Personal Finances of Defence Personnel

If we assess the personal financial profile of defence personnel there would be a very small number who actually manage their finances well and can generate adequate corpus to meet the personal financial goals comfortably by beating the inflation in the short span of service. The problems such as  Paucity of time, separation from family, remote locations and instability due to regular transfers and shifting are a few of the prominent difficulties which adversely affect financial planning. Lack of knowledge about the deeply rooted financial world due to being away from the mainstream, and absence of credible financial advisors are few other important factors that further aggravate personal financial management. 

Two important scenarios and their effects 

The factors which we have discussed above lead to non-permanence and put the financial planning on the backburner. Whether, staying with family or staying separated from family are the two prominent scenarios. Both of these have their own challenges and requirements for money management. While most of the time defence personnel stay separated from the family mostly due to service requirements such as being posted to non-family stations and in far-flung areas and sometimes due to personal problems such as non-availability of good schooling or some other family conditions. In such condition, the expenditure would be double first being the personal expenses and second finances which would be required for maintenance of family at other location. Contrary if staying together poses a different set of problems shifting of luggage damages settling down at new location school admission etc leads to heavy outflow of money.  In both scenarios, adequate liquidity is the most important factor. The requirement of liquidity can be fulfilled by the regular remuneration however it is important to keep at least 5 months salary in a fixed deposit which can be made available as and when the requirement arises.  

Popular investment instruments of armed forces personnel.

One of the traditional and most popular methods of saving for decades is by putting the money into DSOP (Defence services officers provident fund ) /AFPP (Armed forces personnel provident fund ) depending upon the rank structure, which gives a compounded return and helps to generate the larger corpus in the long run. Serving defence personnel save a percentage of their basic salary in the DSOP fund. These funds are one of the best ways of creating a sizable corpus for goals, such as buying a house and have the requisite liquidity during retirement years. As a newly recruited in the armed forces, this should be one’s starting point. Get a decent sum deducted each month and increase the subscription during a field tenure or posting to a CI Ops, since additional allowance is given while expenses are lower. Avoid withdrawing from it since that destroys compounding. Finally, since DSOP subscription takes care of deduction u/s 80C, there is no need to invest in any instrument for tax-saving purposes. However, The recently presented Budget has made interest in PF contributions beyond Rs 2.5 lakh taxable. This leads to revisiting financial planning again. Other than DSOP/AFPP  there are many other instruments available in the market which are comparatively less risky and generate good corpus in the long run.

Systematic investment plan in Index mutual funds 

A mutual fund is a  big market and nothing is free here. We often hear people saying “mutual fund Sahi hai”. It is true but we need to consider many factors before selecting the correct mutual fund which suits one's goal and does not require consistent monitoring. The few most important factors to be considered are the expense ratio and the size of the AUM (Asset under management)  and the past performance of the fund manager managing your fund. However, If we believe in the growth story of our country which is the fastest emerging economy and as per BBC news India By 2050,  is projected to be the world’s second-largest economy (overtaking the United States) and will account for 15% of the world’s total GDP. By analysing the past figures, it will be understood that investing in the index mutual fund turns up to be a good decision in the long run. The BSE(Bombay stock exchange ) popularly know as Sensex started with 100 points at the time of its inception in the year 1979 and in fy 2021 it has touched 50000 points thus if we consider CAGR (Compounded annual growth rate ) It will be 15.96% over 42 years which no other asset class has given and since the economy is growing the Sensex will also grow in future and it does not require constant attention. It is suggested to avoid thematic mutual funds until one has sound knowledge of market movement and tracking the market regularly.

Equity Allocation 

 Create a portfolio of equity to beat the high inflation in the long run, with long-term goals, such as retirement plan, child’s education, child marriage etc. While DSOP gives the predictable compounding effect, equities give the magical flavour in the portfolio if selected properly for value investing. If we take an example, the cost of education in India is skyrocketing. In 2007, the cost of a Medical Degree was 15.50 lakhs. In 2017, the cost of a Medical Degree rose to `41.43 lakhs. In 2027, the cost of a Medical Degree, assuming a 10% rate of inflation, will be appx. 173 lakhs. Thus, it is crucial to invest a part of the savings in an asset class that can beat inflation and ensure that money will grow to match future money needs. 

Some DOs

1.Due to the paucity of time it is always advisable to have a compact and clean portfolio that does not require consistent monitoring. 

2. Spend Less Than You Earn, it is a very good practice for wealth creation if you spend less you save more and with the saved amount you will be able to create a big corpus. 

3. Live a debt-free life. Avoid unnecessary loans and multiple credit cards. While a home loan is fine. Don't fall prey to credit card companies. 

4. Keeping heavy money in fixed deposits should be avoided because interest earned is taxable and keeping inflation into account will generate a negative return.

5. Don’t buy property merely for tax saving or just for rental income. Rental income is taxable. Invest in the house which you are planning to live in after retirement.

6. Moneywise be wise do not invest without thorough investigation and do not take decisions in haste.

7. Invest in Sovereign Gold Bonds which are issued by RBI in six tranches every year and earn interest of 2.5 % every year. With the mismatch in demand and supply, the is likely to soar further and will hit  1.5 lakhs per gram by 2030.

8. Keep your spouse involved in money matters.

9. For investing directly in equity always remember to buy right and sit tight 

10. Buy a medical insurance plan by keeping the pandemic such as covid -19 in mind.

 

Some Don'ts

1.   Don't buy insurance-plus-investment products. Understand both are totally different from each other. While  AGIF (Army Group Insurance Fund) subscription contributes towards insurance. Depending upon the rank, insurance covers are for around ₹50–75 lakhs. Since there is a provision of family pension, the need for insurance cover is comparatively limited.