Investing advice for a long sabbatical

[rennamo]

Updates:​

• Update 1
• Update 2

Original Post​

I found this subreddit very useful, and I really wish I had found it a couple of years ago. Anyway, better late than never. I spent a lot of time over the weekend going over ELI5 Series and The Wiki posts.

I am a 34 yr old individual. My partner and I quit our jobs last year to go on an indefinite sabbatical. After working, living frugally and saving up over the years, our current net worth is about 25-30 times our annual living expenditure. Most of it is in fixed deposits (stupid, I know!). Some of it has been invested in PPF over the years. A small amount is in illiquid investments like a piece of land, and some gold.

I am starting to think about a plan to ensure both of us are financially independent over the long term. It is very likely that we will be earning some income over the rest of our lifetime. But it will probably be irregular, and we do not want to depend on it. We will probably inherit some money over the long term as well, but I want to ignore that too. So to simplify things, I will assume that I am not going to have any employment income for the rest of our lives.

The post A Simple Financial Plan Roadmap was very useful. I am using it as a template to illustrate what I have done and what I intend to do. One of the big goals is to keep things simple, so that I spend a minimum amount of time managing my money. This might mean we are not squeezing out the best possible returns, but that is okay. We are aiming for financial security, and if possible a modest increase in our wealth levels over the long term.

Any suggestions and advice is welcome.

Step 1: Check Insurance Requirements

We bought comprehensive health insurance coverage last year. The annual premium is a bit on the higher side, but medical expenses is not something we want to compromise on.

We have no dependents, and it is unlikely we will have kids, so we decided not to get any other sort of insurance.

Step 2: Check Level of Emergency / Contingency Funds (Basket 1)

• I want to maintain 2L INR in our savings bank account on average, which is about the money we need for our expenses every quarter. In the absence of any other income, I am a bit unsure about the best way to consistently maintain the balance amount, without keeping too much in FDs which pay out interest quarterly. Any advice on that specifically is appreciated.
• I have decided to put 10L INR (a little bit more than our annual expenditure) in Franklin India Ultra Short Bond fund - Direct as a contingency/emergency fund. This was on a tip from this comment.

Step 3: Short-term goals coming up in next 2-3 years (Basket 2)

Short term goals we have are around electronics/appliance upgrades (laptop, phone etc…) and travelling. So I have decided to put aside about 5L INR for that.

I was thinking of of putting that in some plan by Franklin. Again, to keep things simple I want to go with the same AMC as in Step 2 above.

Step 4: Longer Term Goals (Basket 3)

Our long term goals are focused around financial security in the long run (w/o any income) and saving for old age, when your expenses are likely to be greater.

I want to slowly move my money from FDs to a combination of:

• ELSS (Franklin India Taxshield Growth - Direct) to make use of 80C allowance
• Long term debt MFs (still thinking about the options)
• PPF
• A small amount to experiment with stocks, ETFs etc.

What do you think? My biggest concern as I mentioned above is around how to conveniently ensure that I have access to 2L INR every quarter to meet our basic expenses. What kind of funds can I invest in which one can ensure a consistent (even if it is not very high) return, and still be better than an FD that pays out quarterly interest?.

 

[nizz]

@rennamo Great setup.

I will leave a longer comment later but for long term goals, are you sure you can meet them with majority of your money in long term debt funds? Can long term debt funds alone help you beat the effect of inflation? Are you considering only ELSS/stocks/ETF for long term and not other equity mutual funds?

 

[rennamo]

@nizz

for long term goals, are you sure you can meet them with majority of your money in long term debt funds?

Long term debt funds is one of the options, apart from ELSS, PPF and anything else (stocks, ETF, and even equity mutual funds). I have not really given too much thought yet to the allocation ratios. That was something I was hoping to fine tune slowly given old age is still 25yrs away .

Can long term debt funds alone help you beat the effect of inflation?

I don’t know for sure. Probably not.

Are you considering only ELSS/stocks/ETF for long term and not other equity mutual funds?

When I said ‘A small amount to experiment with stocks, ETFs etc.’, I also meant other riskier financial instruments like equity MFs as well. I don’t really know much about all of these, so the idea is to start slowly and learn over time.

The thumb rules I am using right now are:

• Use ELSS to max out 80C deductions. This helps save tax, and also provides a decent long-term investment option
• A long term investment portfolio is typically contains a mixture of equity and debt. So the idea is to counterbalance the investment in ELSS with some debt fund. Maybe I am making some incorrect assumptions?
• Nothing is set in stone. As I learn more, I will adjust my portfolio.

 

[nizz]

@rennamo http://www.firstpost.com/investing/...n-equity-and-equity-mutual-funds-2561694.html

http://www.subramoney.com/2013/09/why-should-i-be-in-equity/

http://www.subramoney.com/2015/08/equity-is-a-long-term-vehicle/

http://www.subramoney.com/2014/03/who-should-be-in-equities/

 

[rennamo]

@nizz Thank you for those links. I read them.

Setting aside any specific advice on allocation ratios for the moment…what I got was that, the key is to have the right frame of mind psychologically. It is important to be patient, disciplined and avoid panicking. I can see how that can be hard .

I do have some experience with being disciplined, after having lived frugally and saved all that money over the years.

As for patience – I have made some hasty decisions in the past, but nothing I have come to regret badly. For example, in the rush to fix my financial situation, I went ahead and did a lot of things before I ended up on this site. I got a demat account, allocated 10k in an ill though out SIP plan (which I later discontinued, so no harm done), and invested a small amount of money in an Mutual Fund NFO (not Direct, but through the demat account). I was just trying to do something in order to get started, when a little bit of reading and research could have helped me. Anyway, no real harm done, but I should really work on being more patient .

I really need to work on avoiding unnecessary panic. I am still new to this, so I have no idea how I will react when a downturn in the market reduces the value of my investments. Let‘s hope I can remember to act upon all the sage advice on offer here .

Thank you.

 

[nizz]

@rennamo Don't worry about the past, you should look to the future

My point was to include some equity in your portfolio, so that a portion of it beats inflation.

 

[sammie2019]

@rennamo Https://redd.it/18d4bz

Check that one too.

Use the SWP option or lumpsum withdrawal as and when needed from franklin ust bond fund. You can use their Liquid Fund too.

25-30x is a decent amount.

Use tax deferment as much as possible. Which means lesser FDs.

You can have a look at annuity too actually to give you a decent base income. That is going to be taxed (split it 50 50 with your partner, so that half each comes in each person's name). So 50L each (total 1 cr) would give around 8-9L per year for rest of your lives.

Health insurance. tick

Life insurance - useless for you. Just to make sure, both of you are married, right. If not, set up a will.

 

[rennamo]

@sammie2019

Https://redd.it/18d4bz
Check that one too.

Thanks. In my situation, it is useful to think of oneself as retired and needing to meet expenses from a pension fund. The DIY pension plan is a great idea.

Just to make sure, both of you are married, right. If not, set up a will.

Yes, we are.

 

[rennamo]

@sammie2019

Use the SWP option or lumpsum withdrawal as and when needed from franklin ust bond fund. You can use their Liquid Fund too.

I looked at the Fund Factsheet, and I also did some more research on this. Let’s say I invest a lumpsum amount in the fund today, and then I start withdrawing from it 4 months from now. How does that work exactly? Will it attract capital gains tax? I am not entirely clear about the tax implications.

 

[nizz]

@rennamo

the tax implications

https://www.advisorkhoj.com/company...articles/Mutual-fund-taxation-in-FY-2015-2016

 

[sammie2019]

@rennamo For very short term, you can just keep the money in your bank account also.

You put 10L in a liquid fund, with NAV 100. You want to withdraw 1L after 4 months.

The NAV will be 104 (assumption 12% a year, 1% a month). You do a withdrawal of 1L which means you withdrew 960 units. Now out of 1L, your principal was 96,000 and your capital gains are 4,000.

You will have to pay marginal tax rate (STCG) on that 4k. Even though you withdrew 1L.

You can set the same system with FDs, say 4 month, 8 month and 1 year FDs. But in FDs, you are inflexible since the time and amounts would be fixed.

 

[rennamo]

@sammie2019 Thank you /@sammie2019 and /@nizz. I understand now.

 

[soombing]

@sammie2019 What happens if NAV is less than 100 at the time of withdrawal? Does the tax scenario change then?

 

[sammie2019]

@soombing You get to claim short term capital loss, which can be adjusted against STCG or LTCG. It is a hands on strategy to use for decreasing the overall tax liability.