# Freefincal Q/A: Financial Strategies for Young Earners

Each week I try and answer generic questions from readers. Here is this weeks edition. You can use the form below to you ask your question. In case you have missed yesterday’s post because of the UP elections, here it is: Personal Inflation Calculator.

Dashrath: Dear Pattu Sir, I have invested in Annuity scheme which offers 7.5% annuity per year and return of Capital, at the END. Can I consider this as a part of my asset allocation of Debt-Fixed Income? (Basic objective of investment was to hook to this high return considering future regime of low interest). Please guide. Regards Dashrath

Pattu: Yes you can, but not in a direct way. Project your expenses at an inflation rate of 6-8% from the year the annuity starts to say age 90. Now subtract the constant pension and account for the rest of the expenses. Find out how much you need to have or invest for this bit. You can use this calculator: Retirement Calculator for the Middle-aged Employee.

DK Nayak: Dear Sir, I have heard about ‘Internal Rate of Return’ to measure the change in growth of an investment. Could you please tell me why it is called ‘Internal’ not just ‘rate of return’?

Pattu: My understanding is that the “internal” simply means that we consider only the cash inflow (investment) and outflow (redemption) directly into and out of the instrument and nothing external(!). Interim actions by the instrument like dividends or bonuses have to be considered as reinvested. Read more: How to calculate returns from Stocks including dividends.

Dilip: Sir, after the introduction of Direct funds, I switched to direct mode of investing. But my regular funds are continuing without additional investment. Is it better to leave the regular funds as it as or redeem and invest via direct mode? The funds are same.Thank you.

Pattu: You can gradually switch to direct funds when the units are free from exit load and free of tax (in the case of equity funds).

Srivatsan: Dear Prof P, Is it possible to plot the Total Market Cap to GNP / GDP (Buffett ratio) for India for the last 10 years or more? Purely an academic exercise. I am not sure about the data availability and its authenticity. ref link: http://www.cnbc.com/2016/11/28/buffetts-best-measure-of-valuation-is-flashing-danger-for-stocks.html Thanks Srivatsan

Pattu: Today everyone doubts the authenticity of the GDP, except the ruling part and its supporters! Data and previous attempts are available. My problem is, I can only do this exercise once a year and even that data may not be right. Is it worth it?

DILIP Bhagwat Rane Dear Sir, While checking returns of mutual funds, I noticed that two-year return of almost every MF is very low. Why is it so?

Pattu: By two-year return, I assume you are referring to trailing returns. That is the last business day to two years before. If so, then please repeat this exercise after a couple of days, and see what you get. It is a bit like blind men touching the mutual fund.

Karthik: Is Postal Life Insurance a good insurance/investment option?

Pattu: If you compare the premium per Lakh insured, you will notice that it is quite expensive compared to a term plan. Of course, this is not a fair comparison as PLI offers some return. However, considering that the sum insured is peanuts, the product is of no use. And DO NOT BUY ANYTHING FROM A POST OFFICE!! (except stamps/speed post/philately material).

Neville Lobo: GM Pattu, I have been using VR portfolio for tracking of MF portfolio. Correct me if I’m wrong, but in one of your blogs, you had suggested using the CAGR value and the weight of each fund in VR during rebalancing of the portfolio. I have been using your technique so far. But today I noticed that the CAGR of a fund did not change after I added a “SELL” transaction. Also, the Total returns for that fund remained unchanged after adding the transaction. In addition, the “TOTAL Return & CAGR” for that portfolio remained unchanged. My query; Why has the CAGR value not changed? Can I continue using this value for rebalancing of my portfolio? Thanks.

Pattu: The annualized return (or the XIRR, let us use CAGR only for lump sum investments) of a fund will not change after a full redemption from it. When these transactions are used for calculating net portfolio XIRR, it can influence the value day to day and this is unlikely to remain the same as the value of your other investments are changing. The only way out is to check it yourself or try my tracker.

Tanu: In one answer you recently mentioned: “If you have 25 Lakhs to spare, you can subscribe to a portfolio management service.” How reliable are these portfolio management services? Are they same as AMCs?

Pattu: That is not a recommendation, the context of that response matters. Reliability is not much of an issue, they can be more expensive than mutual funds. They are also AMCs but they will manage your money as an individual basket and unlike mutual funds, you will have to pay tax each time they buy and sell. It is like hiring somebody to invest in direct equity or bonds.

RK: I recently have discovered your blog. I understand the basics of stock and returns, however I have only recently started to study mutual funds. It looks like you have great posts, please provide what is a starting point and must read posts at this time. Also, I am well insured, have no debt (other than housing loan), have some free cash that I may not need anytime soon. I am NRI but would like to invest in India for sentimental and financial reasons. As such I am not qualified for PPF, etc. I send taxed money to India and try not to pay taxes again in India(legally). What is the best way to move forward. My risk profile is aggressive – because I am 36, and earn well to cover middle-class life in US.

Pattu: Investing in India is a pain in the ass for many NRI from the pov of tax. If you have close family (not minors) in India, one option is to invest in their name, but legally it is their money! Not many mutual funds will accept US NRIs. You can buy Indian Stocks either by yourself or a PMS. Use a NRE account if you wish to repatriate it.

For mutual funds, the posts linked within mutual fund selection guide or How to select an equity mutual fund in 30 minutes! or the two e-books on money management can be a place to start. It is time I collated the posts and made it into an e-book.

Srivatsan: Dear Prof, I request your views / opinions on the following : 1) Is it possible to build an equity MF screener based on underlying benchmark, portfolio PE and PB values in your mutual fund screener ? 2) Is it possible to plot the variation of Nifty versus the earnings of the underlying stocks for the last 7-10 years? 3) Reg our email conversation, Is it possible to create an excel for Heiserman’s earnings power toolbox? This method will help us assess whether company is massaging its books.

Pattu: 1) Underlying benchmark wrt returns and risk is possible. PB and PE is published only once a month and I am not sure it is of any use. Anyway will see what I can do.

2) No, that kind of data will require considerable money and not worth the effort.

3) I tried once and got lost a bit. Will have to start again.

Vandhi: I have a query with Portfolio overlapping tool, Let us take Three funds in my Retirement goal : Mirae asset emerging bluechip, SBI Blue chip, Mirae asset India Opportunities. Both funds from Mirae (emerging and Opport) has 55% overlap. Even if move either one of the fund to other long term goal (Son education) , how come the overlap will be reduced. Still its part of my overall Mutual fund holdings. I mean all the list of funds which i am holding for all the goals. So i think overlap still exists even you keep it in different goals. Please help me to understand about this overlap.

Pattu: Overlap that exists for different goals do not matter! Even for the same goal, it is hard to avoid overlap in the future. At some point, the no of common stocks will be quite high. Don’t worry too much about it.

Prakash: Dear Pattabhiraman Sir, I have retired two years ago from public sector .I have recently joined one company as a consultant on regular basis & I can invest approx 50000 Rs per month .Is it advisable to go for debt fund or pure equity fund or equity balance fund. Regards Prakash

Pattu: There is absolutely no way that anyone can advice you based so little information. At a very nominal cost, you can consult one of these fee-only financial planners.

K S Panchal: I want to invest 60000rs. In balance funds.suggest 2, or 3 funds for 3 to 5 years. Whether I should invest lump sum or sip which is the best way for high return n high safety. Reply on my email address early. K S Panchal thnx.

Pattu: I had made it clear enough that I will not provide product suggestions. I have no idea how o get high returns with high safety.

Asheesh: Dear Sir, I was wondering, what if I extensively invest towards my retirement total target investment and achieve it with in next 1-2 years, will it serve the purpose more effectively? Does it make sense to cut hold other big expenses, say new house/car vacation. will it give more certainty to achieve total retirement corpus which otherwise planned to accumulate 20 Years down the line.

Pattu: Wow! If you can achieve your retirement target in two years, then go right ahead! The new house/car/vacation for that long … but perhaps not longer 🙂

Chaitanya: Hello Professor Pattabiraman. I have been reading your articles for quite some time. They are very educational. I sincerely thank you for extending your knowledge and enlightening us in understanding and taking care of our finances. I have 2 questions. 1)What kind of a financial strategy would you suggest for a 32 year old bachelor with no financial liabilities and can invest 25,000 per month for wealth creation with low or moderate risk factors? 2)For a 62 year old female pensioner who has to avail of the 80C deduction every year, is ELSS advisable because of its lowest lock-in period? She does not depend on the returns of ELSS, also no plans to redeem after 3 years and may continue it for some more years. Or is it wise to go for Tax saving FD or PPF?

Pattu: Thank you. I would recommend that you decide an asset allocation first. It can be say 60-70% equity and the rest in EPF (+ VPF if you wan tax benefits). Try and increase the amount you put in each year, if not each month. This is the true way to create wealth: What is your investing growth rate (CAGR)?

I have an entire section dedicated to young earners, plus an e-book. Some related posts:

An Introduction To Personal Finance For Young Earners

Personal Finance Essentials For Young Earners

Minimalist Portfolio Ideas for Young Earners

2) If the money put into ELSS is not necessary for at least the next 7+ years, then yes it can be used for tax saving.

Aniket Bhadane: Dear Sir, Suppose I have invested corpus more than Rs. 10 Lakhs in a Mutual Fund scheme through SIP over past 5 years. Now I want to withdraw/redeem all the amount I have invested till now. How should I go about it? Should I withdraw all amount at once? Or should I gradually withdraw over some time period? Also should I first stop the SIP and withdraw all amount except last 1 year? (since profit on last 1 year would be taxed)

Pattu: I am not sure what I can say except state the obvious: If you need all the money in one shot, redeem in one shot. Tax does not matter. If you can afford to redeem in stages, then that is it.

Kiran: Came across this post from Subra – http://www.subramoney.com/2017/03/market-dynamics-are-changing/ Many commentators in the financial sector always worried about low penetration of MF in India and how a simple SIP is the best solution for long term investment than the traditional modes. So, why is Subra worried about the money coming in exactly the way it was always wanted? Is it because Indian companies are way too small and our markets are not ready for such huge retail participation? Or, it is a matter of one big correction and things will be back to normal again and in a way Subra is reading way too much into this?

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## 3 thoughts on “Freefincal Q/A: Financial Strategies for Young Earners”

1. Neville Lobo says:

GM Pattu,
Thanks for providing a solution to my query.
However as I’am a Job’s Fan, I loathe Microsoft. And hence cannot use the “tracker” that you have made.
I have a workaround which involves additional work;
Instead of inputting a “SELL” transaction in VR, I delete the units on FIFO basis.
Kindly confirm if the solution will give an accurate result.

brgds
Neville

2. Jabir says:

Hi Sir,

We would like to know your view on the last question asked by Kiran (Regarding Subra’s concern with huge SIP influx).

1. freefincal says:

Our market is governed primarily by FII investments. Most SIPs are peanuts.