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!.

Bundle of contradictory investment advise - Equity or PPF or FD?? :-)

Self explanatory ( with my notes :-) ) snippet from a newspaper.

Did you know ?- Facts on PPF

1) Interest rate for PPF is now pegged against the long term ( 10 year) government securities yield. ( which is 8.8% as on 30 Mar 2014). So, going forward the yield on PPF will vary with the G-sec rate . The days of fixed returns is gone.

2) Interest on PPF is calculated based on the lowest balance in your account between 5th and last day of the month. Interest is compounded annually and is credited at the end of the year. But the interest calculation is done based on the monthly balance rule stated above.( so ensure you deposit your money before 5th of every month in your PPF).

PPF- Public Provident Fund account.

# PPF account, the must have for every investor

Public provident fund is one of the best investment tools that provides safety, compounding and tax benefits in one package. This should be the first investment that one gets into immediately after turning 18. The account is meant for a period of 15 years but can be extended by 5 years @ tenure expiry.

The safety of government assurance and the compounding effect will definitely take care of your retirement needs. You can invest up to 12 installments a year and up to 1 lakh in this account every year. You should try to invest the maximum amount possible in PPF account every year.

The following articles provide a great insight into " why investing in PPF is a must?"

20 must knows about PPF

6 great reasons to open a PPF account

PPF account can be opened at SBI bank branches or at your nearest post office. Selected ICICI bank brnaches also provide PPF account facility.

Quick guide to open PPF account

If you are looking for comparing PPF with EPF and NPS, here's another  write-up.

One small step

"A journey of a thousand miles begins with a single step." -- Confucius

When I interact with a lot of people who are interested in personal finance, I do talk about the benefits of SIP investing in diversified equity funds.( Why this is a must for long term wealth creation...so on and so forth). People genuinely seem to understand and are raring to go.

But many do not take the " pain" of enrolling for an SIP.Some collect forms from fund houses then wait. Some have actually downloaded forms , filled them and really didn't have the time to kick start it by posting the completed form.

EPF rate still @ 8.5% (2009-10)

EPFO has maintained the interest rate for 2009-10 on EPF funds at 8.5%. ( EPF- Employee Provident Fund - normal 12% deducted from basic + 12% employers contribution)

If you are a person who looks at stocks as very volatile and are looking for good fixed income returns, increase your EPF contribution ( Voluntary contribution which most of the employers allow). This would ensure that your money earns a tax free return of 8.5%. With the declining Fixed deposit rates , this seems to be a good option. Fixed deposit returns have almost come down below 8% (with a slightly downward potential). Again , your Fixed deposit interest is not tax free. PPF with 8% tax free return would be the next best option to consider for , if you are not keen /able to increase your EPF contribution. Both of these investments (EPF/PPF) can get you deductions under 80C ( upto 1 lakh) and generate a handsome tax free return.

ELSS and PPF

Among the tax saving investment options, ELSS and PPF/EPF are unique in the sense that returns from are absolutely tax free.

1) Interest earned from PPF is not taxed during accrual or pay out.

2) Dividend from ELSS is tax free.

3) ELSS has a lock-in period of three years. So,Profit on sale of units held after 3 years is a long term capital gain. It is subject to Nil tax as per current IT act.

ELSS and PPF are the way to go...

ELSS- equity linked saving scheme of Mutual Funds

PPF- Public provident fund

RPF- Contribution to Employee Provident Fund

' Tax investment options' , " Ways to invest to save tax', "1 lakh investment exemption under 80c'

'Which is the best tax saving investment option?',ta saving tips, how to save tax, what are the instruments that you can invest to save tax,best option to invest

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

Why you must have a PPF account?

1. Highest Return- 8% among the safest category of investment.

2. Only instrument that falls under EEE (Exempt - Investment amount, Exempt- Interest accrual ,Exempt- Interest pay out) category under Income Tax Act..You need not pay a single penny of tax.

3. Power of compounding can act effectively as the investment period is for 15 years.

4. Tax exemption under section 80 C.

5. The Lock-in period keeps reducing as years go by (15,14,13....and so on). Example if you opened a PPF account in 1992..the amount you invest in 2005 can be got back in 2006....

So Open PPF account even if you are wary of the 15 year lock in ….Keep investing the minimum amount every year (Rs 500) and you can use it during the final 3/4 years with a minimum lock in period!!

Happy Investing :-)

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.