Things I wish I had known 15 years back!

( Warning :- This article is loaded with  "Hindsight bias")


I have been an avid saver and investor over the last decade. I have immensely benefited from my saving and investment habit. Looking back, I think I could have done better in these areas. ( Not an exhaustive list but the things that are on top of my mind at this point of time)

1. I should have "fully loaded" my  PPF  account from first year.

I opened a PPF account 15 years ago( good decision). But I didn't fully invest into it every year. During the initial years, I kept PPF account active by doing some minimum investment. NSC or ELSS was my preferred choice for parking the money. The reason being "15 years in PPF" looked "too long " for me.

I probably didn't understand the power of compounding and also that PPF is more tax efficient than NSC.

This mistake was corrected a few years back and now the PPF account is extended for the next 5 years :-).

2. Choosing growth option in Equity fund.

During initial investment years I thought , Dividends from equity funds was the most efficient way of "profit booking"  a.k.a risk mitigation and it was better than growth plan. But didn't realize that in effect , dividends also broke compounding and selling units of growth option was the best way to book profits , if at all needed.

Now, most of my Equity MF investments are under growth option ( Direct plan- learn more)

3. Should have avoided more money in tax inefficient FD.

Bank FDs were my favourite investment to start with.

FDs are the least efficient way of investing for people in higher tax bracket. It doesn't help to beat inflation and no indexation benefit is available for FD investments.Having all your debt investments in FD is tax inefficient.

Of late, I use debt vehicles that defer taxation till withdrawal.

4. Having too many accounts.

I  used to open one SB account whenever I switched jobs and wanted to hold all the five star funds ! Attractive bank FD rate hoardings led to many banks for opening FDs.

Having too many accounts eother it be SB, FD, demat or MF folio makes life difficult for you. Simple is always better!

Realising this, started closing  many accounts and consolidating folios. Still some more work left here!.

Comparing PPF and ELSS as tax saving instruments

Contributions to PPF ( Public Provident Fund) and ELSS ( Equity Linked Savings Scheme of Mutual funds) are eligible for tax deductions.

PPF gives a return of 8% p.a. The most attractive part being the interest is tax free*. 15 years is the minimum term that you need to hold this account for. It definitely helps in compounding your money in such a period of time.

ELSS also generates tax free dividend (if you opt for dividend payout ) and the capital gains you make out of this scheme is also tax free*.

These two schemes definitely stand out of the rest in terms of tax saving schemes. Fixed Deposits, NSC ( National Savings Certificate ) do not enjoy tax free* returns. ULIPs also enjoy some tax benefits but we have emphasised the need to separate insurance from investment enough on this blog.

So, When we compare PPF and ELSS , Equity is capable of generating greater returns in the long run( esp ..like PPF period of 15 years). So, if one is ready to lock in his money for 15 years or so, he can prefer equity based investments . ( ELSS have yielded 40% return in last 5 years # Same performance however cannot be expected year on year, but around 12% returns can make a huge difference!!! in a 15 year period).

NSC/ FD VS Equity/ MF Comparison table
FD vs FMP/Debt Funds

NSC and PPF Comparison

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* tax free as per income tax laws applicable in Sep'07

NSC and PPF Comparison

NSC and PPF Comparison

1. Return - 8% on both.

2. Lockin Period -15 Years for PPF and 6 years for NSC

3. PPF - Principal + Interest (fully exempt from tax), Tax Payable on Interest at the end of sixth year in NSC

4. Interest earned every year on NSC can be shown as reinvestment under Section 80 c for the current year.

For Example
if you invested Rs 50,000 in NSC in Jan'06.You would have availed Rs 50,000 under Sec 80c last year.

You can also claim the interest earned on 50,000 during the current year under Section 80 c.

See Table below for details.

From a taxation point of view PPF is better (Why you must have a PPF account?), if you are comfortable with the lock in period of 15 years.

NSC/ FD VS Equity MF Comparison table

A self explanatory table of comparison between investments

( Fixed Deposit/ National Savings Certificate Vs Diversified Mutual Fund)

		Amount in Rs
Investment	F.D./ NSC	Diversified Equity MF
Amount	10000	10000
Period	6 years	6 years
Maturity Value	15868.74	29859.84
Tax on Income/ Capital gains	1573.68	0
Inflation	4185.19	4185.19
Value of Investment after 5 Years	10109.87	25674.65
(post tax post inflation)
Difference	(15564.78)
Rates	Per annum
Inflation	6%
Rate of Interest on F.D./NSC	8%
Rate of Return on MF	20%***	(Last five years average 40%)
Income Tax rate	30%

***This post was published originally in Dec 2006 ( When the global equities were moving to a  peak ). In those times,an average equity mutual fund had annualized returns over 40% for five years ( 2001-2006). In 2013, the average annualized return for equity funds stand at around 5 % (considering the last five year period 2008-13).

So, Please know your facts and risks associated well before investing. Blind extrapolation of the past would lead to great failures.

Also read, http://ideasmoney.blogspot.in/2013/09/fixed-deposits-or-debt-funds.html