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Will Debt Funds help you create wealth?

debt fund and wealth creation

Debt funds are good investment vehicles to protect your capital and still earn more than your bank interest, but they may not sufficient to help you generate enough wealth to achieve financial independence.

Let us understand this by an example.

Assumptions:

  1. A 30-year-old salaried employee has a current monthly income of INR 1.5 Lacs
  2. Annual Salary increment: 8%
  3. Annual Expenses: INR 1.15 lacs (Rent: 60K, Grocery: 20K, Child Education: 20K, Medical: 5K and Travel: 10K). The inflation rate for each is as follows: Grocery: 6% | Rental: 10% | Medical: 12% | Education: 10%
  4. The balance is saved in a combination of debt instruments which give the returns as follows: PPF: 7.6% | Bank Savings: 3.5% | Debt Funds: 7.0%
  5. The weighted average rate of return is around 6.7% annually
  6. Annual compounding of returns assumed
  7. Assumed no taxes on gains on investment

So let us see how your expenses increase for the next 30 years vis-à-vis your debt investments.

When will you run out of money?

As you can see, your expenses will outlive your income from Year 22 onwards and that is when you will start dipping into your debt savings which will start declining thereon. And this happens while you are still working. You can well imagine what should happen once your recurring income drops or becomes negligible post your retirement.

We often ignore the impact of inflation on our lives and hence, the above is a very common “kahaani ghar ghar ki”. Therefore, even in the best case scenario, debt funds will perhaps help us match inflation but not create additional wealth that can make us live through our retirement comfortably. And this is the reason the majority of retired or nearly retired Indians are working out of compulsion. A lot of such people would have ideally wanted to spend their time reading or travelling or just basking under the sun on a chilly winter morning. But even after 40 years of working, they are striving to make ends meet just because our normal income flow cannot live up to the increase in expenses.

We, therefore, need to invest our savings in instruments which can considerably beat inflation. This is where equity comes into play. You may not like it but you may still have to consider it for a comfortable future. However, equity is a challenging subject for most and we tend to have an increased the fear of loss because of our own lack of understanding of which funds to invest in. Therefore, for a person who is new to equity investing, choosing the SIP mode of investing through a trusted advisor is the best route to choose.

But then why do people still invest in Debt? And where exactly should you be investing? Read here to find more.

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Should I invest in Debt Funds or Equity Funds?

Which fund to choose

Both Debt and Equity Mutual Funds are thriving in the Indian Financial Market. But which one should you as an investor choose between the two?

When are Debt Funds suitable?

  • When you want to park some surplus cash for using it within 3 years
  • For creating your Emergency Fund
  • From an asset allocation perspective (when your risk appetite requires you to invest in low volatility instruments)
  • You want to invest funds for a long period of time but the safety of capital is most important (Example: Funds of your retired parents who may need it any time)
  • You have a lot of FDs on which you are paying significant taxes

When are Equity Funds suitable?

  • When you want to create a fund for a goal which is more than 5 years away
  • When you have surplus funds which you do not need to deploy in the next 5 years
  • When your preference is to generate inflation-beating returns and you think you have the ability to survive the volatility

In short, every investor should have some debt and equity components as part of the overall portfolio. For a lot of people, the debt exposure is taken care of through PF, PPF, FDs, NSCs and other such low return instruments. But for those who are investing for the first time and do not have a certain percentage of their wealth in the debt instruments, they can look to start investing in both debt and equity funds.

How does CAGRfunds help?

At CAGRfunds, we seek to make investing simple for you. So we do not clutter your mind with complicated technical financial terms. We just ask you your objectives of investments and suggest the suitable solutions to you. We believe in developing long-term relationships with our investors and hence our focus is solely on helping you meet your financial goals. For more information, feel free to contact us on +91 97693 56440 or drop us an email on contact@cagrfunds.com

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Company health insurance or Separate health insurance?

Health Insurance vs Corporate Insurance

“At CAGRfunds, we do a weekly session of knowledge sharing within the team. Last week, we had a rather long discussion on whether a separate health cover is required if the employee is covered by his or her company health insurance (Mediclaim) policy.

So we started digging into the various critical reasons as to why we need health cover at all. We realized that depending solely on the health insurance provided by our companies can land us up in the following situations:

Corporate Health Insurance coverage is the same for all

The employer decides our coverage amount. So, if your coverage amount is 5 lacs and your hospital bills amount to 7 lacs, the balance comes out of your pocket. Therefore, you need to ascertain the adequacy of the coverage as per your own health conditions.

You may not be rewarded for being healthy

Most companies (especially the small and midsized ones) deduct insurance premiums from our salaries. For people having the same coverage amount, the premium is also the same year on year, irrespective of how healthy or unhealthy an individual might be. So, if you are a healthy non-smoker individual, you are perhaps paying the same premium as your colleague who is slightly unhealthier than you are.

Also, in an individual health insurance, a lot of policies give either “no claim bonuses” or discounts on subsequent premiums for claim free years. That means you have more security and you save more money if you take care of your health.

You do not have the flexibility to prioritize the features you want

Corporate Insurance is a general insurance that covers a group of employees. So, the features are generic and may not be completely in sync with what you prefer. For example, if there is a history of cancer or diabetes in your family (which puts you at risk for the same), there is a chance your corporate insurance will not cover it. Or, your corporate insurance may be capping your room rent to a small % of sum insured which is unlikely to cover even half of your actual room rent.

You will have zero health cover just when you need it the most

Corporate Insurance will only cover you till you are employed with the company. So, if you are currently depending on your corporate health cover, you will have none on retirement. If at that point in time, you decide to take a private health cover, it will cost you significantly higher than what it would cost if you take a policy when you are young.

You might face several issues on changing your employer

Drop in coverage amount

Your new employer may offer you a lower coverage than your previous employer. You might want to go for a separate health cover when that happens, but do take into consideration the increased premium that you will have to take at a higher age. Also, every new policy has a waiting period for pre-existing diseases. This means that the Insurance service provider will not sanction any claim arising out of any pre-existing disease during the tenure of the waiting period. In most cases, this period ranges between 2-4 years. The older you are, the longer it is.

Lesser Dependents

Many companies today offer health insurance for not only you but also your spouse, children, parents and (occasionally) your in-laws. But, not all companies offer the same protection. If you change your company, your new employer may only support you, your spouse and your children. Having your dependants not covered in future can lead to a considerable risk of an unforeseen medical expense.

But, what should you do if your corporate health cover seems to be adequate?

Well, it is certainly possible that your company adequately covers you and your family and also provides you with the features that you prefer to have. You can choose to adopt any of the following routes:

  1. Secure your cover for post-retirement: You can take a small cover separately so that you do not have to shell out a huge premium for taking a new policy post-retirement. A new policy at retirement will also subject you to the long waiting periods for pre-existing diseases which of course defeat the purpose of the policy at that age.
  2. Secure the possibility of a massive medical emergency: Corporate covers are at best, generally adequate for normal medical situations. In case of a massive unforeseen emergency, the chances of incurring a huge expense are quite likely. Therefore, you might want to secure that eventuality and take a large health cover separately to take care of the same.

Want to know more about health insurance? Contact us on +91 97693 56440 to know more about the suitable plan for you.

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This Independence Day, check if you are financially independent

Independence Day and Financial independence

A few months ago, I was out taking an evening walk when I happened to run across my old school friend, Gaurav. We both were elated to see each other after more than a decade and decided to grab some coffee and dinner. We walked into a nearby café and started marvelling over how the past 10 years seem to have flown by.

After graduation, Gaurav got his pilot’s license and started working for a well-reputed airline. He was making a comfortable 30 lacs p.a. with no dependents. I was pretty impressed with how well his career had panned out so far.

We both finished our meal and decided to leave. He offered to pay the bill with his credit card and drop me home in his car. I obliged.

While on our way to my house, I saw him being very callous about his spending. He had unnecessary add-ons in his car, designer seats, expensive smartphones, etc. He was also too generous with his tipping to the Barista and the Petrol Pump Attendant. I asked him how he could afford all of this. He replied with a grin, ‘EMIs’.

I was shocked. On further enquiry, I found out he had EMIs for everything – Cars, Mobile, Laptops, and even his clothes! I asked him if he saved anything at the end of the month and he simply replied with a small ‘No’.

Worried, I asked him if he was investing any money in assets.

He replied, ‘Of course! Look at this expensive phone, my car, my house, these are all my assets!’

I frowned as I went on to explain to him how assets are those that generate income or appreciate in monetary value.

Being a finance graduate myself, I decided to help my friend organize his finances. We met over the weekend and decided to plan his journey towards financial independence.

Step 1. Budget and Analyze

We listed down some of his EMIs:

Expense Loan Amount Interest Tenure Monthly Cost
Home Loan INR 10 lacs 9.00% 20 years INR   90,000
Car Loan INR   8 lacs 10.00% 10 years INR   10,572
Laptop INR   70K 12.00% 3 years INR     2,325
Phones INR 65K 12.00% 3 years INR     2,159
Designer Suits INR 50K 12.00% 3 years INR     1,661
Home Renovation INR 2 lacs 14.00% 5 years INR     4,654

And his other monthly expenses:

Expense Monthly Cost
Restaurants  INR 35K
Movies  INR 4.2K
Electricity  INR 2K
Water  INR 600
Fuel  INR 4K
Mobile Bill  INR 1.5K
Maintenance  INR 5K
Misc.  INR 15K

His total monthly expenses came to INR 178,671. His income being around INR 180,000.

We now decided to split his expenses into three categories:

A: Important and Unavoidable expenses. (Example: Rent, EMIs, Insurance, Investments)

B: Expenses that can be postponed. (Example: New clothes, new furniture)

C: Unnecessary expenses. (Example: Luxury Items, High-end dining)

I asked him to only spend money in categories A and B for a month and indulge in minimal wants (category C).

Gaurav managed to save INR 20,000 in just this one month!

Step 2. Emergency Fund

Many of us often end up taking personal loans to cover for unexpected expenses such as medical emergencies, car repair, home repair, etc. These increase our monthly expenses and leave us with lesser money to grow our assets. This problem can be solved by having an emergency fund. This money can be used during times of such unexpected emergencies and will not cost you any additional interest. Therefore, we decided to keep INR 5000 per month, in a Liquid Debt Scheme as an emergency fund.

Step 3. Insurance

With the rising costs of health care and other expenses, buying insurance is unavoidable. Gaurav had no insurance since he stopped being covered under his parents’ insurance. Insurances, although are being unwanted goods, are necessary for everyone to save you on rainy days. I asked him to get health insurance and car insurance that can help him out in times of crisis. It cost him INR 10,000 for both.

Step 4. Investing

The final part of handling personal finances is investing. Money saved will depreciate in value over time. Money invested, will grow and earn for you forever (thanks to the magic of compounding). We decided to start a small SIP of INR 2,000 and build from there. The leftover money was deposited in his Savings Account.

Soon, he started understanding the unnecessary expenses and callous attitude that was costing him all his money. He gradually increased his investments and savings to pay off his massive EMIs.

As of today, his investments have already reached INR 30,000 and continue to grow. Just the past few months, gave him enough incentive to save for his future, thus becoming completely financially independent in the coming 15 years.