Author: Sanjeev Govila

21 Jan 2019
Financial Question And Answer

Do these financial googlies worry you too as an Armed Forces Officer?-4

Q&A at talks on Financial Management given by CEO, Hum Fauji Initiatives, to Higher Command Course at Mhow and Armed Forces Program Officers at IIM, Indore on 9th Jan 2019

Our CEO, Col Sanjeev Govila (retd), had been invited to give a talk on ‘Personal Financial Management for Indian Army Officers’ to the students of Higher Command Wing, Army War College, Mhow. He also gave a talk to approx 35 officers undergoing the ‘Armed Forces Program’ (AFP) at IIM, Indore the same day. The talks were well appreciated at both the places and the Question & Answer (Q&A) Sessions at both the places far exceeded the time allotted.

Some of the questions asked, of common interest to serving and/or retired armed forces officers, are summarised below. Due to the sheer large number of questions asked, this will be given out as a series of 4 parts over next 8 days. This one is the last part of the 4 parts, previous part of series can be checked here.

Q. How much retirement corpus and pension am I going to get when I retire?
A. As on today, a Col retiring at the age of 54 years gets about Rs 55 Lakhs as the retirement corpus + his DSOPF accumulation, assuming he does not commute any pension. The pension received will be about Rs 1.15 Lakhs per month. If he commutes 50%, he will get an additional Rs 55 Lakhs or so and his pension comes down to about Rs 63,000 per month. Please remember that these are very broad ballpark figures, would vary slightly depending on your rank and years of service and would vary more if one is retiring as a Doctor since the NPA forms part of the basic salary.

Q. Is it good to go in for a property as an investment with a part of the retirement corpus since the property prices are quite depressed right now?
A. First thing to remember is that the old structure is changing in the country. Old-time ‘physical’ assets like real estate and Gold have not performed for a long time and may not do so for quite some time to come. Secondly, ‘financial’ assets are becoming more prominent since they have better liquidity and returns now, and hence, are able to meet our enhanced life-styles and requirements better.

Real estate in India thrived on black money resulting in the property prices zooming up to unsustainable, artificial highs. With a sustained clampdown on the black economy, property as an asset class has floundered. To top it, there is a huge demand-supply gap which has built up all across the country and it is estimated that in most of the major metros, next five years’ residential property demand is ready and waiting for buyers while new supply further keeps added to it. This is not what a good investment avenue should be like. Investing life-time savings into such an avenue is not recommended.

Q. Should serving or retired armed forces officers go in for National Pension Scheme (NPS) since it gives an additional tax rebate for Rs 50,000?
A. NPS is a retirement product which is designed to give monthly pension from 60 years of age. Hence, treat it as such – the additional tax saving on contribution of Rs 50,000 per year in NPS is just the icing on the cake, and should not become the cake itself. In NPS, investment is made till the age of 60 years.  The contributions are invested in a suitable combination of asset classes, primarily Equity, Government bonds, and Corporate bonds. NPS has some drawbacks as below:
· Liquidity is an important facet of any investment. In NPS, you will not be able to withdraw until the age of 60 years except in special circumstances. Hence, treat NPS as a true blue retirement product and do not confuse it with an investment product or your PF equivalent.
· You can withdraw up to 60% of the lump sum accumulated at the age of 60 years tax-free. Balance money is locked up for life to give you pension (called Annuity here). The pension is fully taxable when it starts.
· The worrying clause is that the Annuity has to be taken from a life insurance company. Annuities are high-cost, low-return products of life insurance companies.
· While much is made of the very low fund management charge, there are multi-level charges at various offices and levels of the NPS system, the cumulative effect of which make the NPS a more expensive system than it appears at first glance. And over the years, these costs have been slowly and steadily going up.

Just because NPS contributions are eligible for income tax deduction initially, does not make it an attractive investment avenue. While selecting any investment avenue, three things need to be analysed – safety, liquidity & returns. Assess yourself if you need NPS in light of the facts brought out above. If you are not likely to have any pension after your retirement, then NPS is one of the best products to have in your portfolio for retirement purpose if you do not much understand markets and want a hassle-free product. However, if you are slightly market savvy, a portfolio consisting of mutual funds along with an ELSS (Equity Linked Savings Scheme) or the Retirement Schemes of the Mutual Funds can better meet your retirement needs with more flexibility in terms of investment and withdrawal, better taxation and good returns.
Please also see the series of articles on this issue on our website on the link https://humfauji.in/?s=nps

Q. I have about Rs 30 Lakhs in DSOPF, am subscribing Rs 60,000 per month further and putting about Rs 20,000 in Mutual Funds (MFs) as SIPs. I have put in about 18 years of service and have another 14 years to retire in the current rank of Col. Is my subscription level for DSOPF and MFs correct or needs to be changed?
A. You have a long time to go before retirement and already have a large DSOPF accumulation. While DSOPF is a hassle-free simple investment product, the returns, in spite of the tax-free status, are just slightly above the inflation level. Taking DSOPF returns to be average 8% and inflation to be average 7%, you get ‘net real’ returns of just 1% per annum. Hence, it is important to diversify into higher yielding instruments. A largely equity Mutual Fund portfolio which balances your pure debt DSOPF Fund is required so that you get better ‘real’ rate of returns. While you are already doing that with your SIPs to some extent, the contribution to SIPs is very less compared to your DSOPF monthly subscription. We would recommend you at least an equal contribution of Rs 40,000 per month in each, DSOPF and a carefully-prepared and well-monitored MF portfolio with a predominantly equity bias due to your age and the fact that you already have Rs 30 Lakhs in DSOPF.

21 Jan 2019
Financial Question And Answer Sessions

Do these financial googlies worry you too as an Armed Forces Officer?-3

Q&A at talks on Financial Management given by CEO, Hum Fauji Initiatives, to Higher Command Course at Mhow and Armed Forces Program Officers at IIM, Indore on 9th Jan 2019

Our CEO, Col Sanjeev Govila (retd), had been invited to give a talk on ‘Personal Financial Management for Indian Army Officers’ to the students of Higher Command Wing, Army War College, Mhow. He also gave a talk to approx 35 officers undergoing the ‘Armed Forces Program’ (AFP) at IIM, Indore the same day. The talks were well appreciated at both the places and the Question & Answer (Q&A) Sessions at both the places far exceeded the time allotted.

Some of the questions asked, of common interest to serving and/or retired armed forces officers, are summarised below. Due to the sheer large number of questions asked, this will be given out as a series of 4 parts over next 8 days. This one is Part 3 of the 4 parts – You can check the previous articles here: Part 1 and Part 2.

Q. How does taxation work in Mutual Funds (MFs)?
A. MFs are of two types – Equity or Equity Hybrid Funds, which invest at least 65% of the money in stock markets, and the Debt or Debt Hybrid Funds, which either do not invest or invest a very small percentage of money in stock markets. Their taxation is quite different as given below.

In case of Equity or Equity Hybrid Mutual Funds, if units are redeemed before one year of investment, the gains (profits) are considered as Short-Term Capital Gains (STCG) and will be taxed at a concessional flat rate of 15.60%. If they are redeemed after One year, the gains are treated as Long Term Capital Gains (LTCG) and such gains will be taxed at a concessional flat rate of 10.40% but the first One lakh in one financial year will be tax-free.

In case of Debt or Debt Hybrid Mutual Funds, if units are redeemed before 3 years, the gains will be considered as STCG, will be added to your income and shall be taxed as per your tax slab, like in a bank FD. If they are redeemed after 3, the gains will be considered as LTCG and will be eligible for Indexation benefits (like in real estate) where net tax liability keeps coming down as per Inflation over the years with the passage of time. For example: say Col XYZ invested Rs 100 in a Debt Fund in January 2014 and its value is Rs 150 in November 2017. This means a net gain of Rs 50 after 3+ years. However, since the investment has been held for more than 3 years, Col XYZ is eligible for indexation benefits. The Govt lays down the CII (Cost of Inflation Index) Table from time to time. In the example here, the indexed purchase value inflates to Rs 124 from Rs 100 due to inflation. Hence, the gains of Col XYZ for the purpose of tax is (Sale or current value – Indexed Purchase Value). Thus, the net indexed gain is now Rs 26 (150-124) and not 50 (150 – 100), and the tax liability is Rs 5.41 (Rs 26*20.80%) which effectively comes to 5.41 (5.41/100*100) of tax even if he is in the 30% tax bracket.

Q. What part of the retirement corpus is tax free and what is the tax on the balance? What part of the pension is tax-free if you get a disability? How much disability pension do you get?
A. Your retirement corpus comprises of five components – Gratuity, AGIF/NGIS/AFGIS payback, leave encashment, DSOPF balance and commutation amount, if any. All of these five components are fully tax-free without any ifs and buts. One gets a tax-free pension if even a single rupee of disability pension is granted or if the person is a gallantry award holder. When one gets a disability pension, there are two components – the service pension and the disability pension. Both the components are fully tax-free if the retired armed forces person is getting a disability pension.

For 100% disability, 30% of additional pension is granted as disability pension. For a lesser disability, the disability pension is accordingly calculated on pro-rata basis. The Govt has also done broad banding of disability. For disability up to 50%, 50% disability pension is given; 51-75%, 75% disability pension is given and 76% and above disability gets 100% disability pension.

Q. If Modi Govt doesn’t come back to power, markets will surely crash. Will it not be a good time to invest then?
A. Stock Markets neither work on crystal gazing, nor on political affiliations. They simply work on the performance of economy in general and of individual companies in particular. The markets boomed in general in UPA-1 regime and were generally subdued in UPA-2 regime, when the political party in power was the same. Currently Indian economy is on the upswing and likely to be one of the best performing economy in the world in times to come. If it remains so, markets will do well irrespective of the political scenario. Indian economy has come a long way in the past decade or so and it will be difficult for any political party to either ignore the aspirations of the people or not bother about the economy’s health.

Also, how much are your investments going to be affected by the health of the stock markets is another moot point. If you are going to invested fully or largely in say bank FDs and debt mutual funds, you should be more bothered about the direction of interest rate movements rather than the stock market!

Your life-time savings and you may not get this kind of money again in your life. The money should largely be in safe investments like SCSS and Debt mutual funds but a small portion, say 20-30%, should also go to equity mutual funds. Please take the help of a good financial advisory company, to manage your portfolio so that this balance of ‘Returns Vs Safety’ is carefully balanced out, regularly monitored and changes are done to it professionally when due and required.

(To be continued….)

18 Jan 2019
Financial Question Sessions

Do these financial googlies also worry you as an Armed Forces Officer?-2

Q&A at talks on Financial Management given by CEO, Hum Fauji Initiatives, to Higher Command Course at Mhow and Armed Forces Program Officers at IIM, Indore on 9thJan 2019

Our CEO, Col Sanjeev Govila (retd), had been invited to give a talk on ‘Personal Financial Management for Indian Army Officers’ to the students of Higher Command Wing, Army War College, Mhow. He also gave a talk to approx 35 officers undergoing the ‘Armed Forces Program’ (AFP) at IIM, Indore the same day. The talks were well appreciated at both the places and the Question & Answer (Q&A) Sessions at both the places far exceeded the time allotted.

Some of the questions asked, of common interest to serving and/or retired armed forces officers, are summarised below. Due to the sheer large number of questions asked, this will be given out as a series of 4 parts over next 8 days. This one is Part 2 of the 4 parts:– Part 1 can be read here.

Q. Should we fully or partially pre-pay a home loan or continue it to take a tax rebate? 
A. Please remember three things about home loan: compared to all other loans, it has probably the lowest interest rate; in case you are eligible for an interest rebate, the net rate of interest (after catering for the tax rebate) comes out even cheaper; and all the loans are typically front loaded, implying that almost 70-75% of the interest is recovered during the first half period of the tenure of the loan and only 25-30% of the interest is balance during second half. Hence, if your loan is already past the half-time, it may probably not be a good idea to repay it back unless a cash crunch is coming like retirement, taking PMR, large loans being serviced, big liabilities coming up like children education etc. If it is only the starting period, reducing this large interest liability will be a happy situation. Not withstanding all this mathematical calculation, how much of a psychological burden do you or your wife feel of a loan pending is another issue – eg, at the time of retirement, almost everybody wants to be loan-free. So many moving parts are there and decision taken has to be a combination of maths and personal comfort level.

Q. How much should one wait more to invest in the stock markets directly or through mutual funds since there will be lots of dips in the markets around the election time?
A. There is no past data to prove that markets will definitely dip during election time. However, there is enough empirical data to prove that markets will almost always behave in a manner contrary to your expectations! Trying to time the markets is listed as the Number One mistake of most investors. Hence, never try to time the markets. The best way to invest it to invest either after a good research of the fundamentals and technical analysis of stocks or, more conveniently, invest through STPs (Systematic Transfer Plans) for bulk investments and through SIPs (Systematic Investment Plans) for monthly investments in selected mutual funds.

Q. This is my retirement corpus and my life-long savings. I should keep it absolutely safe and risk free. So tell me where to invest this amount?

A. The common rule of investing says the following:

Please peg all your investments against general inflation. Taking average long-term inflation in India to be about 7% per annum (last 20 years’ average is about 7.47% CPI), your investments as a whole should earn at least 7% to break even or actually earn a Net Zero. Only when your long-term post-tax returns go above 7% are you actually generating positive returns from your money. So, if your SCSS gives you 8.3% interest, is fully taxable and you are in 30% tax bracket, you are getting only 5.81% net returns after tax. This also means that your money is actually losing its purchasing power at the rate of 7.00 – 5.81 = 1.19% per annum compounded. The report card of bank FDs, POMIS etc is much worse.

So, if you do go in for such ‘safe’ avenues, you should balance it out by going in for some volatile avenues too like equity mutual funds so that your money, on the net, earns a positive return and doesn’t lose its purchasing power. However, it does not mean an all-out investment in equity or risky avenues. Please keep a balance. This is your life time savings and you may not get this kind of money again in your life. The money should largely be in safe investments like SCSS and Debt mutual funds but a small portion, say 20-30%, should also go to equity mutual funds. Please take the help of a good financial advisory company, to manage your portfolio so that this balance of ‘Returns Vs Safety’ is carefully balanced out, regularly monitored and changes are done to it professionally when due and required.

(To be continued….)

 

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