Intelligent readers and followers help me to deliver my best..


Dear friends, I received lots of love and feedback from my followers and readers. I get some curious comments too. Few such comments are very thought provoking and insightful. I hereby sharing one such comment and my reply with you all so that you can get in depth knowledge about different aspects of Personal Finance.

This, my follower, is a typical young IT guy earning handsomely. What stands out is his approach and thought process about Personal Finance. He reads lots about personal Finance and its concepts and tries to understand those thoroughly and implement those personally. I received his comment on my email.

Thanks Shashwant for allowing me to share your comment. Others readers will be benefited by this.

Post: http://www.apanadhan.com/2019/09/08/best-investments-options-for-short-term-as-well-as-long-term-goals/

His Comment:

Very beautiful post Preeti.

I would like to add couple of points to it.I have been reading a lot about SIP and long term investment on quora these days. Everyone is saying invest in EQUITY for long term and all that stuff.
But this is only half information.

POINT-1 :

No one talks about time value of money when they say define your goals. We need to take into consideration the inflation rate and then calculate the future value of our goal even if our goal is only 1 year away.

POINT-2

It is said we can invest some part of our investment in Equity mutual funds if our goal is more than 7 years away. Let us see some calculations :CAGR of nifty between 2000-01-01 to 2008-01-01 was around 17%.
And between 2000-01-01 to 2009-01-01 it was around 8%.So my point is whenever you talk about GOAL based planning do share the exit plan as well. Half information can be dangerous. What if NIFTY is down by 50% when my goal comes. So it’s pretty simple. Calculate the future value of your Goal. Invest for getting that FUTURE VALUE. If that goal can be achieved with 7% CAGR we need not to take any extra EQUITY risk even if our goal is 20 years later from now. (We are tempted by the returns and run after high returns. But for goal based investing returns doesn’t matter what matters is that I should have the required corpus when my goal comes. Pretty simple).

My reply

Thanks for your details comment Shashwat. You really understood the concept of equity well. Equity is definitely for long term and is the only vehicle available to beat inflation in longer term.

Point 1:

Time value of money is the most important factor in financial planning. Every DIY or RIA will consider this while calculating future value of your goals. Even if the goal is away by 6 months inflation will hit the value of that goal. So you need to consider inflation for each and every goal. Importantly inflation is not same for every goal. It varies with nature of goal too. E.q. when you plan for your kids , inflation rate for education goal differs with marriage goal. For education you need to consider 9 to 11% inflation and for marriage purpose it should be 6 to 7%. Same pattern is for household expenses and medical expenses. Planning for Medical emergency you have to consider inflation@ 12% where general inflation can be 6 to 7%. I always take care of this factor while arriving at the future value of life goals for my clients.

Point 2 :

Shashwat if you read my all post carefully I always emphasis on asset allocation and time horizon of our life goals. When you are 30 yrs old and planning for retirement which is 30 yrs away you can have 70:30 exposure in equity and debt as this goal is a long term goal. But as you grow older and your time horizon of that particular goal comes nearer this asset allocation should be changed.

  • At the age of 45 it should be 60:40 and
  • After 45 it should be 50:50
  • When you cross 52 it should be 40: 60
  • After 55 it should be 30:70 or 20:80 and
  • When you reach 57- 58 you should slowly shift all your money from equity to debt in a staggered manner by way of STP (systematic transfer plan) to Debt mutual funds.

This concept is well explained in http://www.apanadhan.com/2019/07/05/thought-process-an-investor-should-have-behind-every-investment/

You can’t keep your money in equity till you be 60. As when you are 57 yrs old retirement goal for you at that time is short term goal where you have to have 100% debt Investment.

This is what I explained in my post.Recognition of the life goals and their time duration is the utmost Important step in financial planning.

For 30 yrs old guy Retirement will be a long term goal where as for 55–55 yrs old it will be a short term goal. Both have to select asset allocation as per the time frame and choose right financial products for themselves.

I never advice my clients or my readers to chase returns. I always emphasis on CRATON ( capital required at the time of need). You should know how much money you want for that particular goal after considering inflation.

Have very conservative approach towards returns. I consider Debt return at 6% post tax and equity SIP return as 10% in long run. And calculate the required amount of monthly Investment for my client. I always say returns are the icing on the cake.

Focus on CRATON not returns. You have rightly said at the end of the day you need the required amount when time of that goal arrived.

But you can be benefited in two ways if you select proper financial products for reach of your goal.

  • First one is you can achieve the targeted amount before the time of the goal
  • And second if you wait till the goal you can accumulate more amount than the required amount.

Provided you have right mix of financial assets.

This concept is explained in Preeti Zende’s answer to What is the the right investment mix in falling interest rate regime? Can you Suggest right debt equity ratio for personal portfolio for a 40 year old person with grown-up child? in Ask about Investments

Hope you agree with me Shashwat. Thanks for giving me the opportunity to explain my views in details. It will surely help other readers too in understanding financial planning more accurately.

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I hope this exchange of thoughts between my follower and me will provide you all detail insights and explanation of Personal Finance and Financial Planning.