Our post on Take Control, Invest Actively : Active Investing Series Part 1 saw a lot many queries and appreciations. Today we decided to share these with our subscribers as many of you may also have the same questions.
Q: Shouldn’t you take tax into account while comparing equity and liquid returns?
A: You should never take taxes into consideration – you might see equities get taxed next year and then removed 10 years later, you have no idea when etc. Plus in both cases you will only see taxes when you exit – and you will always exit in smaller chunks (to take care of expenses) which will be taxed lower. So taxes shouldn’t be considered at all in the long term, IMHO.
Plus we will demonstrate how you can use business income and expenses to offset many of these tax snafus so that the returns could be created in a tax-equal manner. We’ve also written about bonus stripping in the past and that can also be used to offset taxes.
Aditya says “This is great! I can’t wait to go deeper in to this. The 10% increase in SIP is a great tip. Thanks!”
Q – Nandan: How many times are looking at making the switch in a 20 year period,… what would be the switch costs that would eat into our target 12% returns?
A: You don’t have to switch – you just slow down subsequent investments in equity until that equity premium is lower. You needn’t even use the equity premium to time it – it’s just an additional input if you can do it. It’s like an excel sheet with just one entry a month. If you don’t use it, that’s also fine.
You don’t want to spend too much time switching. The idea is this: This month, should I put my money half into equity half into debt, or simply invest everything in a liquid fund because stuff looks blown out of proportion? That’s all you need.
Ganesh says “Excellent. After 10 years of working, I was living pay-to-pay, with 3 loans and no savings (I had even encashed my PF while switching jobs). Then made by financial plan excel till end of life, very similar to what you have shown here. That was eye opener.
Now after 5 years, I am debt free and saving regularly. Total savings reached only 15 Lakhs, looks miniscule compared to target of 5Cr. But as you have shown, compounding is a friend which we can rely on.”
Q: Why choose a 3 yr rolling SIP and not a 1 yr?
A: 3 year is more smoothed than a 1 year. I would take a 5 year but we don’t have that much data.
Q: Are you suggesting we check the risk premium value each month and decide on investment into equity or not?
A: Using the risk premium is optional – but it’s one way to asset-allocate.
To add to this: you might find it painful to do this. Then, you just keep your investments going, based on where you need to be. If you’re already where you need to be, then you don’t have to invest further into equity. Just park the funds in a liquid fund and wait it out till the investing theme looks better for equity. Waiting is an important part of investing.
Q: If not in equity the SIP amount should go to debt funds fully for the months where risk premium is below 10%?
A: SIP should go into liquids for the high risk premium times. It will then be pummeled back into equities when the risk premium falls.
Krish says “Deepak, one of the best written article. This article makes it quite scary to live up to 90. It needs diligent saving for 20 years, hell lot of planning to generate 12% return for next 30 years and to maintain decent health upto 90 (lighter vain).”
Thanks for some great feedback and we’ll have a lot more on this!