Investment Strategy: “Goal Based Investment, creating a portfolio for individuals with fixed income”
Abstract:
There is no one particular perfect style that works for all in the world of Investments, if I like to drive at 150Km/hour, it doesn't mean driving at 100Km/hour is bad of any sort. Choose wisely and try out whatever fits you the best.
Disclaimer:
There is no guarantee or undertaking on the points mentioned in this blog-post. The author is not a certified advisor and the content here should be used only to get some hints in the journey of investment. This blog introduces pointers and to be taken as an intro guide. Please warn yourself that investments come with high risk and the reader has to self educate on risk appetite, market scenarios and act responsibly. Please invest wisely and contact a financial consultant to create a portfolio that fits your needs.
Goal Based Investments
Define Goal and Risks
Asset Allocation
Equity (ETFs, Mutual Funds)
Debt (FDs)
Assumption: There are many financial terms and instruments talked about below, this part would be left for self reading for the user and not explained. Hence out of scope in the scope of this blog.
Goal Setting:
Definition of Goals in investing is very very important. If you don’t have a financial goal, do not read further.
For sake of simplicity and easier documentation, have termed Goal settings here primarily into 3 types:
1. Long Term Goal (15+ years span): Wealth creation for retirement etc
2. Medium Term goal (5 -8 years span) : Kids marriage, Buy a House etc
3. Short Term Goal (3-5 years span): Buy a car, plan a long vacation etc
Before going ahead, some crucial pointers to decide are as follows:
Each of the goals basically deals to prepare you with a (inflation adjusted) corpus amount and hence the time horizon determines a crucial part in your investment portfolio. Moreover being an expat, its really important to have a short or long term goal if you would still attain the same wage in near or long term future
How old are you, are you married and if you have a dependencies (on going loans, health risks, parents old age, etc)
What's your risk appetite? (this comes with self retrospective)
Since there is no one answer, let me just take a use case and draft a plan:
Shoutout: What is Goal-Based Portfolio Management? https://youtu.be/HH6ytlg5f4g
Example Use Case :
Mr. Ramnath
Age: 34
Status: Married, no kids
Monthly Savings (after all expenses): 1000 Euros
Risk appetite: low to Medium (meaning he is not panicking for a market downfall and a capital loss of upto 10-15%)
Assumption: Ramnath moved to Germany recently on work and plans to work for few years (~7 to 10 years) and plans to settle and retire back in India. Has moderate expenses and no major dependency back home.
Goals Based Investments:
Goal 1) Long term goal: Generate corpus savings for retirement in India
Goal 2) Short term ~ 2years: Buy a Car, Plan a long trip
Goal 3) Medium term ~ 5-7 years: Kids education, Buy a house
Since it's only math and a lot of assumptions (which car type, how big a house, how many kids, how fancy of a trip etc) of what kind of lifestyle you are currently into, the reader is hereby requested to make his own analysis based assumptions.
For the sake of simplicity and pure intention to help a novice investor, the below example is jotted down i.e long term goal plan.
Shoutout: How to create a long-term investment portfolio: https://youtu.be/LHRkY70wmm4
Generate corpus for retirement:
*Assumption: Already said above, Mr Ramnath has decided to spend his retirement in India
Age to retirement | 26 years (assuming you retire at 60) |
Life expectancy | 85 years |
Years in Retirement | 25 years |
Corpus needed on day of retirement | ~7 Cr (Assuming Rs 50K as monthly expense now and 7% inflation, you require ~3L/month at start of your retirement). Multiply by 25 years = 7Cr |
Investment needs to be done | Rs 20K/month + 5% increase every year = ~ 300Euro (Goal 1) |
Similar to above, there are other goal targets which we are not discussing in detail, rather are assuming a final value:
Goal 1 (Retirement) | Goal 2 | Goal 3 | ---- | --- | Total Monthly Investment |
300 Euro | 200 Euro | 250 Euro | | | 750 Euro |
Asset allocation:
Equity and Debt:
How much of the savings go in which investment pockets is decided by creating a asset allocation chart based on his risk appetite, age etc.
Mr Ramnath, has a moderately aggressive risk factor, lets see how a Asset allocation chart look for his requirement:
NOTE: With above risk factor, assumption is to achieve a target 10-12% rate of interest on the invested capital.
It takes more math to divide Mr Ramnath’s monthly investment into proper asset buckets:
Equity part:
As per above chart, Mr Ramnath needs to invest as of today 76% of 750 = ~ 600 Euros in equity markets.
Possible equity elements as a NRI:
There are many ways to stay invested in equity market, but to keep it simple only 2 sectors are targeted here:
ETFs and Mutual Funds:
ETFs in Germany:
Why ETFs?
To have exposure and invest in markets of europe, USA etc so that you have a diversified portfolio
Passive funds have lower risk on manual errors and ETFs usually target a particular market index and there is no real Fund Manager (read more here: http://passivefunds.in/)
Remember you dont have any Rate of interest for the money kept in regular savings german bank account (Giro konto).
How to invest in ETFs:
Just like your bank girokonto, you need to open a trading account which can be opened in many different brokers.
* example: Scalable Capital broker
ETF Brokers comparison: https://de.extraetf.com/etf-broker
* Exactly like opening a online bank account (N26, Ing Diba, etc) you need to complete a online application and do a Postident verification (for Indian passports done at Deutsche Post Filiale)
What ETFs to invest in?
Read about kinds of ETFs, risks, duration and what kind of market areas you would like to invest in. Examples are : Global or World , EU, MSCI, STOXX, S&P, etc
Use below portals to nicely compare risk, volatility, AUM, returns per year, invested companies etc.
Creating a account is free in both these portals and highly recommended.
Just ETF: https://www.justetf.com/en/
ExtraETF: https://de.extraetf.com/selection
Are the returns taxable in germany (Capital gains etc)?
Yes, but there is a tax allowance which you can declare in the broker website which will be then considered non-taxable (1000Euros for singles, 2000Euros for married individual)
Mutual Funds (Indian Markets):
Why Indian MFs when you already have a ETF?
Sure, investing in an Indian ETF is also possible via an online broker as explained above. Although, couple of pointers to note are:
Having access to deeper market pockets, investor can allocate funds on specific kind of funds like a Multi-cap fund instead of just following the market
Assuming you want to retire in India, mutual funds invested now can easily be maintained for longer terms.
Money invested NRE can be completely free for repatriation
FAQ from RBI: https://www.rbi.org.in/scripts/FAQView.aspx?Id=23
How to Invest in MF:
Pre-req: Create a NRE account in any leading Indian bank
Do a eKYC with any Mutual Fund website or from many FinTech apps like IndMoney (https://www.indmoney.com/), ETMoney etc
Know you KYC status here:
Which MF to invest?
There are lot of SEBI fee only planners, we recommend choosing one for your own self:
SEBI approved list: https://freefincal.com/list-of-fee-only-financial-planners-in-india/
Not SEBI approved: https://themfguy.wordpress.com/themfguy-advice-only-plans/
These planners help you and advise which equity MFs to buy and how your SIPs need to be organized.
Don't want to spend on a fin planner, choose yourself: https://freefincal.com/category/monthly-fund-screeners/
Shoutout: If you have no idea still, invest in any Nifty Index Fund or a Multi-Cap fund.
Are the returns taxable in germany or in India(Capital gains etc)?
In Germany: YES: When you SELL your bonds, if the profits earned is above 2000 Euro for couple, 1000 for singles, NO: if interest earned is below that
In India: Yes, When you sell/close Indian MF units, since you fall under a NRI category, 30% taxation on capital gains are defaulted.
Solution (Equity Part):
So Mr Ramnath follows above guideline and divides his 600Euros into 2 Mutual Fund Sips(5K each) and 2 monthly savings ETFs (200Euros each)
This amount is just for example and the monthly invested in SIPs/ETFs can be higher based on how aggressive you want to save.
Debt Part:
According to the asset allocation chart above:
24% = ~150Euros equivalent of the fund is to be allocated monthly in Debt part which are
mostly Corporate Bonds, FDs, PPFs, FCNR etc
Options available in Germany:
Fixed Deposits (FD):
Weltsparen: https://www.weltsparen.de/festgeld/
Zinspilot: https://www.zinspilot.de/
Check24: https://www.check24.de/festgeld/
Intro, pros and cons: https://www.finanztip.de/festgeld/
Analysis: Low risk and even lesser rate of interest! ;-) Not recommended.
But sure is a option better than money lying in your girokonto with 0% interest rates
Private Pension Plans:
Riester (Förder) Rente & Rürup-Rente (Basisrente)
Analysis: Sure a valid idea for long term investors especially who plan to retire in Germany. More info left for self reading to the reader.
Options available in India:
FCNR: It might be attractive rates but due to falling INR rates and a lot of paperwork involved, it's not considered here as a feasible or flexible option.
PPF: One of the good option for "very" long term investments but works only if you already had an account open before you got the the NRI status. Opening a new PPF account not an option (at the time this document is written.)
Fixed Deposit: Currently a rate of 6% ~ 8% interest / year is given for NRI's
Examples:
Yes Bank: https://www.yesbank.in/personal-banking/nri-banking/nri-deposits/fixed-deposits/nre-fixed-deposits
HDFC bank: https://www.hdfcbank.com/personal/resources/rates#/Domestic--NRO-and-NRE-Deposit-Rates--5-Cr
Analysis: To keep it simple and having a long term vision (retirement in India) in mind, make use of your empowered NRE account which gives you a higher rate of Interest and create FD’s or recurring deposits (RD’s) once in a few months.
Are the returns taxable in germany or India?
German FDs: Maybe, depends interest earned are taxable in Germany
Indian FDs: Maybe, you need to declare the interest gained while filing your German ITR.
( "Maybe" above means, YES: if the interest earned is above 2000 Euro for couple, 1000 for singles, NO: if interest earned is below that)
Solution Debt Part:
So Mr Ramnath follows the above guideline and invests every 6 months a FD of 1000 Euro equivalent in his Indian bank.
As described in the flowchart, Ramnath re-visits his portfolio and does relevant adjustments in equity/debt elements every 6 months.
Investment tips from practical experiences:
Stay invested long, do not panic on market crashes, do not watch your portfolio every day or week or month. As suggested in the flow chart, revisit it once in 4-6 months.
Do not look to “time” the market, there is no particular right or wrong time to invest.
Do not invest in a lot of ETFs, MF funds. Choose only 2 or 3 Max and stick to them. Also in other way, dont invest all you have in just 1 ETF/MF. “Don’t lay all your eggs in the same basket”
While opening a depot account (required for ETFs), check out for any hidden or annual cost.
Speak and connect to a RM(relationship manager) or financial advisor while opening an account or investing, the time/money invested on them gives you returns on long terms.
Be compliant and file your taxes on time for both Indian and German tax systems.
Conclusion:
These are few simple instruments available in market that exist in an investment journey.
Real estate, Gold, Stocks, Crypto's and many others do exist which are out of coverage from this document. Again, the goal of this document is to give pointers for a novice/first time investor and give few entry points in the journey of investments. Happy investing!
Links and references