Will you reach your money goals? Find out how you can go wrong, how to avoid it


Prashant Kumar, 34, wants to be financially free at 50. The Noida-based software engineer is targeting a corpus of Rs 7-10 crore over the next 15 years. He does regular SIPs in individual stocks—focusing on sectoral leaders that will be consistent compounders. There’s only one glitch. Kumar has baked in return expectations of 20-25% from his equity portfolio to achieve his target. Can he get over the finishing line?

Like Kumar, many of us feel that our investment plans are sorted out. Nearly three out of four respondents to an online survey by ET Wealth are convinced that they can achieve their critical financial goals. But are you really on the right track? The building blocks of your investment planning may contain the answer. In this special edition marking ET Wealth’s 11th anniversary, we explore this facet.

You may be earning a good salary and even be good at investing. But are you sure this alone can help you reach your goals? Can the sum you put away every month take you to your destination? Have you made the right assumptions of the returns and accounted for inflation in your estimates? Is your asset allocation geared to withstand economic upheavals?

There are multiple variables that can affect the final outcome. Even the best-laid plans can go awry. But if you weave the right nuts and bolts into your approach, it can take you closer to the target. Let us explore where some of you may be going wrong and how you can get back on track.

Securing the foundations

Before getting into the nitty-gritty of individual goals, you need to ensure that your foundations are strong. An untimely death, a bad accident, extended illness or job loss can send the planning awry. The past two years have given enough evidence of this. The financial fallout of covid has exposed the fragility in our personal finances. The disruption in incomes has unravelled the goal math and ambitious targets. To avoid such situations, your investments should be ring-fenced against unforeseen events. This includes securing your family with adequate life and medical cover, apart from maintaining an emergency corpus.

The amount required for each will vary according to your own personal circumstances, though there are broad thumb rules for each. For instance, the life cover should be at least 8-10 years’ annual income. Three of every five respondents in the survey claim to have adequate cover. Avoid fixing an arbitrary amount such as Rs 50 lakh or Rs 1 crore for the life cover. Make sure the quantum of coverage is aligned with your income and expenses. If you have large-ticket liabilities, your term cover needs would be much higher. Mrin Agrawal, Founder and Director, Finsafe India, suggests, “Get a better fix on your life insurance requirements with a human life value calculator that factors in your income, expenses, liabilities and investments.”

For covering hospitalisation expenses, make sure you have standalone mediclaim cover of at least Rs 5 lakh. More than 70% of respondents said they are covered for this or a higher amount. However, individuals living in metros may need more. Financial advisers maintain that a family floater policy of Rs 15 lakh is ideal in current times. Go for the higher cover with a super top-up policy to keep costs low.

Another critical element of your foundation is the emergency buffer. Not having this cushion can spoil the best-laid plans, points out Tarun Birani, Founder and Director, TBNG Capital Advisors. “Any financial planning starts from creating an emergency corpus. The entire process can go much smoother if you have that buffer in place,” Birani adds. Set up an emergency fund that can take care of the next six months’ expenses. More than 72% claim to have this financial cushion in place. Some experts say an additional buffer of 3-6 months’ expenses may be required, particularly for those engaged in more vulnerable occupations.

Be financially prepared for unforeseen events

Which of the following do you have in place?

CS-5

Apart from these, a critical illness cover can also prove very useful. A basic health policy does not cover specific terminal illnesses. Having a critical illness cover of Rs 10-20 lakh will cover the costly treatment for such diseases. More than 70% of respondents are without this cover.

A common pool or separate silos?

Baroda-based content writer Tasmai Dave, 27, has started investing recently and is yet to figure out his goals. For now, he is simply putting Rs 60,000-70,000 into stocks and funds every month. Like Dave, many young investors are hazy about what goals to plan for. Savings are too meagre to allow meaningful investments. The usual approach is to start accumulating investments with the singular focus to make the money grow as much as possible. All the accumulated savings—spanning fixed deposits, mutual funds, stocks, etc—are treated as one big money pot from which to withdraw as and when the need arises. A large majority (57%) of respondents to our survey are building towards their goals in this manner. Dave acknowledges that as savings increase over the years, a more refined approach would be needed.

In our survey, 35% of respondents admit to not having put numbers to their goals. By extension, you are less likely to have a pulse on how much you should be investing to achieve that target. This can potentially leave a shortfall when the time comes, irrespective of what return your investments generate. Further, without goal-based investing discipline, one runs the risk of overdrawing funds for the nearest goal. This can potentially leave much less for future goals. For instance, if you withdraw too much for your house down-payment, your kids’ higher studies or your own retirement may be compromised. Amol Joshi, Founder, PlanRupee Investment Services, observes, “A common pool of funds can give a false sense of availability of disposable cash towards goals that are lined up before others.


It is better to invest separately for goals


How have you planned for critical financial goals?

CS-1


Regular investing is the best way to achieve goals


How do you typically invest towards the goals?

CS-2

A better strategy is to tag investments to specific goals, putting each goal in a distinct silo. This doesn’t necessarily mean you need different investments in each bucket. The same mutual funds or other investments can be used for different goals. Only, the investments are carved into distinct buckets for specific ends. Prableen Bajpai, Founder and Managing Partner, FinFix Research & Analytics, says this demarcation need not be rigid. “Some overlap in investments across goals is fine, and schemes can be used interchangeably. But tagging every investment to a goal is a must for getting clarity.”


Setting a target is essential


Have you set a target corpus for each goal?

CS-7

The basic idea is to demarcate your investments. Since the end use is defined, you know why and where every rupee is flowing into. Rohit Shah, CEO, Getting You Rich, insists, “Once you are clear about why you are investing in the first place, it is easier to execute the plan.” You are less likely to tamper with your savings or redirect funds if you know how it will hurt a particular goal. Further, this helps you clearly define the outlay towards each goal, ensuring you do not underinvest for a particular goal or over-compensate another. Most importantly, it enables you to monitor the progress at regular intervals to know where you stand.

Most are confident of reaching their goal targets

Do you think your investments & planning can help you reach the targeted corpus?

CS-12


Getting the assumptions right


Starting an SIP or finding the right investment is only a job half done. You must also know how much a goal would cost and how much you need to invest for it. Take the current cost of your financial goal and estimate its future value by taking into account the likely inflation rate in the intervening years. Each goal-related expense will have a different inflation rate because the increase in prices of goods and services is not uniform. So, while house prices may inch up by 3-4% a year, the cost of higher education may rise faster at 8-10% or higher. “Your inflation estimate should be based on the goal you are targeting,” contends Bajpai. Even if you can’t arrive at an accurate estimate for each goal, it is best if you be little aggressive in your inflation estimates. Building in a 4% inflation rate for the next 15-20 years is too conservative. Two-third of our survey respondents are estimating inflation rate between 6-8% for their goal outlays.

Equity funds are the most common instrument for long-term goals

Which of these options have you invested in for your long term goals?

CS-3


Goal estimates must factor in inflation


How much inflation rate have you factored in when calculating the target?

CS-8

Once you factor in a reasonable inflation estimate, you can put an exact number to the required outlay. Now you also need to arrive at the amount you need to put away regularly towards the goals. For this you must estimate what return you expect to generate from your investments. This will be a function of your asset mix. Here, it is better to err on the conservative side. But many end up making mistakes here.


Return expectations should also be reasonable


What return expectations have you set for meeting long term goals?

CS-9

Almost 30% of the respondents who have an equity exposure of less than 40%are expecting to earn more than 11% returns. And 40% of those with an equity exposure of less that 60% are targeting returns of more than 13%. These expectations are far too ambitious and these individuals are likely to end up with sizeable shortfalls in their goal corpuses.

Not everybody needs a high equity allocation. In fact, a lot of investors can reach their goals even with a low equity exposure. But the returns expected from the portfolio should reflect the chosen asset allocation. You cannot have high return expectations from a conservative portfolio. “Keep return expectations realistic to avoid staring at a deficit later,” exhorts Bajpai. Also, factor in the taxation at the time of withdrawal.


Don’t ignore the asset allocation you planned


Do you adhere to a predefined asset allocation as per own risk profile?

CS-6

Revising the return expectations lower may demand a bigger outlay towards the goal, but that is what will take you closest to the target value. Even those with equity-heavy portfolios need to be a bit modest in their return expectations, insists Agrawal. Only 20% of the respondents have an equity allocation of more than 80%. Of these, some 13% are expecting their portfolios to generate more than 15% returns over the long term. This should be pared to avoid surprises later. Don’t extrapolate the returns of the past 18-24 months into the future. This was an aberration, not the norm, remarks Joshi. An equity-heavy portfolio can be reasonably expected to generate 11-12% return over 15-20 years. A balanced portfolio can achieve about 9-10% returns. But those leaning towards fixed income should not expect more than 7-8%.

High equity exposure is good for long-term goals

How much is your equity exposure for long term goals?

CS-4

What if you fall short

So you have secured all fronts in your goal planning. But closer to the goal, what if you discover you are still falling short of your target? The stock market can take a sudden plunge 2-3 years before your goal date, taking a chunk out of your accumulated corpus. What you do in this situation is critical. The best option is to do nothing. Yes, that’s right. “Two-three years is usually enough time for the stock market to regain and recover lost ground,” insists Joshi. Half of our survey respondents indicate their inclination to stay put.

Be ready with measures if your corpus falls short

What will you do if the corpus falls short when the goal is 12-18 months away?

CS-13

Another 43% have indicated that they would even consider investing more if required to take advantage of the lower valuations. But this can work both ways. It can help you lock in more units at low prices that can potentially fetch you a higher final corpus when the goal comes due. But if the market doesn’t see a turnaround in the final days, it can leave your corpus vulnerable. Ideally, you should start moving from equity to debt 2-3 years before the goal date. Don’t do this at one go, but start a systematic transfer plan (STP) from equity funds to a debt scheme for the remaining period.


Don’t react adversely if markets are volatile


What will you do if stock markets tank by over 20% about 2-3 years before a goal?

CS-11

What if you see a shortfall just 12-18 months before the goal date? 11% respondents in the survey say they would invest aggressively in stocks to try and bridge the gap. This is a strict no. Now is not the time to be adventurous. Equities can be extremely volatile in such a short time span. A majority (44%) suggest they would defer the goal. This can be done in case of negotiable goals like buying a house, car or even a planned holiday. But critical goals like kids’ higher studies cannot be deferred. In such circumstances, 12% indicate they would pull out money from some other goals. If money is funneled from non-essential goals, this is fine. But taking out funds from another critical goal is not. The temptation may be to dip into your retirement corpus to fill the gap. This should be the last resort. Instead, consider unlocking value in traditional insurance policies or other unmapped investments, if any. If liquidating investments is not possible, consider opting for an education loan with the child as a co-borrower. “Rather than funding the entire cost of higher studies yourself, take an education loan to cover any likely shortfall in required corpus,” suggests Shah. Nearly 20% individuals say they would be inclined to scale back outlay for the goal. This is again doable for noncritical goals like buying a car or house.

Regular course correction

In the midst of your journey, some variables may come apart. Existing investments may not fetch expected returns. Or higher than expected inflation might upset your calculations. To avoid getting caught off guard nearer to the goal, you must regularly track the progress. Even a 1% higher than estimated inflation rate can send your math haywire. At 7% initial estimated inflation, the cost of your child’s MBA would rise from Rs 25 lakh today to Rs 69 lakh in 15 years. You can save this sum with a monthly SIP of around Rs 13,671 assuming 12% returns. But if the annual fee hike touches 8%, the corpus would likely fall short by a whopping Rs 10 lakh. Five years before the goal, you would need to hike your SIP outgo to Rs 28,562 to cover up the shortfall. That is why it is essential that you review the numbers periodically— at least once every two years. “Regular course correction is needed to plug emerging gaps and realign goals if assumptions not working out,” avers Shah. Two-third of respondents in our survey say they reassess goal targets on a yearly basis. Others review the math occasionally.

Goal math can go wrong if variables come apart

What if inflation turns out higher than expected

CS-15


Or returns come in lower than estimated

CS-16


Revisiting goal math regularly can help avoid shocks later


How often do you reassess goal target corpus?

CS-10

This must be accompanied by a regular asset rebalancing exercise. Over the years, your asset allocation can get skewed with the ebb and flow of capital markets. Having lopsided exposure at either end— equity or fixed income—can put your goal in harm’s way. You should bring the mix back in your comfort zone at regular intervals. Bajpai feels asset allocation discipline becomes more critical as you edge closer to goals. “You may realign asset allocation only sporadically in initial years. But once your portfolio grows beyond a certain size and your goals approach, the frequency should increase.” Most experts suggest this as a yearly exercise. More than 23% of survey respondents always adhere to their set asset allocation while another 45% stick to it most of the time. Only 22% maintain the status quo some of the time while 10% don’t bother with asset allocation at all. Agrawal maintains, “Planning for goals is akin to going on a diet. If you don’t follow through, you will not see desired results.”

Very few want professional help

Do you feel you need to consult a financial adviser?

CS-14

Finally, if despite careful strategising, you are hazy about achieving your targets, be open to seek external help. More than one of four survey respondents are either unsure of achieving goals or feel they may miss out. Yet, 25% of these feel they don’t need a financial adviser to sort out the mess. Another 36% are unsure of taking advice. A good financial adviser would help bring order to your investing approach. We hope with the right advice, you reach your financial goals.

.



Source