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If you have not read through the rest of the series of Investing 101 , then we suggest to go through them here first!

What if you could keep just 20K aside and create your Freedom Fund? For some of us 20K might be a big amount, but if we really try and cut down on all the unnecessary expenditures, 20K is nothing !

Let’s start spending our 20K per month wisely, shall we?

₹ 12,500 in PPF 

₹ 12,500/-  out of the ₹ 20,000/- (20K) goes into a safe Debt fund like PPF ( Public Provident Fund ). It is backed by the Government of India and is one of the safest investments around. Let us see in 20 years what a neglected scheme like PPF can do to your Investment !

When I say safest investment around , I mean compared to the rest of the investment available in India. Random economic turmoil like Venezuela or Zimbabwe can happen to any country in the world. So take my “safest” with a pinch of salt. Also note that if PPF interest rates go down drastically then India is inching towards a developed country.

Lets see how 12,500/- out of the 20,000/- grows over the years, thanks to the power of Compounding ! 

One can clearly see that in 20 years your money would have compounded to 74 Lakhs. And this amount is tax free , which means on withdrawal you won’t have  to pay a single pasie in taxes.

Ten Lakh = 1 million 1 Crore ( cr ) = 10 million  Just to clarify if you are not aware of the Indian currency metric.

Note 1:  PPF interest rate keeps fluctuating and during the time of writing this book it was around 8%. Remember the fact that even though the returns don’t look so lucrative , one should not forget the fact that the money is going through the magical paradigm of Compound Interest and the amount withdrawn is totally Tax free. 

Note 2: Make sure that you extend the PPF tenure at the end of 15 years. The tenure can be extended in multiples of 5. After year 20 you can keep extending the tenure and add as little as 500/- per year to keep the account active and continue the compounding magic.

₹ 7,500/- in Index Fund 

Now we are left with INR 7,500/-. The next best option for better returns is to invest in growing Indian Economy through a passively managed Mutual Fund like Nifty 50 Index Fund.

Till date Nifty has given an average return of 12%. Most economists believe that in the next 25 years Indian Market will perform way better !! So expect more than 12%. But let’s not get carried away and assume we will get 12% over the next 20 years. 

If one invests in a Low Fee passively managed Mutual Fund like Index Fund which may give a return of 12% compounded. What would it look like ?

SIP of 7500/- in Nifty 50 at 12% for 20 years. Return of 75L! ( You could continue to invest and generate more returns, those Future value numbers are insane!! ). All this is possible only because of the Power of Compounding!

Now if we add up the returns from PPF and Index Fund investments it would be a mind boggling 1.49 Crores!!! Comfortably hit our Freedom Fund goals for a monthly expense of 40,000/- INR. And all this without having to break a sweat.

We should increase our contribution of 7500/- as we grow in our career with a hike of 6-15% in salary.If the contribution to Nifty 50 Index Fund gradually is increased at ~7% we would be looking at 1.2 Cr in returns over a period of 20 years!! A combined return of ( PPF + Nifty Index ) = 0.74Cr + 1.2Cr = 1.94Cr (~2 Crores) !!!

Forget all the Fund Advisors, their exorbitant Fees, constant tracking of the Stock Market. Just put your money and relax. Do something more useful with your time than to worry about investment!

Starting this year ( 2018 ), a fixed Capital gain tax of 10% is levied during withdrawal of your Fund money after 1 year, this is independent of the Tax Slab you are in.. See chapter on Compound Interest – for Tax free investments.

With career growth, you will be able to add more than just 20K per month towards your Freedom Fund. 20K Rule can be applied to everyone in your family and not just you. So act wisely and multiply the 20K rule . Speak with your Spouse , plan to create a 20K rule even for your kids!

If you and your spouse start saving 20k each , the Freedom Chest sells to 4+ Crores. Have a girl child ? Get her enrolled into Sukanya Samruddhi Yojana giving 8-8.5% interest.  Putting in a sum of 1.5 Lakh at the start of the year as a lump sum into these schemes is a smarter move , as your money starts accumulating interest immediately.

Max out the investment towards PPF ( 12500/- per month) and put the remaining in a low cost Index Fund. 

Your Freedom Fund could later even sponsor a dream Vacation in Europe or buy you that Dream Home! All it needs is discipline.

I just coined the 20K rule to show how easy it is to build substantial wealth over a period of 20 years. Feel free to adjust this based on their current income( I would still say get to 20K rule somehow). Create your own rule, could be 30K, 40K, 50K rule … but start with 20K rule immediately if you are new to investing.

If you and your spouse enroll in 20K rule , in 20 years an extremely healthy Freedom Fund of 4 Crores can be built.

Make sure that the investments are Electronically ( ECS ) cleared at the start of every month as soon as the salary is credited. This approach is famously known by a lot of Investment Gurus as “Pay yourself first” .  ECS helps create the discipline needed to generate long term wealth and prosperity.  Most people are happy to have this mechanism enabled for their loans but very few have this for their investment plans.

No country in the world can promise such a bright future for your investment. 

If you feel 20k is a lot due to your economic constraints, start with 10k with a split of 7.5k in PPF and 2.5K in Nifty Index Fund.

Make use of it and Happy Investing !

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