A Career Plan without a Financial Plan is Meaningless

When people think about their careers, they think about skills, role, designation, the brand value of the company they work for, or wish to work for, the number of people who report to them, and in addition they think about salary, perks and benefits.

These are all important things.

But they are not THE most important thing. THE most important part of a career plan is a financial plan.

There are three reasons why a financial plan is the core of a career plan. Let me go over them.

First, any career, howsoever successful, will ultimately end in failure if it does not lead to financial security. We all work hard, long hours, we take unbelievable stress, we commute for hours through a toxic pollution haze. It is worthwhile to take the time to think about what we do with the money we are making. It is not enough to make large salaries. Examples abound of famous stars and sportspersons who made millions in their heydays, but were ultimately left bankrupt, unable to finance even a roof over their head. It is not enough to have a large income. It is necessary to plan how that money will accumulate into enduring wealth and financial security.

Second, your career choices depend largely on your finances. The choices you can make, or let go, depend on the money you have.. Want to start up? You will need the staying power of personal wealth. Want to negotiate hard for a raise? You will need the safety of a large balance to be able to bargain hard. Want to wait for the right role to come along before you start working again after a hiatus? You need money to have staying power without a salary. Personal wealth provides you flexibility. It multiplies your options as you grow in your career. It provides you the cushion to take risks, because you know that even if you fall, you have enough to get back up again.

Third, a financial plan helps you set the priority of your career in the larger scheme of your life. For a few of us the working life is all there is to life. This set of persons gets up every day raring to go to office and does not wish for anything more than to be able to work at the office lifelong. For many of us, however, a career is a means to other ends. We spend our time at office working with great dedication and effort, but desire more from life than just an office and a designation. Do you know what is truly important to you? A world tour? A holiday home? Kids’ education? Your own house? A year biking in the mountains? And do you know what is perhaps not so important? All careers involve a tradeoff between time spent earning and time spent spending. The financial plan helps you make your choices. It can help you determine what you must have, what you can let go, and how long and in what way you need to work to have enough money to get what you truly want.

If you do not have a financial plan, then you really don’t have a career plan. Write to us at SphereGreen.Investments@gmail.com and we can help you understand how to develop a basic but effective financial plan for free, and then help you set it into action.

Click here to view or download our presentation on basic DIY financial planning

What returns can I expect from Equity Mutual Funds?

Equity Mutual Fund returns are highly volatile. However, over the long term, typically five years or more, they are also highly rewarding. Returns on Equity Mutual Funds depend on the investments they make. Large Cap Funds tend to have stable returns. Mid Cap Funds offer higher but more volatile returns.

In this post I am considering just these two fund types and comparing them to Bank FDs

Here are the ACTUAL annual returns on various categories of Equity Mutual Funds from four top fund houses: DSP, HDFC, ICICI and UTI over the last 3, 5 and 10 years as on Jun 21, 2016:

Equity Large Cap funds: 15.41% in 3 years, 10.17% in 5 years and 11.76% in 10 years.

Equity Mid Cap funds: 31.65% in 3 years, 17.44% in 5 years and 13.44% in 10 years.

Comparable returns on Liquid funds have been

Debt Liquid Funds: 8.67% in 3 years, 8.85% in 5 years and 7.80% in 10 years.

Now, Bank FDs provide about 1% less than Liquid Funds at about 6 months tenure. This difference adds up. At 6.8% return (10 year liquid fund return minus 1%) a Bank FD would grow Rs. 1 lakh to Rs. 3.7 lakhs in 20 years. If we include the impact of 30% tax as applicable on Bank FDs for top income tax bracket, the growth in Bank FD would be Rs. 1 lakh growing to Rs 2.5 lakhs in 20 years.

The average large cap fund would grow Rs. 1 lakh to Rs. 9.2 lakhs in 20 years. The average mid cap fund would grow it to Rs. 12.5 lakhs. There is more. The BEST large cap fund would grow Rs. 1 Lakh to about 21.5 lakhs over 20 years (if we assume that the 10 year return would be valid for a 20 year period also). The best mid cap fund would grow Rs. 1 Lakh to Rs. 56 lakhs. And all Equity fund returns are tax free after a year of holding. So no tax is payable at all.

The net net is this: it is extremely loss making to invest money for the long term in Bank FDs. ACTUAL history shows that in the last 20 years investors lost Rs. 55 lakhs in trying to protect Rs. 1 lakh.

EPF and NPS: Retirement products in India are necessary, but not sufficient.

The 2016 budget has made changes to the withdrawal and taxation rules related to EPF contributions. Tax rules on EPF and NPS are still being clarified as I write this post, and there is hope that changed rules will be brought into place that will make EPF and perhaps even NPS EEE schemes - i.e. Exempt from tax at investment, Exempt from tax on returns generated, and finally Exempt from tax on withdrawal. We will get away from taxation, but there are other very onerous requirements that are being missed. EPF withdrawals have been made impossible till 58 years of age, for instance.

Both the NPS and the EPF are great products, even if the new taxation rules apply. There are however four things that make these schemes extremely dangerous and should be kept in mind before one invests.

First, these products assume that a person will not retire until 60 years of age. In today's world that is no longer a viable assumption. Many of us will be forced to retire by 45 simply because there will be no other employment opportunities worth pursuing. It is also possible that many of us will simply not have the will to keep up with the grind of corporate employment at enormous personal cost. India is a young country and the pressure from an ever younger workforce will make it difficult to sustain a long term career, or to survive a layoff in the late thirties or early forties.

An early retirement will lock you out of your NPS and EPF funds for 10 to 15 years, from when you retire at 45 to when you get access to the funds when you are 60 years of age. How will a person finance such a gap? How will a person handle critical funding requirements such as a child's education or wedding or house purchase or a financial emergency that occur from 45 to 60 years of age? The avenues are other investments or personal loans.

Second, lump sum withdrawal from EPF and NPS are tough and will be made yet tougher and more taxable in the future. These funds can no longer be used to finance critical lifetime milestones such as buying a house or financing a child's education or wedding. They are also not very useful in managing an emergency requirement for large sums.

Third, you will be forced into buying an annuity using the corpus created in NPS and EPF. An annuity is an insurance guaranteed return on money irrespective of interest rates. You pay a large sum of money to an insurance company - say Rs. 1 crore, and they pay you back a  monthly amount, which, currently, would be about Rs. 50,000 per month. Annuity products are provided by the Life Insurance industry and this industry has a very patchy customer service reputation. Simply put - all the benefits you make through EPF and NPS could be appropriated by your annuity provider by giving you a bad annuity product. And you will not have a choice to say no. To be a captive customer to India's life insurers is the stuff nightmares are made of.

Fourth, NPS and EPF funds are completely government regulated. You have little or no control over what changes may come about in the future. For instance, the government may force all NPS money in government bonds in order to finance its fiscal deficit in times of crisis. Anyone who believes that such changes may not occur is dangerously naive. The government will be tempted to use your money for its finances, even if that damages you financially. I have no doubt that they will fall to such a temptation. The age of socialism is upon us. The time when one can be arbitrarily labelled too rich to be spared tax is here.

Intelligent financial planning demands that you invest in NPS and EPF. Intelligent financial planning also requires that you do not depend entirely only on these schemes. NPS and EPF are necessary, but not even remotely sufficient.

Our view: if you do not have a healthy equity and debt exposure through Mutual Funds, your financial plan will not work. It just won't. The math does not add up.

It is at times like these that money is made

The Sensex is close to 24,500, substantially below fair value. Markets are volatile, but cheap. People who have invested money in the market over the last two years are almost all losing money, and there is a sense of gloom. Not surprisingly, the question I get asked most often is "Is it a good time to invest?"

Yes. This is a great time to invest money, and it gets better as markets fall further. It will be a rare, once in a decade event affording a special opportunity to make extraordinary returns if we are lucky enough to see a 20% further crash from here. At that level, below 20,000, I would borrow and invest in the market.

When the Sensex rises , and touches 40,000, and is substantially above fair value and expensive. When people who have invested recently are sitting with double their money and there is a sense of euphoria and a belief that good times are here to stay. That is when nobody asks me whether they should invest in the market. They just go ahead and do it.

Actually, that is the worst time to invest in the market. That is the time when I advice people to take their money and sit tight. And I can tell you very few people ask the right questions.