Author: admin

The bank deposit has been the instrument of choice of generations of low risk investors. However it is becoming harder and harder to ignore the challenge presented by debt funds. The two serve a similar function and are close rivals. The primary areas of difference are returns, safety, taxation, liquidity and returns with mutual funds holding the advantage in tax-adjusted returns and fixed deposits in safety.

Get updates from Value Research in your inbox

Safety First
Bank Deposits are one of the safest avenues for savers in India with an almost negligible chance of default (although there have been instances of co-operative and local banks defaulting). As with all mutual funds, there are no guarantees in debt funds. Returns are market-linked and the investor is fully exposed to defaults or any other credit problems in the entities whose bonds are being invested in. However, that’s a legalistic interpretation of the safety of your investments in mutual funds.

In practice, the fund industry is closely regulated and monitored by the regulator, Securities and Exchange Board of India (SEBI). Regulations put in place by SEBI keep tight reins on the risk profile of investments, on the concentration of risk that individual funds are facing, on how the investments are valued and on how closely the maturity profile hews to the fund’s declared goals. In the past, these measures have proved to be highly effective and problems have been infrequent such as during the 2008 crisis and more recently with Amtek Auto and JSPL. Another common risk faced by debt funds is interest rate risk with funds losing value in a rising rate scenario and vice versa. Fixed Deposits which have been locked in for long tenures also face this risk in terms of opportunity cost but there is no actual loss of value when the deposit is held to maturity.

Taxation
The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.

Liquidity
Turning to liquidity, open ended debt funds proceeds are credited within a period of 2-3 working days depending on factors such as whether an ECS mandate is registered. Fixed Deposits are also typically available at 1-2 day’s notice, but usually carry a penalty if they are redeemed before the maturity date. Debt funds also have exit loads or charges that are usually levied for redemptions, typically upto 3 years. These exit loads are not applied to liquid funds with just a few exceptions for very short periods of time.

Returns
As the returns of debt funds demonstrate, you can beat the bank by investing in debt funds. Debt fund investors assume both credit risk (lending to riskier borrowers) and interest rate risk (the risk of bond prices falling when interest rates rise) and are hence compensated by higher returns.

In summary, you can beat the bank by investing in debt funds instead. However you should be cognizant of the risks involved and choose the right fund in order get the best possible deal.

 

Compared to other allowable investments, ELSS funds are uniquely advantageous. There are two reasons for this. One is that ELSS funds are unique in being the only viable tax-saving investment within this R1.5 lakh limit that brings the benefits of equity returns. Sure, there are two other options that give equity-linked returns- ULIPs and the National Pension System (NPS). However, ULIPs have long lock-in–at least ten years–coupled with high costs and poor transparency. The NPS is a retirement solution rather than a savings one. For one, it has only partial exposure to equity, and secondly, it has a very long lock-in period that effectively extends till retirement age. There’s no way a three year lock-in product like the ELSS can be compared to the NPS.

Subscribe to the free Value Research Insight newsletter

ELSS funds actually have the best combination of much lower cost than ULIPs, 100 per cent equity as well as a reasonable lock-in period of just three years. Beyond this, ELSS funds have another hidden benefit. For many beginner investors, it makes an excellent gateway product in which they get the first taste of equity investing and of mutual funds. You end up investing in these funds because the tax-savings attracts you and it has the shortest lock-in.

This experience encourages investors to invest in equity mutual funds over and above their tax-saving needs. Once you have a taste of long-term equity returns, then you end up trying other types of equity investments as well.

For the best way to choose ELSS funds, one should plan ahead and not wake up to tax-saving investments late in the year. For a variety of reasons, savers tend to make hasty and poor decisions while choosing their tax-saving investments.

For one, many of those who wait till the end of the year are those who don’t make any discretionary investments other than the tax-savings. They’re inexperienced in this whole activity and make a foray into investing only once a year, generally to fall prey to the first salesman who comes along. As long as an investment saves tax, they feel that the immediate job is done.

This approach proves expensive in the long run. A good tax-saving investment must be an investment first and a tax-saver later. For most people, the investment that should make most sense is in an ELSS fund. This is because salary-earners generally have some of the permitted amount going into fixed income through PF deductions and to balance that, equity is advisable.

There’s a widespread misconception that equity is too risky for older investors or for retirees and therefore they should not use ELSS. Nothing could be further from the truth. Everyone who has taxable income should invest in ELSS to save taxes.

Even for people who have a reasonable size of savings, the main problem in retirement planning in India is to compensate for inflation. The reality is that our savings are eaten away at a ferocious rate by the declining purchasing power of the rupee. Over the average 25-year period during which a retiree needs income, one can expect prices to rise by about eight times.

Moreover, some of the goods and services that could form an outsize part of a retiree’s expenses–healthcare, for example–have seen even higher rates of inflation.

Equity investment is a higher risk over the short term. However, for investment periods of three to five years or longer, the risk on equity investments is considerably lower. In fact, when you take inflation into account, it is bank FDs and similar deposits that are suboptimal for the retiree because of inflation.

Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. That’s also the way to avoid any last minute rush. At the beginning of every year, estimate the amount you have left over from the R1.5 lakh limit after statutory deductions, divide it by 12 and start an SIP.

There are two kinds of investors in this world, those who understand compounding and those who don’t. Almost everyone who invests money claims to understand compounding but very few do.

Subscribe to the free Value Research Insight newsletter

In a way, that’s an unfair accusation. Compounding produces such unintuitive results that perhaps only a few mathematical geniuses can be expected to have a real feel for it. The rest of us must rely on calculations. What will grow your money more? 10 per cent a year for 15 years, or 33 per cent a year for 5 years? The answer is that the two will earn the same amount, about 4.18 times.

But first, let’s define exactly what compounding is. In the textbook (or on Wikipedia), the term that is defined is ‘Compound Interest’. Here’s the definition: Compound interest arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding. Although we use the word ‘interest’, the idea applies equally to all forms of returns, not just those that are called interest.

The biggest thing that investors should appreciate about compounding is the enormous value of time. As your returns themselves start earning, and then the returns on those returns themselves start earning, the profit starts piling up at an enormous pace.

The graph below illustrates the example above and shows this clearly. The green line starts rising slowly, but as compounding takes over, the extra time means a lot more income.

Translated into a human lifetime, it means that starting to save at the age of 35 instead of 50 can mean retiring with four times the wealth. The graph shows this clearly. If one has time to learn just one thing about investing, then it should be this.

 

Last week, the interest rates on the Public Provident Fund (PPF), and a number of other deposit schemes run by the government (Kisan Vikas Patra, the girl child scheme, senior citizens deposit etc) were cut by 0.1 per cent per annum. The PPF rate went down from 8.1 to 8 per cent. There were some protesting noises on social media and from some of the usual suspects, but they were mostly just murmurs, probably on account of of the marginal quantum of the cuts.

Get updates from Value Research in your inbox

In fact, a lot of people wondered what the point was of such a small cut. This shows that the idea that these rates are now market-linked is not widely known. They are reset every quarter, depending on the interest yield on government securities. Give how things are going, it won’t be too surprising if these rates fall further. PPF rates are already at a historic low and if the go below 8 per cent then the psychological impact of hearing 7-point-something will be huge on savers. The KVP is already down to 7.7 per cent. It’s also worth noting that there’s a maths trick to this 0.1 per cent. Your income from PPF is actually down by 1.2 per cent.

The point that savers have to realise sooner rather than later is that PPF and these other schemes are now poor vehicles for long-term savings. PPF specially is widely used as a tax saving and retirement vehicle. However, it does not even maintain the value of your money after taking real inflation into account. While the official inflation rate may be less than the PPF rate, the inflation rate in your own life, especially that of the old and retired, tends to be higher. Expenses like medical services hardly stick to the orderly single-digit world of the Consumer Price Index.

This sounds like heresy to the conventional way of thinking about savings in our country, but abandoning PPF and using equity-based tax-saving and retirement solutions such as the ELSS and NPS is increasingly unavoidable.

 

Buy term. You must have read this a million times in these pages. If you are looking for a life insurance policy to protect your family against your untimely death, then the only product type to buy is a term insurance plan. But it may not be that easy to buy it. There are three possibilities that may play out when you try to: you may have to undergo additional medical tests or submit more documents, you may have to pay a higher premium, or in the worst case be denied insurance altogether.

Subscribe to the free Value Research Insight newsletter

Several things determine your experience of buying a term policy. The important ones can be broadly categorised under health, income, educational qualifications and occupation. We tell you how you are assessed on these parameters.

Your health status
Insurance is the business of covering risks and for that the insurers charge a premium. To do this, it’s important for the insurer to determine if the risk is insurable and the price appropriate. This process is called underwriting. Two kinds of underwritings are applicable in this case: medical and financial.

Under medical underwriting your age and health status are reviewed. Insurers typically consider you for insurance if you are under 65 years of age. So if you are young and healthy, buying a term plan is a sitter otherwise insurers are cautious. “Obesity, diabetes and hypertension are the three important red flags… and we may ask for additional medical tests. We may decide to load the premium, but if the health condition is so severe that even loading doesn’t price the risk appropriately, the customer is denied a cover,” said V. Viswanand, senior director and chief operations officer, Max Life Insurance Co. Ltd.

Smoking can be a factor for raising the cost. “If you SMOKE say, 10 cigarettes a day, the insurer will not only load the premium but may deny you insurance especially if you have other health issues as well,” said Mahavir Chopra, director, health, life and strategic initiatives, Coverfox.com, an online insurance broker. Premiums for smokers can be higher by about 40-50%.

Family history can also play a role. “It is important to know if the customer is genetically predisposed to an ailment. Physical or congenital impairment that affects the ability to earn, may also mean the customer is denied the cover,” said Sujoy Manna, vice president-product, HDFC Standard Life Insurance Co. Ltd.

Even early deaths in the immediate family due to chronic lifestyle diseases or critical illnesses can impact underwriting.

Financial underwriting
While health has a more direct impact on your insurability; your income, educational qualifications and occupation also have a bearing. “Income ascertains the eligibility of sum assured. For term insurance, as a thumb rule, more than 20 times of income as sum assured is not permitted,” said Yashish Dahiya, chief executive officer and co-founder, Policybazaar.com.

However, for higher- income individuals, loading norms can be relaxed. “Higher income segment typically have better access to health care and depending on the severity of current lifestyle disease, insurers may or may not charge higher premium,” added Viswanand.

Eligibility for insurance doesn’t mandate earning capacity, but the economic value of the insured.

“A housewife, for instance, may not draw a regular income but she manages the household. So if she is not around, an alternative investment will be required in the form of an external help such as a daycare for children. We offer life insurance to housewives under the joint life term cover,” said Vijaya Nene, director operations, PNB Metlife India Insurance Co. Ltd.

Other than income, educational qualification also plays a role. According to Chopra, insurers discourage applications from non-graduates unless they are in a high- income bracket of Rs5-6 lakhs per annum. Insurers say that education also determines the amount of sum assured a customer can get. “Educational qualification determines the earning capability of the customer. While there are group policies specifically designed for customers with low- or no-educational background, an individual policy will underwrite customers on the basis of their educational qualification as well,” said Manna.

Lastly, your job profile is considered too. If you are in a high-risk profession, the insurer may load or reject your insurance. “For instance, noncommercial airline pilots and non-administrative defence personnel will typically end up paying higher premiums. But insurers may refuse to cover a professional deep-sea diver,” added Viswan and.

Even self- employed customers may face greater scrutiny. “There is always a risk that these individuals don’t disclose correct income. So the insurer may also ask for income tax returns in addition to the standard documents,” said Dahiya.

Other than these, factors like your location are also considered to assess your risk. It helps to understand what the insurers look at, so that your expectations are more realistic and you can improvise on parameters.

Most people are fairly unanimous on the fact that from all investment opportunities, stocks offer the most potential for growth. Despite ups and downs in the market, stocks historically have always earned more than fixed return instruments over the long term. Moreover, it is one asset that fire proofs savings against inflation.

However, not everyone is a stock picker. Benjamin Graham, also known as the father of value investing, once remarked that making money depends on the “amount of intelligent effort the investor is willing and able to bring to bear on his task”. Intelligent effort refers to the intensive research, capability, and time that an individual has to put into stock analysis.

Besides, one would also require a significant outlay of cash. Without it, a highly concentrated portfolio of a few stocks puts you at a great risk.

In the light of the above issues, it makes sense for investors to opt for an equity fund from a reputed fund house. The investment decisions are left to an asset manager and his team of analysts. And one instantly gets a well-diversified portfolio.

Besides being a logical decision, here are three reasons an equity fund makes sense. 

• Huge opportunity

There are thousands of funds from 40 asset management companies, or AMCs, that are available to the retail investor. So there is no dearth of options.

Within equity, the choices abound. You can opt for a growth fund or a value fund, or a fund that combines both investing styles. Alternatively, one can pick a fund based on its exposure to various market capitalizations. There are funds classified on the basis of sectors or themes, such as auto, infrastructure, FMCG, and pharma. There are international funds too that offer a global exposure to a portfolio.

Besides equity, there are also debt funds and gold funds and hybrid funds that combine asset classes. So one can diversify their entire portfolio and conduct their asset allocation by resorting to mutual funds.

Within these funds, one can stick with the growth option or opt for periodic payments by taking the dividend option.

However, be wise and pick up funds which have a good track record and where the fund house boasts of a good pedigree.

• Entry and exit is convenient

By investing just a tiny amount, you get a ready-made, well-diversified portfolio. Let’s say you start a monthly systematic investment plan, or SIP, in a diversified equity fund. By investing as little as Rs 1,000/month, you instantly get a portfolio of at least 40 stocks across numerous sectors.

The selection is made by the fund manager who will invest after conducting his research on which sector and individual stocks to invest in.

Once you put an SIP in place, the amount that you decide to invest will automatically be deducted from your bank account and invested at the date pre-selected by you. With no effort on your part, your savings will be channelised into the fund of your choice.

To redeem your investments, you will have to fill up a redemption form. If you submit it before 3pm, the net asset value, or NAV, of that working day is applicable. Post that time, the units will be redeemed at the NAV of the next working day.

Once the redemption request is successfully received and verified, it takes anywhere from 2 to 4 working days for the proceeds to be credited to the registered bank account.

Open-ended schemes can be redeemed anytime. If you want to sell your units in a close-ended fund before the tenure of the fund has been completed, you will have to sell them on the stock exchange, where liquidity is an issue. Some close-ended funds offer a redemption window periodically.

• No tax on buying and selling stocks

If you are managing a stock portfolio, you will have to pay brokerage on your transactions. In an equity fund, an investor will be charged an expense ratio, which averages 2.5% of the assets of the fund. Do note, the NAV declared is post deduction of expense.

However, besides brokerage, if the selling of stocks is done within one year of purchase, then you are liable to pay short-term capital gains tax.

A fund manager has no such restrictions. There is no capital gains tax for an asset manager even if he were to book short-term capital gains for his stock transactions. So should he churn his portfolio rapidly over a few months he will still not be liable to pay the tax, as in the case of a retail investor.

An investor in an equity fund is taxed on short-term capital gains but pays zero long-term capital gains tax. Having said that, investors in any equity product are advised to hold on to their investments for a couple of years at the very least.

 

Is equity a must for all portfolios? Before I answer this question, I’d like to start by asking you a question: did you know that with the advancement of medical science the time we spend in retirement will be almost the same as the amount of time we spent earning? Here is a different way to look at the same concept: if your monthly expenses are Rs 50,000 today and you are 40 years of age, your expenses will increase to Rs 1.33 lakh per month at 60 years, assuming an inflation rate of 5% per annum. Even during retirement, the impact of inflation will mean that your expenses keep growing every year and will touch Rs 2.16 lakh a month at 70 years and Rs 3.52 lakh per month at 80 years.

Subscribe to the free Value Research Insight newsletter

Prima facie, these numbers may sound astronomical but they will be close to reality if inflation continues at 5%. To meet these expenses for 30 years, you will need a retirement corpus of at least Rs 2.5 crore at 60 years (assuming that after you take out your annual expenses from this corpus, the balance corpus earns about 10% returns every year in retirement). What does this mean? It means that our money must work harder than ever for us to meet our expenses. Indian households hold more than Rs 25 trillion in savings bank accounts, which earns about 4% per annum. Even if half of this money is needed to meet unforeseen emergency expenses, the other half is certainly not being invested optimally. If that money, Rs 12.5 trillion, were invested outside a savings bank account and earned 10% a year, investors would receive $12 billion or Rs 75,000 crore of additional investment income every year.

As the above example shows, while we have traditionally been great savers, we are not necessarily great investors. Remember, there is a difference between saving and investing. Following a ‘one size fits all approach’ to saving money, wherein we have a common investment kitty comprising physical assets (gold, real estate) and financial assets (mainly assured-return products), and drawing out from this kitty to meet all our needs, may not be the best way.

While this approach may have worked well in the past, it is no longer adequate for three key reasons: our propensity to save has reduced, our aspirations are much higher now, and interest rates from fixed deposits and other assured returns products have fallen from double digits in the 1990s to single digits today.

So, instead of looking at whether to buy equity, debt or other forms of investment, what is more important is to first adopt a planned or a goal-based approach to investing, where investments are segregated for each goal and monitored till the goal is achieved. Just as we use services of specialists like wedding planners, interior designers, nutritionists or physical trainers; goal-based financial planning too requires special skill sets of professionals such as Certified Financial Planners (CFPs) and financial advisors.

Now to the question of how to go about building the desired corpus. Two things are very critical here, regardless of our goal: starting early and having a planned and methodical approach, including proper asset allocation. Starting to invest early for your goals is critical, as any delay in investing can negatively impact your cash flows in a big way. For example, one needs to save Rs 11,000 per month (assuming returns of 10% per annum), starting at age 30 to build our desired retirement corpus of Rs 2.5 crore. This increases to about Rs 33,000 per month if we wait till age 40, and Rs 1.21 lakh a month if we wait till age 50 to start building this corpus.

The second critical aspect of asset allocation is deciding the amount of money allocated to different asset classes, such as equity and debt mutual funds in our portfolio. One way to decide asset allocation is the age and time horizon available to reach that goal. For example, a young person in his first job may be willing to take more risks as he may have limited liabilities and responsibilities. On the other hand, a 50-year-old could have higher liabilities and responsibilities and may choose a portfolio with a slightly lower return but with relatively less risky investments. So, deciding the right asset allocation, based on our goals and risk appetite, is very important in constructing a well-planned portfolio. Remember, financial planning is not just about investments, it should also include contingency plans like insurance and succession planning.

So finally, to the initial question: are equities a must for all portfolios? I would rather ask: why are equities a must for all portfolios? We established that we need more money, which has to work harder and last longer. Equity mutual funds (MFs) have the potential to provide higher returns vis-a-vis most other investments over a period of time. But due to higher risks involved in getting these returns, equity investments should be chosen for long-term goals, which are ideally more than 5 years away. Equity MFs are one of the best ways to save and invest for the long term and all investors should consider equity as part of their investment portfolio.

Remember this quote by the author of Rich Dad Poor Dad, Robert Kiyosaki, “It’s not how much money you make but how much money you keep, how hard it works for you, and how many generations you keep it for”.

My yoga instructor once told me, “Yoga is like SIP. The results will definitely show over time.” This rang a bell. How many of us think of wealth and health on similar lines? Do we invest in our health and wealth regularly? When we don’t, the usual response from most of us is that there is time to catch up at a later date with these two important pillars of our lives.

Subscribe to the Value Research Insight newsletter

The great artist Pablo Picasso, an influential modernist painter, once famously quipped, “Action is the foundational key to all success.” When it comes to taking care of your health and wealth, the same foundational key rings true for all of us.

Once we start postponing matters, we tend to keep postponing till it is rather too late. Because of the many distractions around us, we think we can catch up with our health and wealth goals in the future. This is far from truth. Recall the tortoise and hare story.

We have to start investing now in our health, and wealth, and persist. And one way to be consistent with both is to weave automated routines into our everyday lives. For instance, investing through a systematic investment plan (SIP) can done easily through your bank account.

Even making greater investments over time can be put on autopilot, as increasing the SIP’s amount is now just a click away. Once you put a plan in place and take action, the process works for you without the need for any additional effort on your part.

Likewise, with health too, you have to create a system where taking action on health becomes a routine, without the need for conscious intervention. Create and block a time for physical activity and weave it into your daily schedule till it becomes a routine. You can also create a predetermined action plan for investments-as you do for exercising and healthy eating-and this can serve as a long-term guide for your health- and wealth-related goals.

Another strategy that serves us well for long-term wealth and health is to strive to achieve a balance. Let’s begin with keeping our health in balance. For example, if weight gain is a problem for some of us, we can safely assume that calorie intake is out of balance. In this case, the simple cause would be that we are absorbing more calories than we are burning: energy intake and energy use are out of sync. A simple solution could be to consume fewer calories and burn more.

It is the same with investing. We have to achieve a balance between saving and spending. Needless to say, spending more and stretching your finances can lead to debt accumulation and difficulties in meeting the goals. To maintain a balance, you have to create a positive cash balance between income and expenses, and channelise these positive cash flows to make investments regularly in various asset classes.

Maintaining a healthy asset mix, or a proper balance between equity and debt, goes a long way in ensuring that you achieve your goals without losing your risk appetite. At times, the price of assets can go over the top, or vice-versa. That’s when a balancing act between equity and debt, via a balanced fund, becomes important. With a balanced fund, one automatically enters an asset when its price is reasonable, and exits when the price shoots up.

Lastly, don’t hesitate to seek help for maintaining your optimum level of health and wealth. It goes without saying that you have to see the doctor when you are not well. But you can stay healthier by turning to professionals such as fitness coaches and yoga instructors, who can instil a routine and good practices in your health plan. For example: a personal fitness coach will make you to hit the road, even if you are not in the mood for exercising. And this regular effort will reflect in your health over time.

Likewise, when it comes to investing, taking the help of a financial planner or investment adviser goes a long way in maintaining the fitness of your wealth. Your adviser can assess and make tailor-made plans, depending on your goals and current income. She also helps you choose suitable financial schemes to help you target your goals, depending on your financial situation. She will help you correct the course of your financial plan, just the way a fitness instructor comes in to change your exercises to target specific areas of your body.

And finally, to put all of this into practice, it is a must to make this a part of your regular routine. The key is consistency. The great investment thinker Ben Graham had said: “The individual investor should act consistently as an investor and not as a speculator.”

Staying consistent means putting your wealth and health on a regular schedule. Ask yourself how you can inculcate the good habits of saving and staying healthy. And strive to catch up if there is a deviation from the plan.

If you find yourself eating more, cut back on calorie intake the next time. Similarly, if you overspent in a month, don’t hesitate to double your investments the next time.

Good financial and health practices are a lot like practicing at the nets regularly. The results will show over time.

Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd.

 

If you want your savings to be worth more, then you should invest more. It sounds like a joke, but it isn’t. Over the last few months, while analysing savers’ long-term projections and answering their questions, it’s become increasingly clear that most people do not save enough. This is not unique to India–financial advisors around the world have started talking about it. In the developed world, this is driven by the realisation that interest rates and the resulting income from fixed-income products could possibly stay at negligible levels for many more years, perhaps a decade or more.

Get updates from Value Research in your inbox

In India, there are a range of reasons why savers need to save more, and interest rates are only one of them. Nominally, in terms of the number that your bank has written on your fixed deposit certificate, interest rates in India are quite high. However, anyone who understands even a little bit about savings and investments knows that this is an illusion and real interest rates over and above inflation are a fairly small one to two per cent. But even that’s an illusion. People’s personal inflation rates, especially as they retire and get older, are generally much higher than the official one.

What’s more, interest rates will likely head down. Raghuram Rajan is the rare RBI boss who was explicitly committed to maintaining a certain real rate of return. In the future, under a governor who is more accommodating to the low-interest cheerleaders, savers will probably have a harder time earning anything at all after adjusting for inflation.

What makes this worse is taxation on interest income. Even if you are in the 10% tax bracket, post-tax real returns from interest on deposits is barely neutral. In the higher tax brackets, it’s clearly negative. That’s the reality of interest income that few realise. None of this is going to change anytime soon and some of it is going to actually get worse. If, like most Indians, you are a believer in deposits, then you’ll just have to put in that much more to get out the same value.

However, that’s not the end of the story. What’s making this worse is longer life spans. In India, life expectancy at the age of 60 is now 17.8 years. As recently as 1990, this was 14.8 years. That large a change in the average means that some people–specially those with access to better nutrition and healthcare are living a lot longer. We can see this around us. It’s very likely that this trend will continue. The flipside is that your retirement kitty may have to last 25 or 30 years. To do this, your savings will have to earn better returns–which, as we’ve seen–is likely to be a challenge. Even if they can–perhaps for investors who have a reasonable equity allocation–there is no alternative to saving more.

Most people just save whatever they can, or they save some arbitrary number driven by tax saving needs. Instead, we’ll have to start projecting future needs and projecting backwards from there to see how much we need to save. The best thing to do is to be pessimistic in these calculations–assume that needs will be higher and returns lower.

This is for those who manage their own savings. For the millions who depend on statutory schemes like PF, the government should tweak the system to lead to higher savings and returns. In the last budget, there was an attempt to reform EPF that had to be rolled back in the teeth of protests. However, an increase in the EPF contribution or some other fundamental tweak is needed to ensure that those dependant upon it can cope with the changes that are taking place.

Longer lifespans and lower returns are a lethal combination for being comfortably off. All of us will have to recognise the threat and act sooner rather than later to manage it.