Suppose you start at the age of 30. You save the maximum possible (currently, Rs 70,000) each year for the next 30 years. Then,

Further reading:

1. Tweets on 2010-05-26
2. Ask the Readers: What Happens If You Don’t Collect Cash from the ATM Cash Dispenser Within 30 Seconds?
3. Ask the Readers: How Easy Is It To Withdraw Your Employees Provident Fund Amount?
4. Ask The Readers: Can You Make Part Prepayments On Your Car Loan?
5. Investment Strategies: How To Save For Your Child’s Higher Education?

I first read about this pension plan in the ET dated June 22, 2010. I was intrigued. Basically, Reliance Life Traditional Golden Years Plan is a regular premium retirement plan that provides guaranteed return, which is declared at the beginning of every financial year during the product term. So far so good. But,

The minimum guaranteed accumulation rate [in other words, the return] will not be less than the savings bank deposit interest rate, as declared by the Reserve Bank of India.

WTF, mate? What kind of guarantee is this?

Next, I ran the numbers through this calculator — assumptions were 35 years policy/premium paying term and a monthly premium of Rs 6,000. Over a period of 35 years, you pay a whopping 6% of your total premium as Premium Allocation Fees and Policy Administration Fees. To further add insult to your injury, you also pay around 1.2% of the accumulated value at the end of each year as Account Administration Fees.

A guaranteed tension plan in my opinion.

My advise:

Over a period of 35 years, you’d do FAR FAR FAR BETTER simply by saving the same Rs 6,000 each month in a Public Provident Fund account.

What do you think?

Further reading:

1. Tweets on 2010-05-26
2. Investment Strategies: How To Save For Your Child’s Higher Education?
3. What Does Your ULIP Premium Do?
4. Tweets on 2010-05-19
5. Ask the Readers: PPF and Retirement

N asks:

I want to save for my kid’s (an year and a half old at the moment) higher education — about fifteen years away. I can set aside Rs 10,000 each month. Where should I save or invest?

Here’s the investment strategy that I recommended:

1. Rs 5,000 each month in a Public Provident Fund account.
2. Rs 5,000 each month — through an SIP — in a diversified equity mutual fund. I’d pick the HDFC Top 200 Fund.

Assuming an 8% rate of return for both investments, you’d have a corpus of nearly 34 lacs at the end of fifteen years — sufficient enough to fund a decent higher education.

And, as I’ve written before, it’s prudent to think about the cash outflow of a financial instrument before you invest in it. For the options that I have recommended, it’s easy to stop/resume contributing depending upon your financial situation — you can even stop one and continue the other.

What do you think? Would you advise a different strategy?

Further reading:

1. Investment Strategies: How to Save 5 Lacs in 5 years?
2. Tweets on 2010-05-26
3. Tweets on 2010-06-23

Mithun asks,

I read your research on pension plans. But what exactly do you mean by “Save each month. Compound your savings in debt instruments…???”

Simple. Rather than paying an obscene premium for 30 years and making the life insurance company obscenely profitable while you receive a paltry pension, you can build a very decent corpus for yourself (and retire off the interest generated) by opening a Public Provident Fund account and saving the maximum possible each year (currently Rs 70,000) for 30 years.

What do you think?

Further reading:

1. Tweets on 2010-05-19
2. Tweets on 2010-05-12
3. Tweets on 2010-04-22
4. Tweets on 2010-04-22
5. Tweets on 2010-02-01

I’ve been working on improving a few Excel-based calculators that I have previously published. Specifically, I have improved the following calculators:

• The enhanced Public Provident Fund investment calculator now provides monthly calculations for a period up to twenty-five years. [Link to the original article.]
• The enhanced Car Loan EMI calculator now supports both Advance EMI and Arrears EMI type of car loans. [Instructions for usage.]

Let me know how I can further improve these calculators. What other calculators do you wish to see? I’ve received many requests for a Home Loan EMI calculator; I will shortly publish one. You can also download a Personal Loan EMI calculator [instructions for usage].

Further reading:

1. Tip Tuesdays: When’s a Good Time to Pre-close a Personal Loan?

Equity is the panacea for all problems.

We estimate the future cost of your daughters’ marriage in 15 years time to be Rs 96 lacs. Hence you need to start saving/investing now by handing over your money to a gamut of equity mutual funds.

This is a gist of the advice given by a popular personal finance magazine to one guy (with two daughters) while analyzing his financial state. Seriously. The same article also advised the guy to close his PPF account in order to send his parents on a pilgrimage. The estimated savings/investments per month to reach his goals were way beyond his monthly take-home income.

Poor guy. All he wanted was some good advise.

Note: I am republishing this post to test my blog’s sanity.

If you haven’t already started on a long-term savings strategy, you could begin on one this April with a Public Provident Fund (PPF) subscription. I believe that the PPF was started by the Government of India in lieu of social security. (I doubt if a Government can ever provide social security to a billion plus people.)

Your money in the PPF account is perfectly safe, earns 8% (at the moment), qualifies for Section 80C of the Income Tax Act, and at the moment is EEE (Exempt Exempt Exempt – the money you invest, the interest earned, and the final withdrawable amount are all tax exempt). You can invest a low of 500 rupees and a high of 70,000 rupees a year (over a maximum of twelve installments per year). You are also allowed to withdraw money or take a loan; there’s a weird formula to compute the same, but I advise against doing so ever.

At the end of 15 years, you can either extend your subscription in blocks of 5 years or else close the account and reap the benefits. The PPF is a great way to set aside money for say your child’s higher education. You can open a PPF account at State Bank of India (SBI) or any of its subsidiaries or at the local post office. An individual is allowed to have only one PPF account.

Click here to download a PPF calculator.

The calculator above can be used for quick reference. The only input you need to enter (in cell B3 — highlighted in yellow) is the amount you are ready to put into your PPF account each month. The calculator gives you an idea of the maturity amount that you can expect over a 25-year period.

Let me know if you find this to be useful. If you already have a PPF account, what goals did you have in mind when starting one?

Update: September 25, 2008

Below is a continually updated list of PPF-related queries which are answered in leading financial magazines such as Outlook Money and Money Today.

From Money Today, September 18, 2008 — Page 30

Q: My wife wants to open a Public Provident Fund (PPF) account in her name and another in the name of our minor daughter. I do not have a PPF account. Who will be eligible for the deduction for the money deposited in our daughter’s PPF account — my wife or I?

A: One can open a PPF account in one’s own name or in the name of a minor as a guardian. However, you can have only one PPF account in your name. If you have two PPF accounts, one will be closed and you will be refunded only the principal, not the interest. Also, two adults cannot open a joint account, though an account-holder is free to appoint nominees. Since your wife is planning to open an account in her name, your daughter’s account will have to be under your guardianship. Therefore, you will be eligible to claim a deduction for contribution to that account. Your wife can claim a deduction for the contribution she makes to her own account. A PPF account can be opened even if you have an Employees’ Provident Fund account with your employer.

From Outlook Money, October 08, 2008 — Page 24

Q: I have a PPF account with SBI. I extended it for five years after the account’s first 15 years got over in 2006. The bank says that since I have withdrawn 60% of the balance as was in 2006, which is the maximum amount permitted to be withdrawn from an extended account, no withdrawal will be possible for the next two years. What are the rules regarding withdrawals from an extended PPF account?

A: Assuming that you have made new deposits during the extended period, the rules regarding withdrawals in an extended PPF account stipulate that only one partial withdrawal is allowed each year subject to the condition that the total of thw withdrawals during the 5-year extended period shall not exceed 60% of the balance as on the start of that period. The bank’s refusal is in accordance with this rule.

Q: As with various payments, is it possible to have standing instructions for transfer of funds from a savings account to a PPF account? If yes, then how can this be done?

A: Yes. It is possible to give standing instructions to the bank to transfer excess amount from your savings bank account to a PPF account, provided the two are with the same bank. You also need to keep track of the amount being transferred as PPF contributions in one financial year cannot exceed Rs 70,000.