Last April I wrote a blog on snowballing your savings and how starting is important, however small it may be. And then I forgot all about it.
The passing of John Bogle rekindled my memory about this blog and this time I hope to go through with the series.
Underinvestment in financial assets
In an August 2017 report of a committee on household finance set up by the RBI revealed some statistics which make for a ticking time bomb for future retirees
I am going to focus on the youth here because that the is segment I am most interested in. They are tech savvy, have time on their side and they are in the building phase of their financial savings habits.
Enough and more has been written about how Indians love gold and property. There are behavioral reasons for these. I have written about why we love to own homes here. Gold is gradually losing it luster as a jewellery consumption item but its benefit as a buffer is still there because of its ease to store and ease of buying. Plus buying a tangible good gives us psychological comfort.
However, it has been seen over long run, equities have beaten every asset class. While there are no guarantees, they still remain the best bet to beat other asset classes and beat inflation.
National Pension Scheme
In India the government has introduced the National Pension Scheme (NPS) along with tax benefits. However the problem that I have with it is that the funds in which we invest are going to be actively managed by fund managers. Fund manager risk is something I cannot plan or guard against if i am going to save for the next 40 years.
I would rather put my faith in an Index fund with low cost and which is going to be managed by a set of predetermined rules. Btw we did a study of MF industry and the active funds didn't beat the index over a ten year period. The gap can be explained to a large extent by costs. (we will release that study soon).
We know what balanced funds are: A combination of debt and equity where the fund manager decides how much allocation has to be made to debt and how much to equity. And depending on his view on the market he keeps shifting the allocation. David Swensen, CIO of Yale's Endowment Fund says "asset allocation" explains over 90% of a portfolio's investment returns. The balance 10% could be because of fund managers, luck, skill etc. And post cost even that whittles away.
Now don't get me wrong, as humans we will always engage in a challenging endeavor. Now, I am an active fund manager but I believe for majority of the investing and saving population index funds are best.
Let us get to a special category of balanced funds called Target Date Funds. A target date fund (TDF) – also known as a lifecycle, dynamic-risk or age-based fund designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (retirement) approaches. The figure below explains how.
So that's it for today. I am going to write the next part on how TDFs work, and how we can create or mimic TDF strategies in India till we get these specific fund types.
The passing of John Bogle rekindled my memory about this blog and this time I hope to go through with the series.
Underinvestment in financial assets
In an August 2017 report of a committee on household finance set up by the RBI revealed some statistics which make for a ticking time bomb for future retirees
- Only 65% Indian households headed by person younger than 35 years hold any financial assets, the data from the RBI report shows
- Only 5% Indians invest over 10% in financial assets
I am going to focus on the youth here because that the is segment I am most interested in. They are tech savvy, have time on their side and they are in the building phase of their financial savings habits.
Enough and more has been written about how Indians love gold and property. There are behavioral reasons for these. I have written about why we love to own homes here. Gold is gradually losing it luster as a jewellery consumption item but its benefit as a buffer is still there because of its ease to store and ease of buying. Plus buying a tangible good gives us psychological comfort.
However, it has been seen over long run, equities have beaten every asset class. While there are no guarantees, they still remain the best bet to beat other asset classes and beat inflation.
National Pension Scheme
In India the government has introduced the National Pension Scheme (NPS) along with tax benefits. However the problem that I have with it is that the funds in which we invest are going to be actively managed by fund managers. Fund manager risk is something I cannot plan or guard against if i am going to save for the next 40 years.
I would rather put my faith in an Index fund with low cost and which is going to be managed by a set of predetermined rules. Btw we did a study of MF industry and the active funds didn't beat the index over a ten year period. The gap can be explained to a large extent by costs. (we will release that study soon).
We know what balanced funds are: A combination of debt and equity where the fund manager decides how much allocation has to be made to debt and how much to equity. And depending on his view on the market he keeps shifting the allocation. David Swensen, CIO of Yale's Endowment Fund says "asset allocation" explains over 90% of a portfolio's investment returns. The balance 10% could be because of fund managers, luck, skill etc. And post cost even that whittles away.
Now don't get me wrong, as humans we will always engage in a challenging endeavor. Now, I am an active fund manager but I believe for majority of the investing and saving population index funds are best.
Let us get to a special category of balanced funds called Target Date Funds. A target date fund (TDF) – also known as a lifecycle, dynamic-risk or age-based fund designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (retirement) approaches. The figure below explains how.
So that's it for today. I am going to write the next part on how TDFs work, and how we can create or mimic TDF strategies in India till we get these specific fund types.
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