This is really a very brave post that I am attempting, caveat emptor. Buyer Beware.

Clarification No. 1: the past is not a great indicator of the future. What happened in the past may / may not happen in the past, and the growth trajectories could be lower. For example the YTD on Nifty as of today is zero, and we believe we are in a Bull Market.

Clarification No. 2: To buy products today based on the taxation structure that is likely to be when you withdraw is supremely idiotic, but I am going to suggest such strategies, because i have no clue what will happen 30 years hence.

Clarification No. 3: If you see equities being taxed, Estate duty being brought in, etc. this strategy will not hold.

With these 3 caveats let me tell you what products are bad from an accumulation STAGE or from a WITHDRAWAL stage.

  1. The top of the list is ENDOWMENT INSURANCE: It does not matter whether it is a ULIP or a traditional life insurance product. The structure of the product is such that the amount accumulated at the end of 15-20 years will surely UNDER PERFORM  a comparable product like PPF. So if you have 3-4 PPF accounts (self, wife, Huf, minor child) you can contribute about Rs. 6L a year in PPF. Do not touch an endowment plan.
  2. Pension plan from a Life Insurance company: inefficient while accumulating (very debt oriented and very high charges) and very inefficient while withdrawing (taxable as annuity). See no merits at all.
  3. Bank fixed deposits: ALWAYS gives a negative real return and is fully taxable. Terrible combination.
  4. NPS: I am not willing to play the ‘cost’ card nor the extra 50k deduction u/s 80C of the Income tax act, 1961.
  5. I am not even covering stupid products like chit funds, etc
  6. Land: if you think a piece of land will appreciate and fund your retirement, it will not.

Can you think of any other assets? I like one Retirement product from a mutual fund – but that my recommendation is to start small when you are young and pump real big time when you are 50+

 

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  1. Dear Subra sir,

    Can you elaborate on NPS for govt. employees and what should be done to mitigate the cost?

    Thabks in advance.
    Jay

  2. Subra I know you are not a keen supporter of investment in real estate but too keep that in the above list is a bit outrageous. Since ages property (read land and not Flat) has funded people retirement, education, marriage etc. Fortunes have been build based on land, one may found many people around us who have become rich on property (I know tere are issues like title problems etc. in properties but still…). A flat/appartment may not outperform equities but land (if title is clear and there is no encroachment) IMHO has always and will always outperform equities.

    Sorry Subra for the above, delete it if you dont like.

  3. Hey Subra, can i invest 1.5L for myself in PPF and another 1.5L in name of my kid? As per my understanding together in both accounts i can invest max of 1.5L. Please help in clear the cloud.

  4. I love people like you Umang. Very very important for people like you to be around. How else can we keep rentals at 2%. Please invest in RE, give it on rent, take 2% yields – I have been living in a rented house for the past 15 years. Thank you. Remove your post? NEVER. Live long Umang. It even rhymes.

  5. sir one point i want to add on land and gold on umang’s post. he is not wrong in a way

    olden days people put in land and gold because only land and gold will help you get your next buva during times of war or other calamities.

    tomorrow pak may drop a bomb or share market may remain flat for next 30 years. who knows. that time online money will not help

  6. For people, who bat for RE, let me tell my experience with RE. I had bought a plot in outskirts of Chennai (5 Kms from Avadi) for “x” @ 2005.Money was sourced through a personal loan @ 14 p.a. It was a 1800 sqft un approved plot.(Means not approved by CMDA).I struggled a lot to get patta for the plot. The reason, out of 1800 Sqft, nearly 500 sqft did not have any clear demarcation. To get this demarcated and getting a patta , it costed me 10K and numerous visit’s to VAO over the weekends.
    In 2012, I bought a house and wanted to sell this plot to source money. I was not able to sell it, Thanks to the land mafia present in that area(Ironically the same guys who sold their agricultural land to the developer. Each time someone goes there to see my plot, they would say this extension is under dispute and they can get the same kind of land for a much cheaper price).Finally, with no option left out, i sold the plot through local brokers for a princely amount of x*2 at 2013. To my surprise ,while signing the sale deed, i came to know that, the buyer is paying (x*2)+2.5 Lacs for the plot. The buyer was a police constable. I met the police constable @ a clinic after few weeks. He told me the actual price he paid for the plot is (X*2) + 2.5 Lacs + 2.5 Lacs (To pay lesser stamp duty, the plot was undervalued).
    And none of these transactions were done in cheque. Imagine the risk of carrying cash, after the sale , when you know for sure you are dealing with criminals.

    Forget about equity, my money would have doubled easily in KVP, than to risk in RE.

    You should thank Subra sir, for warning about RE. If you still want to invest in RE and that too for Retirement, you should not be reading subramoney.com 🙂

    P.S: I bought the plot when I was 23, and before I started following subra’s blog.

  7. dear surbra sir,
    my parents invested all their money in RE. They married 4 daughters – with huge money – as ‘giveaway’ to brides.

    Every time one of us got married- they sold one piece of land. They said, the transactions were always profitable.

    Recently, I sold a piece of land in small town. It doubled I think in 5 yrs – which funded buying another RE in Mumbai.

    Ofcourse – I cant compare RE with equity – as I hv still not invested in it. Just letting reader’s know – so that they can choose asset allocation wisely.

  8. sreedhar,

    any research should be repeatable by anybody under similar condition and get same result. this is fundamental basis

    problem with real estate is 100 people will have 100 different experience and neither the return or the experience is 100% reproduced by another person. also nobody can validate the information available in real estate. what is true what is bogus god only knows

    i will also say this. it needs 10times more talent to be smart in real estate than share market. you have to be aware of so many things and know which will develop in next 5-10 yrs. it is not easy. and everybody cant do it

  9. Both equity and real estate have their own merits and demerits, The question we have to ask ,is it possible to invest in real estate now for a middle class salaried person without taking loan,Then only option available is investing in equity through SIP in mutual fund to beat the inflation.

  10. subra sir,
    please correct me if i am wrong. this is my understanding of your retirement post regarding real estate

    from 25 yrs to 50yrs accumulate money majorly in shares or mutual funds. then buy house for retirement by putting 50% down and 50% on loan. pay it by 60 yrs by retirement.

  11. Whenever I think that buying a land is profitable idea, I go and watch the Khosla ka ghosla movie. Although, in the end the hero manages to turn the tables, I leave it to a bollywood hero to do it. I neither have political connections nor the will and capacity to become a goon

  12. Subra sir,

    another category would be gold. Some people have a strategy to buy gold or ornaments every year so that it can be utilized for children’s marriage. I think it has lot of additional cost of paying charges to the jeweler for buying and then selling gold and also people get emotional in selling gold.

  13. Dear Subra Sir,Your article on retirement is very useful.In the last three lines you have written that you like one retirement product from a mutual fund,kindly disclose the name of mutual fund for the benefit of your readers.waiting for your reply.

  14. I think people debating on the merits of real estate vs equity forget the basic fact that all of these go through cycles. Equities have shorter time frame for boom & bust vs real estate. Anecdotal evidence that real estate led to marriage of daughters, education etc. We also know how investors in Reliance in the early days were able to do similar things. We should have a balanced portfolio with all different kinds of assets – debt, equity, RE, gold.. The allocation should be different based on your ability to handle volatility, your age etc etc.

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