simple is the way to go and you have correctly pointed out that in your article.
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Good article Ranjan! The advantages of the 88% solution outnumber its disadvantsges easily. It does not matter whether or not its boring as long as it makes you good money.
Excellent article.
All your tips are very useful, I would like to add one more thing regarding Gold ETF..
Gold as well as equities are two fantastic asset classes for wealth creation over the long-term. However, to manage the inherent risk in equities, one should have 5% -10% allocation towards gold, as it acts as a hedge against any economic turmoil.
@Vishal (Financial Planning). Thanks. Good to see that you, a representative of personalfn.com has good things to say about this blog. You guys are doing a good job.
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I do know why people does not think of VPF i.e VOLUNTARY PROVIDENT FUND where an employee can contribute same percent as PF from basic pay or more in multiples of 5 and again it comes under tax slab of 1 lakh .It is good and easy retirement fund which is tax free at the time of withdrawal.
Pls give comments regarding my suggestion
@Anand VPF or APF in some companies (Additional PF) is a very nice suggestion, though not available in all companies. Thanks Anand
well i wish to know that post april 2012 when DIRECT TAX CODE will be implemented then how should tax planning be done—like only term plan,NPS ,PPF is under EXEMPTION! right?
so how we should plan for tax and investment ; help mee
I think this is one of the most significant information for me. And i am glad reading your article. But should remark on some general things, The web site style is great, the articles is really nice : D. Good job, cheers