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What should be my mix of MF, Stocks, Gold, NPS, FD, PPF and ELSS if I want to invest 50k per month?

This post is targeted at investors looking at distributing their investments in the usual products available in the market.

What should be my mix of MF, Stocks, Gold, NPS, FD, PPF and ELSS if I want to invest 50k per month?


Posted on 21 Sep 2021
Author: Sayan Sircar
17 mins read
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This post is targeted at investors looking at distributing their investments in the usual products available in the market.

What should be my mix of MF, Stocks, NPS, FD, PPF and ELSS if I want to invest 50k per month?

📚 Topics covered:

Introduction

It is typical among new investors to find a surplus investible surplus after all expenses and look for a way to invest that. If this is “spare money” left after investing for other goals or a lump sum that is yet to be invested, we have discussed this in some detail here. However, if you have not invested before and have an amount to invest monthly, this post will tell you what to do.

We will use the concepts in this post on choosing suitable investments to ensure that we invest in only those products that allow us to fulfil the investment goals. All other considerations are secondary. For each goal, depending on the horizon, priority and risk profile applicable, we will choose those investments that are suitable for beating inflation (or not), have suitable taxation and liquidity.

We are covering a few typical investment options in this post but the list is not exhaustive.

Equity-linked savings scheme (ELSS) funds

ELSS funds are mutual funds with a mandatory 3-year lock-in for every purchase and offer a tax deduction under section 80C. If you are investing in SIP form, then keep in mind that every instalment is locked for three years from the date of purchase.

All ELSS funds are currently available only as active funds. Only having active funds leads to a “which is the best ELSS fund” confusion amongst investors. The thumb rule to choose active funds is

  • keep expense ratio as low as possible
  • past returns are good to know (to avoid the consistently worst funds) but unimportant as a predictor of future returns
  • stick to 1-2 ELSS funds in the whole portfolio
  • you should ignore star ratings shown in rating portals

Many investors use the 1-lakh equity LTCG tax exemption to roll their ELSS funds every year. This form of tax harvesting involves selling the oldest (>3y) ELSS units and reinvesting them immediately in the same or another fund.

Investments in ELSS funds should be only to fill any remaining 80C limit and should be as per the equity allocation of your goals. This post shows you how to select an ELSS fund: What are best tax-saving ELSS Mutual Funds?.

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National Pension Scheme (NPS)

NPS is a voluntary investment that works like more or less a mutual fund where the final corpus is

  • withdrawable only at 60 years age of which
  • 60% can be withdrawn as a lump sum tax-free
  • the remaining 40% is compulsorily invested in an annuity to provide lifelong pension

NPS contributions are tax-deductible under 80C. There is an additional deduction under section 80CCD for an 50,000 i.e. tax payable reduces by 30% (slab rate) times ₹50,000 or ₹ 15,000 per year.

Who should invest in NPS

NPS may be a good option for those investors who

  • have stable jobs up to age 60
  • do not plan to retire early (due to 60 age lock-in)
  • want to save tax under section 80CCD (there is little benefit in doing that though if your retirement is far away)
  • have an employer match component in NPS

If your employer offers to pay 10% of your basic into NPS, match it via your contribution since it is a part of your CTC.

Who should not invest in NPS

If at least one or two of the above conditions are false makes NPS an unsuitable investment for investors who

  • what to retire earlier than 60 (FIRE candidates)
  • understand that annuity rates are going down as the economy develops and annuity income is taxable
  • do not mind the missed tax saving under 80CCD since, over time, this ₹15,000 should grow a lot more in outside investments than in NPS

The fundamental critiques of NPS are

  • compulsory taxable annuity in a falling interest rate environment
  • lack of liquidity in accessing the corpus until age 60

Many proponents of NPS have the following opinion:

  • 60y lock-in is good since the purpose is retirement. The investor needs to evaluate if they are disciplined enough not to touch the retirement corpus for non-retirement expenses. If they are not disciplined, locking their money in NPS will not save their retirement corpus since they have an option of spending money every month on other expenses and not contribute to NPS
  • ₹15,000 80CCD tax saving has a compounding effect: this depends on the investor’s perspective and ability of portfolio construction. The tax not saved by forgoing NPS can be considered a cost of liquidity on ₹50,000 of corpus/year. Alternatively, many investors can be confident that they can make higher returns in the market by properly managing an equity portfolio with an equity proportion more than the 75% maximum equity limit in NPS funds

Bank deposits (FD/RD)

Fixed deposits offer a known interest and principal amount at the time of opening the FD. They are the only product that has this feature. All others are market linked and the return is unknown. There is a deposit guarantee insurance for money kept in banks up to ₹5 lakhs per bank. However there is no timeline as to when the money the money will be received if a bank fails. If you need absolute safety, stick to RBI’s list of Systematically Important banks which are currently SBI, HDFC and ICICI.

Bank deposits are taxed at your highest tax rate (say 30%) and post-tax the return is much lower than inflation. They should be avoided by most investors except in one special case as below.

Given how taxes work for debt mutual fund, if a goal is within three years, it should be saved in bank FD/RD solely because the final value of the FD is known and taxation will be same. This makes FD and RD good options for:

  • emergency fund: FD provides safety and liquidity
  • sinking fund: RD provides a way to save the amount regularly and makes the money available as per need
  • goals within three years: since taxes are same as debt funds but the return is known

Direct stocks

Buying individual shares requires considerable time and effort to analyse and pick stocks. If you have a full-time job, it may be challenging to devote the necessary amount of time to research and pick stocks. As we have argued before, if you invest in direct stocks, it is good to benchmark that frequently.

Mutual funds (MF)

Mutual funds give you the option to get your money managed by a professional asset manager without you having to track stocks markets, bonds markets and the overall economy. Once you start investing in mutuals funds, the only thing you need to do is a regular review of your funds.

This post will show how to choose suitable debt and equity MFs to create a portfolio.

Provident fund

These are government-backed debt instruments with known interest rates and usually long lock-in periods. However, these are very popular due to their tax benefits.

Public provident fund (PPF)

PPF allows you to invest ₹1.5 lakhs/year in every family member’s PPF account (grandparents, parents, children) and allows ₹1.5 lakhs exemption/year under 80C per investor who is investing. So a family with goals that are far away can invest 1.5 lakhs/year for multiple family members as long as their asset allocation allows it. The interest rate for PPF is 7.1% today and is expected to fall with time. The money is locked until maturity for 15 years.

Employee provident fund (EPF) / Voluntary provident Fund (VPF)

These are retirement schemes (currently offering 8.25%/year) with the following main differences

  • all salaried employees must invest in EPF while VPF is optional
  • EPF is locked in until retirement age, while VPF can be withdrawn after five years

VPF should be considered if the asset allocation allows it and not because of the interest rate.

Related:
EPF vs. mutual funds: which is better?

Sukanya Samriddhi Yojana (SSY)

SSY is allowed only for girl children and has a ₹1.5 lakhs/year limit. It offers a deduction under 80C and has a 8.2% interest rate as of today. The amount is locked in until 21 years from account opening and allows partial withdrawal once the child is 18. It is recommended that SSY is used mainly for goals like post-graduation degree and marriage due to the lengthy lock-in if your asset allocation allows it. However, if your monthly investment amount is high enough, SSY can also be used for retirement planning.

It is expected that over time, as the economy matures, these debt instrument returns will go down. Invest in them only if

  • the product maturity aligns with the goal maturity (PPF is 15 years, EPF is up to retirement, and SSY is 21 years)
  • the motivation is not just to save tax under 80C. There are other alternatives to save tax

Related:
How Sukanya Samridhhi Yojana (SSY) and Public Provident Fund (PPF) can together take your daughter from college to PhD?

Gold as a part of the investment portfolio

Investors may consider adding gold to their portfolio only if

  • they consider risk reduction the primary motivation knowing that the returns will be less
  • they have a view on how the rupee-dollar exchange rate will behave in the future
  • have the discipline and systems in place to perform a regular portfolio review and rebalance between stocks and gold

As a percentage of the total equity portfolio, investors should choose the proportion allocated to gold as per the desired amount of risk reduction in this chart.

(click to open in a new tab)
Reduction of risk via gold

This post gives more details on how and where to invest in gold.

Putting it all together

Investing ₹50,000/month in this example starts with goal-setting and asset allocation. This will throw up a split of equity and debt allocation for the portfolio based on your goals and risk profile. If you have not set goals, stop here and then go through this post on goal-setting first.

You can follow these thumb rules:

ELSS allocation under 80C

You should not invest in ELSS unless it is to save tax under 80C. If you target 80C allocation, fill that with EPF, life insurance (term plan preferred), housing loan principal and children’s school fees as applicable. If you have not reached ₹1.5 lakhs, fill that with ELSS up to the allowable limit of your equity asset allocation. If some amount is left in getting to ₹1.5 lakhs, ignore that. It is better to have a correct asset allocation than to save tax.

Please note that we are not advocating PPF and Sukanya Samriddhi as a part of 80C investments. However, they will be a part of debt assets as per goals.

Equity allocation

Any part of the SIP that will not be a part of ELSS should be invested in a single index fund without complicating things. If desired, a small percentage of 5-15% of the equity allocation can be in gold.

Debt allocation

Debt allocation has three parts:

  • short term debt allocation for goals up to five years that has to be kept liquid in a bank account or suitable mutual funds
  • liquid debt allocation for rebalancing purpose
  • long term debt that is illiquid like provident funds and SSY

If the model says that you need to invest ₹30,000 per month in debt funds and of which ₹18,000 is for short term goals, you should split the remaining ₹12,000 between liquid (like debt MF) and illiquid (PF, SSY). Do not divert the entire amount of ₹12,000 to fill PF or SSY just because there is room in 80C.

A worked out example

Imagine a family with the following goals and ₹50,000 of investible surplus, including ₹5,000/month EPF contribution:

  • daughter’s college education starting 14 years from now that costs ₹22 lakhs today
  • daughter’s marriage that costs ten lakhs in today’s money and is targeted 27 years from now
  • 30-years in retirement starting 22 years from now with a lifestyle equivalent to five lakhs/year today
  • ₹30 lakhs down-payment for a new house eight years from now
  • a new car for five lakhs three years from now

We will assume the old tax regime is applicable and there is a single earning member (so 80C limit is ₹1.5 lakhs)

The family has been investing for some time and has 35 lakhs of assets invested as:

  • 10 lakhs in equity mutual funds (including three lakhs in ELSS)
  • 10 lakhs in a provident fund (PPF and EPF)
  • 2 lakhs in SSY
  • 13 lakhs in bank account (savings and FD)

Currently, 80C is filled up to ₹90,000 with EPF, child’s school fees and insurance premium. However, a deduction is available for another ₹60,000 in 80C and ₹50,000 in 80CCD (NPS) for the whole year.

(click to open in a new tab)
Goal-based investing plan for family with ₹50,000 surplus

As the goal-based investing planner shows, this family needs to invest ₹70,000 per month for all goals and rebalance the existing corpus so that the equity component is ₹15 lakhs. However, since the investible surplus (income minus expenditure) is ₹50,000, we will prioritise the retirement, house and car goals. We will skip the college education goal until more surplus becomes available.

Model output

Goal Equity Debt Total need
Retire 13898 9265 23163
College 10963 7950 18913
Marriage 1001 667 1668
Car 0 6043 6043
House 3670 16718 20388
Total 29531 40644 70175

SIP allocation

You can allocate the SIP amounts as below:

Goal EPF PPF SSY Debt MF Equity MF Total
Retire 5000 4265 0 0 13898 23163
College 0 0 0 0 0 0
Marriage 0 0 1000 0 0 1000
Car 0 0 0 6043 0 6043
House 0 0 0 16718 3670 20388
Total 5000 4265 1000 22761 17568 50594

Since we have a ₹60,000 buffer left in 80C, we have room for ₹5,000/month which will be allocated as ₹4,265 in PPF (for retirement) and ₹1,000/month in SSY (for marriage). It is recommended that instead of SSY, this ₹1,000 goes into an equity MF for the college education goal. There is no need to invest in ELSS since the 80C limit is now reached.

This planning exercise that has been done above has to be repeated annually as per the review and rebalancing process.

A note on having the prerequisites in place

At all times, ensure that you have the following in place

Once you start investing,

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Asset Allocation (21) Basics (8) Behaviour (13) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (22) Health Insurance (5) House Purchase (33) Insurance (17) International Investing (12) Life Stages (2) Loans (20) Market Data (8) Market Movements (17) Mutual Funds (47) NPS (8) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (16) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

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This post titled What should be my mix of MF, Stocks, Gold, NPS, FD, PPF and ELSS if I want to invest 50k per month? first appeared on 21 Sep 2021 at https://arthgyaan.com


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