One question that I face often is this – your plan seems to be quite apt for longer term goals as equity investments are likely to grow in this period, but what about shorter term goals? Will the same 3 portfolios work here or do we need a different strategy?
Before attempting to answer that we need to understand the traditional investment plans for short term goals. As usual we will do this with an example that is easy for everyone to relate to:-
- I plan to buy a car in 5 years, current cost of it is 6 lacs.
- At 8 % inflation, the car will cost 8.81 lacs.
- As it is shorter than 10 years, experts will advise me to put money in RD for meeting the goal.
- At 8 % interest I will need to put 1.5 lacs per year or 12,500 Rs per month.
I see very little value in doing it this way, primarily because the premise of not using equity for shorter term goals is a flawed one. As i have explained earlier equity returns are non-linear and therefore the dependence on time is not so important. It is quite possible to get returns of 40 % in one year as it is to get a return of -40 % in another. More importantly, I do not see the necessity of making a distinction between long term and short term goals.
Let me explain. You will normally chart out the important events and milestones of your life first, before mapping these to your financial goals. Buying a car will also be such a milestone in your goal timeline, it just happens to come much sooner than your children’s education or your retirement. You can therefore keep investing in the 3 portfolios, based on your investment needs for fulfilling all your goals. At the time of the goal, your redemption strategy will also be exactly the same as for any other goal. You will redeem from equity if it is an appropriate time to do so, if it is not then look at debt. This is where your PPF will come in handy. For any account which has completed 15 years you will have enough these to withdraw for meeting most of your goals other than retirement.
You can easily see the benefits of the system now – a single goal timeline for all of your goals, a single investment plan with 3 portfolios and finally a simple strategy for redemption when the goals arrive.
Put this framework in place once and you will be in complete control of your investment life.
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