A reader says, “For a salaried employee contributing to an employee PF, would it be good advice to invest 50% of take-home pay first into PPF and the remainder into an index fund? This would be an investment towards a retirement corpus. The EPF and PPF would be the fixed-income part of the corpus, and the index fund investment would be the equity component. Its attraction would be its simplicity”.
The first consideration should be asset allocation. Assuming the person is young and retirement is far away, we recommend 50% to 60% in equity and the rest in fixed income.
This is hard to achieve for most salaried employees for two reasons. (1) The EPF contribution starts from day one of employment, while equity investments are typically delayed by a few years. This makes the debt corpus huge, and it would take years of playing catch-up to attain a 50-60% equity asset allocation. (2) Most salaries are insufficient, at least to begin with, to invest much more in equity than the mandatory EPF contribution to meet asset allocation targets.
Therefore, your plan to “invest 50% of take-home pay first into PPF and the remainder into an index fund” with “EPF and PPF as the fixed-income part of the corpus, and the index fund investment would be the equity component” is likely to result in a large fixed income corpus than desirable. This would greatly reduce the chances of reasonable portfolio growth and could fall short of the target retirement corpus.
A PPF account is unnecessary if one already has EPF. We must eliminate our love for tax-free fixed income to build wealth and enable financial independence after retirement. Otherwise, combined with the difficulty of investing enough, we would be guaranteed failure (insufficient corpus, portfolio growth rate lower than practical lifestyle inflation).
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So, we recommend avoiding the PPF and investing the rest in equity, ensuring an asset allocation of 50-60% equity. One can always include a debt mutual fund if the investment amount increases. See: What debt fund should I add to a long term investment portfolio?
Choosing a single index fund for the equity component is the simplest choice. It eliminates fund manager risk and the headache of worrying about fund performance. Those who suffer from FOMO may include an active fund in the portfolio or choose active funds altogether. Efficient goal planning is the key. There can be flexibility in product choice. See: Choosing index funds is good, but more crucial factors must be considered first!
Risk management is essential. Once you start investing, a goal-based review of the portfolio is necessary. How much is the current portfolio worth with respect to the target corpus? Am I on the right track? Should I invest more? Should I change my asset allocation schedule? These are far more important than looking at the returns from each portfolio holding.
Here are two example calculations of comprehensive retirement planning using the freefincal robo advisory tool:
- I am 30 and wish to retire by 50; how should I plan my investments?
- Retirement plan review: Am I on track to retire by 50?
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
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