Tax Efficiency of Debt Mutual Funds

Here, I am arguing a case for debt mutual funds against FD, mainly on the account of the difference in the tax treatment for these two instruments.

Tax Treatment:
FD: Interest is taxed on accruals. I agree that you can opt to show on cash basis - but it is impractical to follow the same. Taxation: Clubbed into the total income for the year and taxed at the applicable tax slab.

Debt Mutual Funds: Taxed on the realized capital gains.  The capital gains can be classified as short term (if the units are held for less than or equal to 3 years) or long term (> 3 years)

The tax treatment of the short term capital gains is very similar to the FD interest - the gains are clubbed to total income and taxed at the applicable tax slab.  The long term gains are taxed differently - The investor can choose to pay tax @ 10% of the gross long term capital gains or @ 20% of the indexed long term capital gains, whichever is lesser.

Illustrative Calculation:
Assume a person is in the 30% tax slab and he chooses to invest Rs 1L @ 10% per annum in FD, for 5 years.
This is how the calculation goes:
Year   : Amount  : Interest: Tax    : NetAmount
Year 1 : 100,000 : 10,000 : 3,000 : 107,000
Year 2 : 107,000 : 10,700 : 3,210 : 114,490
Year 3 : 114,490 : 11,449 : 3,435 : 122,504
Year 4 : 122,504 : 12,250 : 3,675 : 131,079
Year 5 : 131,079 : 13,108 : 3,932 : 140,255

He ends up getting Rs 140,255 after 5 years, for Rs 100,000 invested in FD.

Instead if he were to invest in a debt mutual fund with a compound annual growth rate of 10%, the 1L would have become 1 L * (1.1) ^ 5 = Rs 161,051.  Tax on the LTCG at 10% = Rs 6,105 (10% on the gain of Rs 61,051).  The net amount will be Rs 154,946.  A difference of approximately Rs 14700 compared to FD growing at the same rate - just because of the difference in tax treatment.

To put in a different way, to get the same amount of what FD @ 10% p.a would have fetched at the end of 5 years, a person can choose to invest in a debt mutual fund with a CAGR of only 7.7%.  For 10 years, the equivalent CAGR is 7.6% and for 20 years it is 7.4%.

A preliminary conclusion is that the debt mutual funds are advantageous if held for long term.  In the short term, the tax treatment is same - both are taxed at the applicable tax rate - or that's what it looks like.  It is not actually so.  Why?

Because the annual interest (accrued even if not paid) is taxed in FD whereas only the gains are taxed in a debt scheme. Our assumptions still remain:  A person in 30% tax slab.  FD @ 10% p.a. Debt mutual fund growing at 10% CAGR.

FD: Rs 1L invested.
    End of 1 Year: Rs 10,000 interest and Rs 3,000 tax.  Net Interest Receivable: Rs 7,000.  Net gain 7% (Effective tax 30%)
 
Debt MF: Rs 1L invested. NAV Rs 10.00 Units Bought: 10,000
    End of 1 year: NAV Rs 11.00 (10% growth) Units Available: 10,000 valued at Rs 11 = Rs 110,000
    Redeemed Rs 10,000 = Rs 10,000 / 11 = 909.09 units sold, means the remaining 9090.91 units are untouched
    Cost of 909.09 units = Rs 9090.9  Sale Price = Rs 10000
    Gain = Rs 909.09
    Tax @ 30% = Rs 272.73
    Net Amount = Rs 10000 - Rs 272.73 = Rs 9727.27   Net gain 9.73%!!  (Effective tax 2.73%)
 
So, if our assumed person needs a regular pay out, it is prudent to take the pay out as gains from an equivalent debt fund than as interest from FD.

For or Against NPS - Part 2

I had written an argument of for vs against NPS, sometime back. Here it is.

Option 1:
We hunted down to making a choice of Rs 80,000 as cash or Rs 200,000 with an assured post tax rate of 5.17%.  This works out to be Rs 10,340 yearly or Rs 862 monthly.

To get this cash flow on a principal of Rs 80,000 this has to offer 12.93% per annum return.  So, getting a post tax rate of 5.17% on Rs 200,000 annuity is equivalent to getting 13% on Rs 80,000 (which is what would be available, by not going into NPS)

Option 2 (not discussed in the other post):
At age 60: Take Rs 200,000 in cash and taken an annuity of Rs 300,000

So here is the outcome at age 60,
Not going for NPS:  Have extra cash of Rs 150,000
By going for NPS :  Have an annuity worth of Rs 300,000 @ 5.17% post tax (assuming the old service tax of 15% and 10% income tax on annuity income)

By going for NPS, Rs 15,510 yearly or Rs 1,293 per month will be the annuity cash flow.  To get an equivalent cash flow on Rs 150,000, the rate would be 10.34% per annum.

As of now, I am still not able to say concretely whether it is go or no-go.  Because, depending on how you look at it and what is important (liquidity vs locked corpus), what kind of assumptions being built in (current tax slab, retirement tax slab, returns of NPS versus non-NPS), the case can tilt either way. 

How much do you spend per km of journey in your car?

I have been driving my car since 2011.  Done around 30000 km in the last 6 years.  My car gives around 10 to 17 km per hour, mostly averaging around 12 km per litre.  The variation is due to different driving conditions - driving in city vs driving on highways.  Max possible is around 17.5 km per lit - with ac. The petrol prices have varied from Rs 60 to Rs 80 per litre.  My overall mileage cost per km would be around Rs 6 per litre.  This is just an incremental variable cost of driving a distance of 1 km in my car.  There are other fixed costs:  Purchase price of the car, regular servicing, cleaning, insurance, tolls and parking.

The objective of this article is to find out the total cost per km.

The car is a WagonR Vxi, bought in 2010 by my father for Rs 4.3 Lakh. He was driving it for a few months before gifting it to me in 2011. For the calculation purposes, I am assuming I bought the car exactly 6 years before, at a price of Rs 4.5 Lakh.  So far I have done 6 insurance renewals, and about 12 regular 6-month servicing.  Insurance renewals started at around Rs 7000 and now I am paying around Rs 4k+.

The current selling price is around Rs 2.5 Lakh

So, let us breakdown the costs as on March 2017:
        6 years opportunity cost of the price of car
        Rs 4.5 lakh with interest for 6 years @ 8% pa    :  7.14 Lakh    (Conservatively assumed an 8% p.a)
        Petrol Price - 30000 * 6                                         :  1.80 Lakh
        12 services of around Rs 4000 each                     :  0.48 Lakh
        Cleaning charges (approx Rs 400 per month)    :  0.29 Lakh
        Parking charges (approx Rs 200 per month)      :  0.15 Lakh
        Insurance   (approx Rs 6000 per year)                :  0.36 Lakh
        Toll charges (approx Rs 0.8 per km)                    :  0.12 Lakh    (considered only 15k km as highway driving with tolls)
     
Adding up, it is around Rs 10.34 Lakh

Reducing the current sale price of the car which is Rs 2.5 lakh (as got from carwale.com and cardekho.com)

Overall fixed costs = Rs 7.84 Lakh.  I have not included in this around Rs 50k that I spent for the Karnataka tax and re-registration!  That's an one off case with me, and should not be considered for a general calculation

This 7.84 Lakh is what I would have spent for the 30000 km that I have driven. This works out to be Rs 26 per km!  I am actually much better off travelling in Ola / Uber within city which charges around Rs 15 - 20 per km.  And, taking a inter-city taxi for long distances.  They, with sedan ranges of car, usually charge around Rs 13 to Rs 15 per km.

I am incurring Rs 26 per km in addition to having responsibility of car servicing, periodic emission check, annual insurance renewal, mileage / air check etc (those monetary costs are included in Rs 26 per km - and not the mindspace in planning and following them through). More than all that, I was awake for all the 30000 km that I drove (otherwise, I would not have been doing these calculations) - which is a lot of time which I could have spent taking rest, sleep or reading books or any light-weight activity!

Though, the one and the greatest advantage is that I can take the car anywhere, any time I want.  I am in a job with fixed timings, so I do not actually have much of freedom on taking the car anytime and add to that you need to be calculative of the traffic too and parking constraints within the city - that puts you off for most times. So, this great advantage is also open to questioning!

This Rs 26 per km cost is for an entry level segment car driving around 5000 km a year.  The costs will be much higher as the price of the car goes up.

May be a shared ownership with mutually agreed usage time table can help drive down the cost.

Commercial view-point:

Then a question arise.  Our own car is not profit-oriented.  It is utility-oriented.  How will a profit-oriented long distance service can afford to run at around Rs 15 per km?  Look at the above calculation break-up.  The major cost is the opportunity cost of the amount spent on the car.  For a taxi service, his business is based on a model that, as he runs more km, he generates more revenue.  So, the same fixed cost is divided by more number of kms.  Toyota Etios may last for 6 years covering 300,000 kms. Divide the price of a Toyota Etios (9 Lakh) with opportunity cost for 6 years = Rs 14.28 lakh over 3 Lakh km = Rs 4.76.  Diesel fuel cost is around Rs 4 per km.  Add other costs around Rs 2 per km. So, roughly Rs 11 per km.  If he charges Rs 15 per km, he may make a profit of Rs 4 per km. This is of course not a lot of money. And there will be an average km that he needs to do every month to at least break even - which depends on the price of the car.

Paying tax on the unrealised gains!

Many start ups offer ESOP - Employee Stock Option Plan. To know more details
about how it works, you can follow this link

https://blog.cleartax.in/getting-esops-salary-package-know-tax-treatment/

Quick summary:
The companies give stock options (right to purchase, no obligation on part of employees) at a said exercise price, which is lower than the fair market value at a future point in time. These options would be vested (become live) after serving for a predefined time.  After the vesting period, the employees may choose to exercise the option i.e. convert the options to shares by paying the exercise price to the company.

There are two kinds of taxes which are involved in here.
    1. Perquisite Tax
    2. Capital Gains Tax
   
When the employee exercises the option, the difference between the exercise price and the fair market value (FMV) of the company will be treated as income of the employee (perquisite) for that financial year and will be taxed in his income slab accordingly.  FMV of a listed company would be the market price as on the exercise date and for an unlisted company, it would be as per the valuation arrived at by the company.  Most of the start-ups belong to the later category.

Capital Gains Tax is to be paid when the employee chooses to sell the stocks. For a listed company (listed means listed in India), short term capital gains (selling within 1 year of purchase / exercise) attracts 15% tax on the gains and beyond one year, it attacts no tax, as the STT is paid. For an unlisted company (or listed companies abroad), short term capital gains will be as per the slab rate (within the 3 years time frame) and long term capital gains (beyond 3 years) attract tax @ 20% with indexation or @10% without indexation
   
Coming to the topic of the post:
Think of the perquisite tax.  On the date of exercise, if the stock trades at a value lower than the exercise price, the stock options which the employee holds has no value at all.  He can as well put them into dust bin.  Who would want to exercise at a price higher than the market price.  Instead one can directly buy from the market at a lower price, if one still has confidence in the company.

On the other hand, let us say, the options are given at Rs 100 exercise price and the stock is quoting at Rs 175.  If a person holds 1000 options, he can exercise and get stocks valued at Rs 175 for Rs 100 by paying Rs 100,000.  Now, the difference between Rs 175,000 and Rs 100,000 is taxed at the income slab (say 30%) - it works out to be Rs 22,500.  And this is what I am saying as a tax for unrealised gain.  In a listed company option, one can choose to immediately sell it in the market and at least be comfortable saying the tax is paid for the realised gain.

In an unlisted company, first of all one has no idea about the fair market value.  Though it is done by following certain standard procedures, the person holding options has not much of transparency into how it is arrived at.  And, he cannot choose to sell immediately, because there is no market that exists for shares of unlisted company.  Paying a tax on this unrealised gain and ending up holding an illiquid and non-transparent share does not make so much of sense. There are very few exit opportunities in the unlisted category.  Either hope for an IPO or for an acquisition or merger.

And consider this case where the fair market value is much higher when you exercised (paying a lot of perquisite tax) and further drops much lower even below the exercise price.  Money down the drain!  In this way, you would have footed the bills of the company which provided you the employment and the government, which gave you the freedom to enter into these transactions.

I do not need to name, but, many e-com companies currently fall into this bracket.

Ramanujan's Magic Square

Yesterday I got a whatsapp forward which I found interesting.  The forward is about Ramanujan square. This is the Ramanujan square.

It is a magic square. Magic square is a square with 3x3 or 4x4 or any such square matrix filled with distinct numbers, whose sum when counted in multiple ways (horizontal, vertical or diagonal) remains the same.

You can have a visit to the wikipedia page on this topic. There are 24 different combinations (of 4 squares) in multiple directions and as 2x2 blocks which all add up to the same number - 139.

The wikipedia page above depicts the different combination as below

Image Courtesy:
Antonsusi shared under Creative Commons license.

This uses six 4x4 squares to depict all the 24 combinations. I have tried the same using a different illustration, with 9 4x4 squares instead of 6.  These 9 squares are created attaching eight Ramanujan squares in all 8 directions (N, S, E, W, NE, NW, SE, SW) of the center 4x4 square.

The first row of the Ramanujan's magic square is his date of birth 22 Dec 1887 written in Indian Style - 22/12/1887!

The Power of Tax Deferment

In 2011 December, IDFC Infrastructure Bonds got issued - which provided for an additional Rs 20000 tax-saving investment option beyond the usual 80C limit.  The quoted interest rate was 9% p.a. So, someone who was in a 30% tax slab, saved Rs 6000 in FY 2011-12 by investing in this bond. This Rs 20k with 9% p.a compounding would yield Rs 30770 after five years.  The interest on the bond is taxable as per the individual investor's tax slab.  The interest over 5 years is Rs 10770. For a person who is in 30% tax slab, this means a tax liability of Rs 10770 * 30% = Rs 3231 in FY 2016-17. The net inflow in FY 2017 is Rs 30770 - 3230 = Rs 27540.  This is for a net effective investment of Rs 14000 (remember Rs 6000 saved on tax).  Works to a very good 14.5% p.a CAGR.

Net tax outgo of Rs 3230 after 5 years is far better compared to a tax outgo of Rs 6000 currently!

There is an option to extend this for another 5 years. Assume this gets extended. Amount accumulated at the end of 10th year is Rs 47347, the interest Rs 27347 would attract tax @ 30% (based on the slab) which means effective net inflow will be Rs 20000 + Rs 27347 * 0.7 = Rs 39143, this on a net investment of Rs 14000 gives a CAGR of 10.83% p.a.  Definitely not impressive compared to the 5 year CAGR.  Figure out how!

Had it been taxed as long term capital gains (as the debt mutual funds are taxed), it would have been a different scenario.  We need to take into out the increase in cost inflation index from the investment year to the current year.  In 2012, it was 758, in 2016-17 it is 1125.   Indexed Cost would be 1125 / 758 * 20000 = Rs 29683.  The net gain of Rs 30770 - Rs 29683 = Rs 1087 will be taxed at 20%, which is just Rs 217!   Net post tax gain of Rs 10553, working out to be 8.84% CAGR  (assuming no tax benefit of Rs 6000 in the tax saving year)

If the investment had been kept for 10 years, 2006-2007 index was 519. Indexed cost is 1125 / 519 * 20000 = Rs 43352.  Total amount accumulated at the end of 10th year is Rs 47347, the difference is Rs 3995 which is taxed at 20% (Rs 800) Net post tax gain of Rs 26547, works out to be 8.81% CAGR.

Tax Treatment on Stock Split and Bonus Shares

Recently, I happened to look at a stock which was bought long back and forgotten.  For a moment I thought that the price has doubled since then, so possibly I can exit the position.  Since the stock was bought before one year, even if I sell, it would be considered as long term capital gains on equity and would not be taxed at all.

I was wrong.

I remember I bought 50 shares, but now I had 100 shares, when I looked at the corporate actions, I realised that the company has recently issued a 1:1 bonus.  So, if you had 1 share, now you will have 2 shares - accordingly the stock price would also have halved.  The total value of my position is still at a gain, but because of the bonus shares - not all will be treated as LTCG (Long Term Capital Gain)

Here it goes
2011 - Bought 50 Shares - Price 40  => Rs 2000
2016 - Have  100 Shares - Price 40  => Rs 4000

So, the original 50 shares - LTCG is Rs 0 - Then it was at 40, now it is again at 40
the additional 50 shares - Gain is Rs 2000 - Since it was allotted as a bonus - effective cost is zero - the entire value is gain and since it is recently allotted, this gain of Rs 2000 will be treated as short term capital gain (STCG) if sold within one year of allotment and taxed accordingly (@15%)

The way the Indian taxation works with stock split is different.  A 2-for-1 stock split will make the investor hold 200 shares of face value Rs 5 if he originally had 100 shares of face value Rs 10.  Note that the face value is not changed in the issue of bonus shares, but gets altered in the stock split.

Since these are the same shares whose face value have changed and because of which the number of shares got increased, the additional shares credited is considered to be bought as on the original date of purchase.  So, in the case illustrated above, if the company had issued a 2-for-1 split instead of 1:1 bonus, I would still be holding the same number of shares (but of half the face value - which is immaterial), all of my shares would still be qualified for LTCG if I sell it today.

Books 2016

2016 was a good year for my book reading habit.  Mostly I was able to use my long commute for the same.  I generally do not like long commutes, but it so happened that that was the case.  I have been spending around 2.5 hours a day up and down in commute alone.  I do not like the commute - especially in the Bangalore traffic, but the habit of book reading is the savior.  Book reading has become an almost essential part of my life, now.

These are the books which I completed in 2016
1. The Art of Thinking Clearly by Rolf Dobelli
2. Richdad's Cashflow Quadrant - Robert Kiyosaki
3. Nudge: Improving decisions about health wealth and happiness by Richard Thaler et al
4. Intelligent Investor - Ben Graham
5. Scarcity: Why Having Too Little Means So Much - Sendhil Mullainathan et al
6. Influence: The Psychology of Persuasion - Robert Cialdini
7. Fooled By Randomness - NN Taleb
8. The Goal 2 - Eliyahu Goldrat
9. The Little Book That Builds Wealth by Pat Dorsey
10. Extraordinary Popular Delusions and the Madness of Crowds by Charles McKay
11. Man's Search For Meaning - Viktor Frankl
12. One Small Step Can Change Your Life: The Kaizen Way - Dr. Robert Maurer
13. Beating the Street - Peter Lynch
14. As a Man Thinketh - James Allen
15. The Richest Man in Babylon - George Calson
16. Think and Grow Rich - Napolean Hill
17. The Way to Wealth - Benjamin Franklin
18. The Checklist Manifesto - Dr Atul Gawande

I realised that I like fiction much less compared to essays, biographies and conceptual books.

Started, but not yet completed
1. The Man Who Knew Infinity - Biography of Srinivass Ramanujan, Mathematician
2. Black Swan by NN Taleb
3. The Summons by John Grisham
-- In the first 2 instances, switched books in between - it is still on my to-read list. I did not like "The Summons" - so stopped reading.
4. The Little Book of Valuation by Aswath Damodaran (still in my list) - this is not a casual read, so waiting till I get a working time with this book.

I would like to do better in reading, this year.

The Goal 2

The Goal 2 is a sequel to the book The Goal by Eliayu M. Goldratt.  Goal talks about Theory Of Constraints.  Goal 2 talks about a concept called "Thinking Process".  The protagonist Alex Rogo is now EVP in UniCo managing three newly acquired businesses.  A printing company, cosmetics company and a pressure-steam company.  The book starts with the board of UniCo deciding to sell off Alex's 3 business and wanting him to turn around the struggling companies to fetch a better sale price.

Over the course, all the 3 divisions make a turn around after analysing the current situation and identifying what the market wants.  The printing company positions itself to give a better price per usable unit thereby cutting costs and reducing unwanted orders from the customers, creating value. The cosmetics company makes a turnaround by acquiring good shelf presence in return of reduced ticket sizes and frequent deliveries to the customers (shops) thereby reducing the financial burden of customers.  The pressure-steam, instead of selling the unit and spare parts, starts selling the pressure steam itself, thereby converting the capex of customer to opex.

The author introduces a negotiation technique involving visual articulation of common objectives and conflicting premises, which would help breaking the conflict.  The Thinking Process involves the construction of Current Reality Tree, Transition Tree and Future Reality Tree.

The Current Reality Tree is the wholesome flowchart of UDEs (UnDesired Effects - shortcomings) for a given objective, as of now.  This connects all the UDEs from one to another.  The premise is that all the UDEs are the experienced pain points which arise from majorly one or two main causes - the idea is to find such a cause.

The Future Reality Tree is built from the current reality tree, with an end objective in mind and creating possible paths for the same.  The paths will have negative branches for which a resolution is sought after. For example increasing sales is a path; reducing price (and thereby creating price war) is a negative branch which needs to be addressed.

The book emphasizes on the point that the product is not simply the physical product.  The product is the wholesome unit including the physical product, packaging, service, delivery along with the financial terms which the customer would value. It proposes to create a competitive advantage, especially sustainable competitive advantage, kind of a moat, which the competitors would find difficult to catch up.

Advocates one of the known but often overlooked idea.  The price of the product is not the cost plus markup, it depends on what the value that the product brings to the customer.  Or is equivalent to the value of the pain that the product or service offers to remove.

Towards the closing chapters, there is a significant talk on what makes a good strategy - an organisation needs to uphold the values of 3 key people - shareholders, employees and the customers.  Any idea which propagates to benefit one group at the expense of other is not a long term sustainable one.

Enjoyable read - this is one of the 2 novels that I read in 2016.

Happy New Year 2017

Wish you a very happy new year 2017!

Sometime back, I wanted to refresh my blog writing.  So, started it small in November and now in the last 2 months, I have written around 20 posts - most related to personal finance topics and products. Looks like it is a significant one considering my hibernation in the last two years.  The post I did before Nov 2016 was in Jan 2015 and that too a new year post, after a hiatus.

Seems I did well - but actually not.  I decided to do a post every day when I started.  But had to put off for many days.  Just procrastination and nothing else.  I got the inspiration from a Tamil movie "Pichaikaran" where the protagonist sticks to an arduous routine for 48 days. I thought why not I practice something for 48 days.  It did not work - though, I think I did better than nothing at all previously.  On a side note, the movie got an instant celebrity status after PM's announcement of demonetisation on Nov 8, 2016.

Similarly another activity which I wanted to renew was walking. I have been practising walking since late 2008 - but on and off.  The inspiration was my economics professor Dr. Tripati Rao, who is practising for around 20 years now!  The new year 2009 was coming, but I did not want to wait for it, I started sometime in December itself.  In the last one and half years, my long bus commute has been prefixed and suffixed by the walks.  But, I wanted to do it as an activity alone, not combined with the bus commute.  So, restarted it in the last few months. It is one of the most enjoyable activity.  I strongly recommend.  I used to use Sportstracker in the early days, now using Google Fit - I find people say it is not accurate - but works for me than having nothing.  At least I know that I am progressing.

I think I am too addicted to metrics - see I count the number of steps, count the number of blog posts that I did.  In the modern day where every minute of living generate data and metrics, it is something which we cannot avoid.  The editor (notepad++) which I am typing in keeps track of the word count, line and columns!

I plan to continue these enjoyable activities in the new year as well.

Give the 48-day challenge, an attempt! On any of the activities you like doing, you feel good doing but unable to do!

All the best to each of your individual aspirations!

For or Against NPS?

I had posted a few days ago, facts on NPS - it is available here.

Once in a few days, we would have got mail from NSDL saying to avail the additional tax benefit of Rs 50,000 per year under section 80CCD(1B).  So, if you are in 30% tax slab, it works out to a direct tax saving of Rs 15000 per year. So, it looks like Rs 15000 easy money.

But, just look at the the exit opportunity of Rs 50000 invested.

You can take out only after attaining age 60. And a mininum of 40% has to be invested in annuity. So, you can take out the lumpsum of a maximum of only 60%.  Out of 100%, 40% is tax free and the remaining is taxable at the appropriate income tax slab.

Let us say we take an annuity of only the minimum mandatory amount of 40%.

The split will be 40% taxfree lumpsum + 20% taxable lumpsum + 40% taxable annuity.

Two possible decisions:
1. Take the tax incentive and invest Rs 50000 in NPS
2. Do not take the tax incentive, pay Rs 15000 (@ 30% tax slab for the current year) and invest Rs 35000 in non NPS equity instruments (Long term capital gains being tax free).

For the ease of calculation, let us assume NPS and non-NPS investments generate the same CAGR over the years till the person reaches 60 years of age.  Assume the current investment becomes 10 times in about 30 years of time.

35,000 Non-NPS would have become 350,000 and this entire sum will be taxfree (assuming the current tax structure prevails after 30 years - big condition!)
50,000 NPS would have become 500,000
200,000 tax free
100,000 taxed at 30% = 70,000
200,000 annuity take which will generate just an inflation matching return beyond age 60

Current annuity table from LIC: https://www.licindia.in/Products/Pension-Plans/jeevan_akshay

@60 years of age, with return of capital, Rs 6600 is the annuity for Rs 1 Lakh purchase.  @15% service tax, for Rs 1.15 Lakh, annuity works out to be 5.74% - effectively just matching the inflation (and there is a possibility it might miss the inflation too in some years!)

And this will also be taxable.  Let us say, the annuity holder is still only at 10% tax bracket - then, net return is 5.74 * 0.9 = 5.17%  If the persion is in higher tax brackets beyond 60 years of age, the return further reduces.

@60 years of age:
Non-NPS is 350,000
NPS is 270,000 + 200,000 annuity

Effectively, the difference is :
Non-NPS is 80,000
NPS is 200,000 annuity with 5.17% return

Assume Non-NPS investment generates 3% higher CAGR - which is 8.74% and non-taxable.  At some point, the non-NPS will start accumulating more capital than the NPS one because of the higher compunding rate.
80000 * (1.0874) ^ (years) = 200000 * (1.0517) ^ (years)

It works out to be 27 years @ 3 percent better CAGR
It works out to be 18 years @ 5 percent better CAGR

NPS works out better if someone has an expectancy of around 80 years and do not foresee more than 5 percent better CAGR in non NPS investments (assuming LTCG in non NPS investments will be tax free)

All our analysis are based on our key assumption that till 60 years of age, NPS and non-NPS generate equal returns.  But, if the non NPS has compouneded at a better rate over the accumulation period till 60 years, then the scenario will be completely different with a tilt towards avoiding investing the tax incentivised NPS.

Mutual Fund Returns Calculator

I have published a SIP / SWP calculator, sometime back.  For now, it works with the Sensex data from Jan 1990.

The SIP calculator helps in calculating the CAGR / XIRR for
    1. Lumpsum Investments
    2. SIP Investments
    3. SWP Investments
   
SIP or SWP can be of daily / weekly / monthly / quarterly / yearly frequencies.

SWP is Systematic Withdrawal Plan where you have a corpus which is invested in an equity instrument (Sensex in this case) and from which a fixed amount is taken out at a regular frequency.

SIP - the assumption of calculating CAGR is that all the investments made at regular intervals compound at the same CAGR.

In SWP, if we have that assumption, then we also mean that the amounts taken out are reinvested at CAGR which may be an impractical assumption.  So, there is also an option given to modify the rate at which the withdrawals can be reinvested in.

Lumpsum / SIP / SWP calculator for Sensex

I am planning to update the calculator with the NAV values for Mutual Fund schemes - so it will be more useful.

MF Comparison Tools

Today, we shall see some tools which help in mutual funds comparison.

Morningstar's SIP Calculator - You can compare the SIP performance across three different funds.  But, it gives the performance review as on a particular date.  There are a few things that this comparator does not tell you:
1. How does a SIP perform across time periods, across different schemes?  This helps in selecting a scheme to invest in.
2. How will a daily or weekly SIP perform vs monthly or quarterly SIP?

FreeFincal (Dr Pattu) gives a rolling SIP returns calculator. He has a series of calculators on various components of personal finance!
https://freefincal.com/mutual-fund-sip-rolling-returns-calculator/
The way to interpret is this:  As on a point on X axis - say Aug 2013 (one of the lowest points of Sensex / Nifty), what would be my CAGR had I invested for the past 5 years (starting in 2008 Aug) and redeeming in Aug 2013?  It is 5% for rolling BSE Sensex.

Here, he compares the performance of several funds - HDFC Equity, HDFC Top200, Quantum LTE, IDFC Premier Equity against their benchmarks.  HDFC Equity and HDFC Top200 on the way to bottom, beats the benchmark - not good, losing more than the benchmark!  See Quantum LTE and IDFC Premier Equity - consistently beating benchmark and during the slide manages to lose less than the benchmark.

https://freefincal.com/nifty-200-dma-buying-high-vs-buying-low/
Here Dr Pattu analyzes whether there is an advantage doing SIP when the index (or the NAV) is less than the 200 day daily moving average vs index being greater than the 200 day daily moving average. The revealing and counter-intuitive observation is that the buying when the index is higher than the 200 DMA, the corpus is higher!