Service to help you plan your retirement savings

Service to help you plan your childrens future (education, marriage, etc.)

Rs 90+ Lakh Anyone? A simple example of Wealth Creation from Indian Equities

Yesterday, I was talking to a young relative of mine about how Sensex had touched 39,000 for the first time and how it had created immense wealth for investors in past years.

But despite being young, this guy was somehow not too convinced about equitys potential for wealth creation.

So I thought I will try to influence him with some simple data. And once I did that, his mind started working in ways that I liked. Mission accomplished. ?

Imagine you caninvest Rs 1 lac every year. So over aperiod of 20 years, you would be investing atotal Rs 20 lac.

Now, what would be the value of these investments over the years?

I took theNifty50returns data of the last 20 years (since 1997-98) and showed the below table to my relative:

After investing Rs 20 lac over 20 years, the value of investments was about Rs 90 lac. This is when the investments were made inJanuaryevery year.

A large figure of Rs 90 lac excited this relative of mine. But he had a valid question after that.

Since markets fluctuate, what would have happened if instead of investing in January, he invested in some other months?

So I showed him the data for months of April, July and October. Have a look.

By investing Rs 1 lac inApril every yearinNifty50for the past 20 years, the value of investments would have become Rs 87 lac. Not bad.

By investing Rs 1 lac inJuly every yearin Nifty50 for the past 20 years, the value of investments would have become Rs 92 lac. Not bad at all.

in Nifty50 for the past 20 years, the value of investments would have become Rs 94 lac. Not bad again.

Ofcourse the figures differ depending on the months we invest in. But the final figure still is good enough to show how wealth is created over the years when investing in equity.

And just to drive home the point, I also compared this with Rs 1 lac investment in PPF for the last 20 years. Here is what I found:

By investingRs 1 lac every yearin PPF for the past 20 years, the value of investments would have become approx. Rs 52 lac. Not bad but much lower than what was possible via equity.

Please dont think that I am trying to portray PPF in a bad light. I personally like PPF and feel thatPPF is a great debt product.

So if you understand the whole premise of asset allocation and also understand the need to have debt in the investment portfolio, then PPF is a great option. (Try thisPPF excel calculator). But ignoring equities just because it can be volatile in short term is not wise.

Equity will go up as well as down. It is in its nature. Its not a bank FD. But if you stick to it for long, the returns delivered are much higher than debt products.

And that is what I wanted to convince my relative about.

He seems to be convinced now. Whether he takes any action on this new found conviction is another matter.

I also shared with him the idea of investing on a monthly basis viaSIP in equity fundsif he (like most people) doesnt have lumpsum amounts to invest. He got inspired by the severalSIP success storiesthat one can easily find.

So if you too feel that someone needs a little push to consider equity for long term investments, then you can use the examples above to convince them.

about Investing, Personal Finance & Financial Planning

You already know that themarkets dont go up or down in straight lines. What this means is that if an investor gets an average return of 12% in 10 years, it doesnt mean that he will get:

12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%, 12%

It instead means that he will get something like this:

-5%, 22%, 4%, 13%, -17%, 57%, 10%, 19%, -12%, 29%

Related to the actual sequence of return an investor gets in real life, I came across an interestingpostthat talks about how the end-portfolio size differs depending on whether the investor gets strong early returns vs strong late returns.

This simply means that in one case, you getgood returns in early yearswhile in other, you getgood returns in later years.

Yes indeed as you will see soon in the remainder of this post.

Suppose you are 30-year old planning tosave for retirement at 60.

You have decided toinvest Rs 20,000 per monthor lets say Rs 2.4 lakh every year for the next 30 years.

You earn 7% every year in the first 15 years and 14% every year during the next 15 years, on your investments.

You earn 14% every year in the first 15 years and 7% every year during the next 15 years, on your investments.

What will be the value of your portfolio after 30 years in either case?

Thats a large difference of about Rs 1.86 crore!

And that too for the same average return during the 30 year period. Isnt it?

It is because of theSequence of Returnsyou get. That is, the order of annual returns that your portfolio is subjected to.

In the first case (where portfolio grows to a larger Rs 5.81 crore), you get strong late returns due to which, a bigger corpus earns better returns (14%) in the later years.Whereas in the second case (where portfolio grows to a comparatively smaller Rs 3.95 crore), you get strong early returns due to which, a smaller corpus earns better returns (14%) early on while the bigger corpus earns lower returns (7%) in later years.

And how do these two cases compare with the actual average return (10.5%)?

Here is how different the 3 scenarios end up looking, even though all have the same exact average returns:

And this is exactly what I wanted to highlight.

You may be hoping to get a portfolio size based on your average return assumption. But the actual size may vary even though average returns are same, due to a different sequence of returns your portfolio undergoes.Averages and Actual differ (River Depth example).

Lets see how the actual investment in Sensex in the last 20 years fared when compared to the reverse sequence of returns.

In this scenario analysis, Rs 2.4 lakh (or Rs 20,000 per month) is invested in Sensex every year during the last 20 years. The sequence of returns that are given in the second column in the image below are theactual Sensex returns in the last 20 years. The value of portfolio changes as depicted by the green line in graph below. Also, a portfolio that runs on the basis of the reverse Sensex returns (the returns have been reversed in the third column) is shown as the blue line in the graph.

As you can see, depending on the different sequence of returns considered (one real other reversed), the portfolio value varies every year and also, the final values are different.

All said and done, can anything be done for this?

You dont get to decide what sequence of market returns you get in future.

This simply but unfortunately means that we have no control over the sequence of returns in the markets.

It is possible that some of you may get better markets early in your investing career and worse ones later. Or if powers above favour you, then you may have not-so-great market returns during initial years but super returns in later ones. This is the very reasonwhy young investors should pray for bad markets in initial years. It may be painful and may not be for everyone, but its a wonderful thing for real long-term investors.

But even though we cannot control the sequence of returns, we can manage the risk to some extent.

At times,using market valuations as an indicatorcan help you estimate the possibility of a weak or a strong market in the coming years and rebalance your portfolio accordingly. By doing this, only a part of the portfolio may be exposed to market returns when required tactically.

This is not exactly a perfect strategy but works often as is proven by thisdetailed analysis of Market Valuations Vs Future Returns.

So to more practically manage the Sequence of Return Risk, you should be slightly conservative in your return expectations. Its better to have lower return expectations and save more than having higher return expectations and saving less but getting shocked later on when it is already late to do anything.

about Investing, Personal Finance & Financial Planning

Health insurance is like an umbrella something that you dont need every day; but once in a while when it rains, it really saves the day for you. On all other days, you wont miss it. But when it rains and if you dont have it, you will feel its need.

Agood health insurance policy helps to protect your financial savingsand makes you better prepared for medical emergencies and expenses.

And besides the obvious medical coverage, health insurance plans also provide tax benefits to you.

Luckily, underSection 80D of the Income Tax Act, you get tax benefits for expenses towards health insurance premiums, preventive health checkup and other medical expenses.

Since most of you will not be hospitalized ever (I hope so!), you would be more interested in the tax benefits on the medical insurance premiums. And yes, indeedthe premium paid towards health insurance is tax deductible under section 80D of the Income Tax Act, 1961.

Lets move on and understand the tax benefits on health insurance in a bit more detail.

Even if tax benefits werent there, even thenbuying health insuranceis a sensible decision.

Why would you want topay big hospital billswhen you can buy medical insurance by paying a small premium to cover that risk.

Imagine not buying health insurance and saving Rs 10,000 for 3-4 years and then getting hospitalized with a big bill of Rs 5 lakh. All small savings you made by not buying health insurance is screwed up with a medical bill several times larger.

Unfortunately, most Indians still dont see it like that.

They feel its an unnecessary expense and waste of money. Luckily, our governments have offered additional freebies in form of tax benefits to push people to buy health insurance.

And this benefit is offered via the Section 80D of the Income Tax Act, 1961 which relates to the tax deductions on medical insurance.

Section 80D specifically provides deduction in taxable income to the extent of the premiums paid on the purchase of health insurance or medical insurance ormediclaimproducts.

It even includes the premiums paid for the health insurance of your parents, children and spouse (wife/ husband).

And it doesnt matter whether you purchase health insurance through a person or go for anonline health insurancecover which are gaining popularity these days. You will get tax benefits in either case.

Also, the tax benefits under Section 80D are over and above the benefits under other sections like Section 80C.

If you are paying premiums for health or medical insurance purchased for the following, you will get tax benefits under section 80D:

Like, lets say your brothers, sisters, father-in-law, mother-in-law, uncles, aunts, cousins, etc.?

Health insurance premium paid for any other person isnoteligible for tax deduction. But you can ofcourse include other family members in the health insurance coverage if you wish to. It is just that the premium paid for them cannot be considered for tax benefits.

There are several different types of deductions that you can be claimed for tax benefits under Section 80D:

Tax deduction on health insurance premiums paid for yourself, spouse & children

Tax deduction on health insurance premiums paid for parents

Tax deduction on medical expenses of super senior citizens

Tax deduction on preventive health check-up expenses

Lets have a look at each of these in detail:

Tax Deduction on Health Insurance Premiums Paid for Self, Spouse & Children (Family):

If you pay the premium for health insurance taken for you, spouse and children, then you can claim a total deduction of up to

If you or spouse is a senior citizen, then you can claim a higher total deduction of up to

This limit for senior citizen was revised upwards in the past years. Earlier (in FY 2017-18 AY 2018-19), if you or spouse were a senior citizen, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.

In addition to the above deduction, you can also get tax deductions for premiums paid for parents.

If you pay the premium for medical or health insurance of your parents, then you can claim deductions as follows:

If both parents are not senior citizens ( 60 years), then you can claim a deduction of up to

If even one parent is a senior citizen (=60 years), then you can claim a deduction of up to

This limit for senior citizen was revised in the past year. Earlier (in FY 2017-18 AY 2018-19), if your parents were senior citizens, then the maximum deduction that could be claimed was up to Rs 30,000. This has now been revised to Rs 50,000.

It is worth noting that while claiming deductions under Section 80D, you cannot include premiums paid for children who are earning. But you can still claim the benefit for earning spouse and parents.

If you spend money on getting health checkups done during the financial year, then you can also claim a deduction of up toRs 5000 for preventive health checkupfor self, spouse and children under Section 80D.

But this is not an additional benefit but is inclusive within the overall limits discussed above. That is, the total tax benefit for health insurance premium and preventive health checkup is limited toRs 25,000 (or Rs 50,000), as the case may be. Remember that the limit of Rs 5000 is the maximum total deduction allowed for preventive health check-ups.

Also, this deduction cannot be claimed on a per person basis but as an aggregate option available so the total deduction allowed cannot be more than Rs 5000.

For example Suppose you pay a health insurance premium of Rs 21,000 for self, wife and children. In addition, you also get yourself a preventive health checkup that costs Rs 6000. Now, how much tax deduction are you eligible for? You are allowed a maximum deduction of Rs 25,000 under Section 80D. So you get a deduction of Rs 21,000 towards insurance premiums paid; and Rs 4000 for expenses towards preventive health check-up. The deduction towards preventive health check-up has been restricted to Rs 4000 (against your actual expense of Rs 6000) as the overall deduction cannot exceed Rs 25,000 in this case (i.e. Rs 21,000 + Rs 4000).

Side Note As you cross 35-40, it actually makes sense to get yourself evaluated medically atleast once a year so that any condition/disease in its early stages can be better handled and addressed appropriately. So this tax deduction on preventive health check-up expenses under section 80D also has positive health side effects!

If you or any of your parents are a senior citizen, i.e. above 60 years, and have not purchased any health or medical insurance, then you can avail a deduction for any medical expenditure incurred up to Rs 50,000 in FY 2018-19 (AY 2019-20).

Remember, to claim this deduction for actual medical expense, the concerned person must be a senior citizen (you, spouse or parents) and also uninsured (i.e. no premium should have been paid for any health insurance).

Before FY2018-19 and till FY2017-18, this rule was applicable for uninsured very senior citizen (above 80 years) and the limit was set at Rs 30,000 per financial year. Now, this benefit is available to younger(!) senior citizens (who are above 60 years) too.

So let me summarize the Income Tax deduction of Health Insurance Premiums in India.

The table below lists the tax deduction limits applicable to health insurance premiums (for the financial year 2018-2019 or assessment year 2019-2020):

So what will be combined limits on tax deductions for a family with self, spouse, children and parents?

If you, spouse, children and parents are all below 60 years of age, then the total limit is Rs 25,000 + Rs 25,000 = Rs 50,000 under Section 80D

If you, spouse, children are below 60 years; and if even one of your parents is above 60 years of age, then the total limit is Rs 25,000 + Rs 50,000 = Rs 75,000 under Section 80D

If any of you or spouse is above age 60; and if even one of your parents is also above 60 years of age, then the total limit is Rs 50,000 + Rs 50,000 = Rs 1,00,000 Rs 1 lakh under Section 80D

But please do remember that these are maximum limits specified under Section 80D. If the actual premium paid is less than the limits, then the benefit will be limited to the actual premiums paid only.

To further aid the understanding, allow me to share a few examples.

Case 1:You (28), Spouse (27), Child (2), Father (58), Mother (56)

You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 25,000 towards health insurance premium and checkup for parents. Since no one in the family has attained 60 years of age, the total deduction eligible under Section 80D is Rs 50,000 for the financial year.

Case 2:You (31), Spouse (29), Child (4), Father (63), Mother (58)

You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one of the parent is above 60). Since one of the parents has attained the age of 60, the total deduction eligible under Section 80D is Rs 75,000 for the financial year.

Case 3:You (61), Spouse (55), Father (82), Mother (79)

You are eligible for Rs 50,000 towards health insurance premium and checkup for self and spouse as you are in senior citizen category yourself. In addition, you are also eligible for Rs 50,000 towards health insurance premium and checkup for parents (as one or both the parent are above 60). Since both you and your parents have crossed the age of 60, the total deduction eligible under Section 80D is Rs 1,00,000 or Rs 1 lakh for the financial year.

Suppose you are aged 38, your wife is 35, son is 8 and daughter is 5 years old.

You have taken a health insurance plan for all for of you that has an annual premium of Rs 23,000. In addition, you had to pay Rs 8000 for preventive health checkup during the financial year.

In addition, your parents aged 66 and 59 are also dependent on you. For insuring their health, you have taken a health cover for them separately for which the premium is Rs 57,000.

So what all tax deductions can be claimed by you for the financial year under Section 80D?

All of you are under the age of 60. You are eligible for Rs 25,000 towards health insurance premium and checkup for self, spouse and child. Since the premium + health checkup costs exceed the limit (Rs 23,000 + Rs 8000 = Rs 31,000), the benefit available will be limited to Rs 25,000 only.

One of the parents is above 60 and hence, senior citizen. Since you are paying medical insurance premium for them, you are eligible for Rs 50,000 towards health insurance premium. Since the premium exceeds the limit (Rs 57,000), the benefit available will be limited to Rs 50,000 only.

Therefore, the total deduction available in this case will be Rs 25,000 + Rs 50,000 = Rs 75,000 only.

I hope this fully explains everything there is about the tax savings that you can do with your health insurance under Section 80D.

Many people pay health insurance premiums for several years in one go as there are discounts on offer for multi-year health insurance policies.

If thats the case, then the tax deduction is allowed proportionately over the years for which the benefit of health insurance is available, subject obviously to the overall limit for each financial year).

So lets say you are 35 years old (i.e. less than 60 years) and your health insurance policy for 1 year has a premium of Rs 15,000 and that for 2 years us Rs 27,000.

So if you go for the 2-year health insurance plan and pay the premium for two years in one financial year itself, then what will be the tax deductions eligible?

Since current rules state that an individual is allowed to claim a deduction of up to Rs 25,000 in a financial year, you will be allowed to claim the total premium paid, but proportionately, over the 2-year period. This means that you will get a tax deduction of Rs 13,500 each (Rs 27,000 divided by 2) in both the financial years.

More things to know about Section 80D tax benefits

It is not necessary to claim deduction using just one policy. You can claim deductions under multiple policies subject to overall limits of Rs 25,000 or Rs 50,000 as explained earlier.

The group health insurance premium paid by your employer is not eligible for deduction under Section 80D. However, if you pay an additional premium to increase the coverage of the existing group cover, then you can claim the deduction against this additional contribution.

The premiums paid for Critical Illness policies are also eligible for tax benefits under Section 80D.

The premiums paid for Top-Up or Super Top-Up health insurance plans are also eligible for tax benefits under Section 80D.

plans are not included in Section 80D. But in any case, term insurance premiums are eligible for tax benefits under Section 80C instead.

If you have taken a Critical Illness rider as part of the life insurance policy, then the premium paid for the specific rider is eligible for tax deduction under Section 80D.

Whether you are paying a health insurance premium for the first time or you are paying the renewal premium for continuing your existing health insurance, you can claim deductions in either case.

As mentioned earlier, you cannot get benefits on health premiums paid for your brother or sister. You can also not claim benefits for premiums of your father-in-law and mother-in-law. But your spouse, if paying the premiums from her own taxable income, then the benefits can be claimed by your spouse.

A lot of people get confused between Section 80D and very popular Section 80C of the Income Tax Act. Lets briefly see what is the major difference between the two.

Section 80C of the Income Tax Act provides deductions of up to Rs 1.5 lakh per year on money spent on various options likelife insurancepremiums, EPF (& VPF) contributions,PPF savings, NPS, NSC,tax saving ELSS mutual funds, school fee of children,home loan repayment, etc.

(Read more here onhow to save tax using Section 80C.)

On the other hand, Section 80D is, in addition, to limit of Section 80C and is meant exclusively for health insurance premiums paid and preventive health checkup, etc. The tax benefit available under Section 80D varies from Rs 25,000 to Rs 1 lakh subject to certain conditions.

I am sure that by now, you would have a clear idea about how to save taxes using health insurance in India.

But let me remind you that whether you get tax benefits or not, health insurance is extremely important.

Why would anyone want to be penny-wise-pound-foolish and try their lucks? The medical costs are rising and just one visit to a hospital and hospital bill can set you back by a lot of money which will be much higher than the money you can save by avoiding health insurance.

If you are unlucky and end up in a hospital without health insurance, it can erode your hard-earned savings andplunge you in a financial crisis. So do not test your luck for saving just a few thousands.

Luckily in India, you are getting tax benefits on the health insurance premiums you pay.

So you have an added incentive there. You can maximize your tax savings by using health insurance for yourself, family and parents by paying the premiums.

TheSection 80D of the Income Tax Actoffers one of thebest tax-saving benefits in Indiaof up to Rs 1 lakh deduction specifically for premiums paid on the purchase of health insurance or medical insurance or mediclaim products. Do not ignore this tax benefit for your own good.

about Investing, Personal Finance & Financial Planning

This is theFebruary 2018update for theState of Indian Stock Marketsand includes historical analysis and Heat Maps ofNifty50as well asNifty500s key ratios, namelyP/E,P/BVratios andDividend Yield.

Please remember that these numbers areaveragesof P/E, P/BV and Dividend Yield in each month. NeitherNifty50heat maps norNifty500heat maps show the maximum or the minimum values for each month. Also, note that NSE publishes PE ratios based on standalone numbers and not consolidated numbers(Readwhy this may matter too).

Caution Never make any investment decision based on just one or two average indicators (Why?) At most, treat these heat maps as broad indicators of market sentiments and a reference of markets historical mood swings.

P/E Ratio (on the last day of February 2019): 26.32P/E Ratio (on the last day of January 2019): 26.26

The 12-month trend of P/E has been as follows:

And here are the average figures of Nifty50s PE for some recent periods:

P/BV Ratio (on the last day of February 2019): 3.41P/BV Ratio (on the last day of January 2019): 3.37

Dividend Yield (on the last day of February 2019): 1.25%Dividend Yield (on the last day of January 2019): 1.25%

Now, to the historical analysis ofNifty500companies

As the name suggests,Nifty500is made up of top 500 companies which represent about 95% of the free float market capitalization of the stocks listed on NSE (March 2017).

Nifty50on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 63% of the free float market capitalization of the NSE listed stocks (March 2017).

So obviously,Nifty500is comparatively a much broader index thanNifty50.

P/E Ratio (on the last day of February 2019): 29.23P/E Ratio (on the last day of January 2019): 29.13

P/BV Ratio (on the last day of February 2019): 3.17P/BV Ratio (on the last day of January 2019): 3.15

Dividend Yield (on last day of February 2019): 1.17%Dividend Yield (on last day of January 2019): 1.16%

You can read