Pension Fund Mess

Every salaried Indian citizen contributes 24% of his basic salary (12% employee and 12% employer contribution) into the organization. For a country with a GDP of $1 trillion and an active workforce of 600 million souls that is a lot of responsibility. I always get the feeling that the thela-wala (street vendor) has more advanced book-keeping system than the EPFO (employee pension fund organization). Don’t believe me?
The street vendor can recite his entire Cash-Flow statement, Balance sheet (how much is in his inventory, how much debt he has taken, how much credit he has given, how much money he has put in etc.) and his P&L. However EPFO takes a year to do these calculations and ever after those, they make a royal mess.
Today I got a mail from my payroll department with my EPFO balance. However that came with this Disclaimer:
“The calculation excludes the interest component & this mail is for your information only.”
Considering that interest rate in India is 8.5% and I have been working since 2004, this information was actually misleading and worthless.
Hence I logged into the EPFO website. The site keeps on crashing, it has no way to get an online statement, paper statement or even call up someone who would know this information. Finally through miracle of god I was able to access: . After fiddling around for 10 minutes, I was able to get this information:
“Your EPF Balance as on 03/03/12 is XXX (Accounts updated up to 31/03/2011)”
What is that takes them one year to update the records? Last year they discovered a huge pile of unaccounted cash-pile (which they disbursed as a bonus/extra interest payout) which they later on discovered was because the interest rates were not accrued properly. Such Goof-ups for an organization that manages savings for over 100 millions souls is totally reckless and unacceptable.

education Investing

Personal Financial Planning

A friend asked me yesterday how one should plan his/her finances. At what stage in life where should the money go and how best to plan my taxes.

After spending a couple of hours listening to his idea, this is what we came up with:
1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 🙂
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?