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Plan for your Goals

In the last few articles, we discussed the need to start with life and health insurance to cover risk; and then follow up with retirement planning as one of the first investment objectives.

Once you are done with these, it is time to think about the other goals in your life. These could include buying a house or a car, planning for higher education of your children, saving up for that dream vacation and maybe (think hard about this one) children's wedding.

You can break these goals into ones which are regular annual expenses (say vacations and children's education) and one-time expenses (say buying a house or getting a child married).

The two key questions to answer are:

  1. How much money would you need for these expenses taking inflation into account?

  2. Where to invest money for these goals?

How much money would you need and how much should you save?

To understand the amount of money needed for a future expense, we need to factor in two things. First, the inflation rate which would take the price of this expense up. And second, the expected rate of return on your investment which will bring down the corpus that you need to build.

As an example, Mr. Sharma wants to buy a car in a year's time. The model he is interested in, is worth 10 lakhs today. Historical inflation rate for automobiles has been around 4%; therefore Mr. Sharma should be expect the price of the car next year to be about 10.4 Lakhs. However, he is able to invest the money in a financial instrument that usually gives 8% annual returns. As a result, he needs to invest 9.7 Lakhs today, which would grow to 10.4 lakhs in a year - when Mr. Sharma walks into the showroom to buy his car.

A simple Excel based tool can help you figure out the investment needed for any of your life goals. Graphic below shows how you can easily input a few details and understand the amount needed for your goals in the future, as well as the investment (Mutual Fund SIP) needed to fulfil the goals.

Please feel free to download the below file and use for your own planning.

SIP for Milestones
Download XLSX • 11KB

Where should you invest?

Our investment philosophy is a function of the the experiences in our lives. Hence someone who grew up in the 60s and 70s swears by Life insurance policies and someone who invested in Equity after Harshad Mehta days might be completely sold over on equity investments.

However, in today's world, it is clear that the only way to get inflation beating results is to have a transparent and diversified investment with a significant equity exposure. That means Mutual Funds!

Mutual Funds need to be our primary investment choice when building a corpus for all the little and big goals in life.

Mutual Funds vs. Real Estate:

Unlike Real Estate, they are very liquid and can be sold within a few hours. Also, when you need a small some of money, you can sell a few units of your funds, while you cant just sell the kitchen of your flat. You will have to sell the whole flat to raise the money.

Mutual Funds vs. Bank FDs:

Mutual Funds have a professional fund manager looking after your money, hence are more likely to provide higher returns year on year. On top of it is the tax treatment, which is quite favourable for mutual funds as against bank FDs, which are fully taxable.

Equity Exposure is Essential! If you see the chart below, it is clear that Post Inflation, Sensex would have given you the highest returns while a Fixed deposit would have left you with almost the same money after full 40 years!

Type of Mutual Funds to invest in:

For a beginner, the choice is really simple.

  • For any long term goal (more than 2 years away), one must invest in a mutual fund focused around large companies, thereby participating in the moderate to high growth of such companies. These funds are called Large Cap Funds and are known to contain words like Bluechip in their names.

  • For any short term goal (less than 2 years away), you might want to park your money in a short duration fund which would preserve your capital and provide a decent return.

  • However, if you dont want to take much risk, then Balanced Funds or Debt Funds could also be looked at.

Find a good investment advisor and understand the investment carefully before you put in your money.

With a discipline of saving, investments in a good fund and time, fulfilling your goals will be a piece of cake!

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