This document lists steps to achieve financial independence in Indian scenario.
Several of my friends have approached me on how to achieve financial independence. This is for all those folks who are on a regular salary and hope to achieve financial independence some time in the future. Having sufficient amount invested will reduce the stress due to job loss and gives you confidence to live a good life despite losing your job.
Ideally, consult a financial planner for managing your finances. There are lot of fee-only financial planners who can help you do proper planning and invest in a systematic fashion. Go for financial planners who charge a flat fee instead of fee based on percentage of your assets. List of Fee-only Financial Planners in India has a list of fee-only financial planners in India who can help you.
If you are confident you can manage your finances or are concerned about privacy please proceed below to do your own financial planning. I would also recommend Lets Talk Money by Monika Halan for doing your own financial planning.
Disclaimer: Advice below is based on my personal experience and might not work the same for you. Please do sufficient research before investing and don't blindly follow the advice.
- Use the 4% rule to identify how much you need to save for financial independence.
- Invest regularly considerable amount of your income.
- Maintain a 70:30 asset allocation. 70% of your investment in equity and rest in debt.
- Primarily invest in passive mutual funds.
- Use Google sheets to monitor your progress and manage 70:30 ratio. Also monitor your monthly expenses.
For gaining financial independence, you need to build a large corpus so that you have enough money to handle all your expenses post retirement. General rule of thumb is that you are ready for retirement when your annual expenditure is 4% of your total corpus. This takes into account both inflation and returns from your investments.
For example, if your average monthly expenditure is 1 lakh, then your annual expenditure is 12 lakhs. So you would need an investment of 3 crores to gain financial independence as 4% of 3 crores is 12 lakhs.
4% rule in Indian Context provides more details on the 4% rule.
You can use How much should I invest? calculator to determine what should be your monthly investment. For eg, you will have to invest around 1 lakh every month if your average monthly expenditure is 1 lakh and you plan to retire in 15 years.
Please see How much equity should I hold after retirement? if you are nearing retirement as 70:30 might be too aggressive for some people.
Maintain a 70:30 asset allocation in your investments. This means 70% of your investments should be in equity and remaining in debt. Even when you invest or withdraw from your investments, you should ensure that your overall asset ratio is maintained at 70:30. You will find this ratio varying with market conditions. Equity fluctuates more than debt.
Keep a tolerance level of 5% when you do rebalancing. This means if the ratio of equity is within 65%-75% range, you dont have to rebalance. Beyond this range, you might have to move your equity investments to debt or vice versa based on market conditions. Rebalancing might incur income tax. So be careful when you do the rebalancing.
Another possible asset allocation ratio is
- 60% in Indian equity
- 10% in foreign equity
- 25% in debt
- 5% in gold
If you want to take out/invest a large amount from your investments for reasons like purchase of house, do lumpsum investment/withdrawal from your debt portion of asset. Then slowly over a period of time(few months) get the ratio back to 70:30. This is because equity is volatile and you cannot time the market.
Switch option of mutual funds is useful when you want to slowly move from debt to equity. Switch is possible between funds of the same fund house. You can also schedule switch operation over a period of time which can move funds in a systematic manner. I generally put in liquid fund of the same house and schedule a switch to equity.
70:30 asset allocation has more details on 70:30 asset allocation.
Invest in Index Mutual Funds. Index funds are funds that mimic a popular index such as Nifty or Nifty Next 50. Generally, these funds have very low fund management cost and have performed better than most active funds in the long run. We dont have to keep monitoring these funds similar to active funds as they dont suffer the risk of fund getting impacted due to fund manager change or change in strategy.
Chose the direct option in investing in mutual funds. There is also the regular option which is what is sold by a distributor and has higher fund management cost as distributor gets their cut. Regular option should be avoided.
You can invest in direct mutual funds through any of these platforms
- MF Utilities - I am using this
- Kuvera
- Zerodha Coin
- Paytm Money
Some of these platforms don't have a good way to analyze your investments. So you can use ValueResearch to manage your portfolio. However, you will have to update the portfolio every time you make a change to your assets.
You can generally expect 10% returns across your mutual funds over a long period ( > 3 years).
Equity funds that I have invested in.
| Name of Fund | Percentage |
|---|---|
| UTI Nifty 50 Index Fund | 50 |
| ICICI Prudential Nifty Next 50 Index Fund | 50 |
Debt funds that I have invested in.
| Name of Fund | Percentage |
|---|---|
| HDFC Short Term Debt Fund | 50 |
| IDFC Bond Fund Short Term Plan | 50 |
Above two debt funds were recommended by ValueResearch in its magazine Mutual Fund Insight 17th Anniversary Edition India's Finest Funds. But you are free to choose your own debt funds based on your research.
You can use following sites to shortlist your mutual funds
Mutual Fund Insights by ValueResearch is a good magazine for Mutual Funds which you can purchase to keep yourself updated.
Ensure that you dont have too many funds in your portfolio as that makes management difficult and reduces returns. Also ensure that you dont have more than 50% of your assets or more than 50 lakhs in a single fund to avoid something like FranklinTempleton Fiasco impacting your assets.
NPS is a good option to invest for your retirement due to taxation as well as low fund management cost. You can keep around 10%-15% of your investments in NPS. NPS gives you the option of maintaining fixed asset allocation like 70:30 and hence you dont have to rebalance explicitly.
Calculate your monthly expenses using Google sheets. For every bank account you have, you can maintain a table with following entries
m_b: Money at beginning of the monthinc: Incomeinv: Investmentsm_e: Money at end of the month
You can compute expense = m_b + inc - inv - m_e .
Calculate this for an year to get your annual expenditure and montly average expenditure. Calculating for an year ensures that most of your annual expenditures like school fees, trips are considered. Updating this on a monthly basis and plotting a chart helps you monitor your expenses and ensure that you are within your budget.
You can make a copy of Expenditure Calculator Template and use it for your calculations.
Have 3 different pages in Google Sheet you use for managing your investments.
Update your Google Sheet once at the beginning of every month and invest your money based on its recommendation. Every month you add a new row to your Google Sheet for that month.
First sheet contains current value of your assets across your bank, equity, debt, pf, ppf, etc.
Second page computes your current ratio and how much to invest in equity or debt based on your current bank balance to maintain the ratio at 70:30. Keep at least 6 months of money (either cash, FD or liquid fund) for emergency.
Third page draws a charts for
- Invested amount, its value, projected returns of your investment at 10% over period of time
- Ratio of equity to debt over a period of time
- Theoretical average monthly income generated by your investments over a 12 month period plotted over a period of time
You can make a copy of Portfolio Balancer Template and use it for your calculations.
Thats all I have to share. Good luck on your journey towards financial independence!