This new year take stock of your life first

From time to time I get people requesting me to help them in Financial planning or to review their existing portfolios. While this is an important exercise by itself, I have always felt that it is a bit analogous to putting the cart before the horse. Finances support your life decisions and activities by allowing you to do the things you want to do in life. They do not, cannot and should not determine how you lead your life. This new year, my suggestion is that you take stock of your life first and then worry about the finances.

So how do you take stock of your life? Well, there can be several ways to do it and I have one which is my favorite. You need to look at a few important dimensions in order to decide how things are going. In each of these dimensions there are some key questions you need to be asking yourself. These questions will differ from one individual to another but I have given some examples that may help you form your questions. So here is how I would take stock of my life in any new year :-

  • My work and profession
    • Is my current work aligned to my overall goals in life?
    • Am I happy with work content, work relationships and benefits?
    • Is my work helping me to create value and is intellectually satisfying?
    • Does it help in letting me lead my life well in terms of work-life balance?
    • Do I really grow every year as a professional and person with it?
    • Is there a case for considering a change in my current work or profession?
  • My family and friends
    • Am I happy with the situation my family is in today?
    • Are all members clear of their goals in life and working towards it?
    • Am I able to influence and add value to their goal achievement?
    • Do I have the financial bandwidth to cater for their goals?
    • Are relationships within my family functional or dysfunctional?
    • Are we able to spend family time in vacations and other activities?
    • Are we able to achieve the difficult balance between space and togetherness?
    • Are all the members clear about important information in family matters?
    • Each year, is there a sense of progress and optimism?
    • If I repeated these above questions for my close friends how will the answers be?
  • My contribution to society
    • Do I have intrinsic value that can be contributed in a positive way to society?
    • Am I doing enough to utilize my value proposition above?
    • Do I contribute to some charities to the extent that I can afford?
    • Am I involved in any community activities in a positive way?
    • Do I donate blood every year and have I predged my organs after my death?
    • Am I a role model to my children for them to become responsible citizens?
    • Do I consciously make an effort to vote in every election?
    • Do I use every public space or utility consciously and leave it in better state?
  • Me as a person
    • Am I taking care of my health today to avoid problems of the future?
    • Do I exercise regularly and is there a need to make changes in that?
    • Do I strike a balance between work productivity and leisure time?
    • Am I able to spend time on the things I really enjoy doing?
    • Do I have a clear vision of the short term and medium term future?
    • Do I have long term goals and am I working towards them?

When you are doing this, do not attempt to rush through. Sit with a cup of coffee or whichever drink you prefer, think deeply through the questions and be brutally honest. Remember the questions have binary answers and if it is not a convincing YES then it has to be a NO. Give yourself 1 mark for every YES and 0 for every NO. In the end see how much have you scored out of 30?

What is a good score in this? Well an overall score of 25 or so will indicate that you are doing great in life and things can hardly be better, 20 will mean that there are several areas you need to improve and less than that will mean you have real issues and need to look at serious changes in 2020 and beyond. While you may want to deal with it yourself and many do have the ability, there is no reason to feel awkward about getting support from your family, friends, boss at work etc to make some important changes.

How can I help in this? Well this is an area where I can add value as an individual and have already done it for some people. I do a program called HELP ( Holistic Engagement for Life Planning ) that looks into life situation, changes envisaged and a way to go for them. It does have a financial planning component to ensure that such life choices can be sustainable. In case you are interested, reach out to me. I hope you understand this is a serious and time consuming exercise and is obviously a paid one 🙂

Wishing all my readers a very happy and prosperous 2020 !!!

HELP- Holistic Engagement in Life Planning

I have been writing this blog for over 3 years now and one of the most common queries that I get from readers is whether I provide any Financial Planning services. Let me be upfront about this at the start – I do not provide such services in the way they are normally understood, nor am I a SEBI registered Financial Planner. In fact, I have absolutely no intention of being one too as I do not see this as my profession.

However, I do provide a service to select people who approach me directly. I have given the acronym of HELP to it. The expanded form is Holistic Engagement in Life Planning. In this post I will explain about this service and explain as to how interested people can avail of my services for this. As I have explained in several posts of my blog, life planning must precede financial planning. As an individual or as someone responsible for your family well being, you will need to plan the important life events as well as the lifestyle choices you want to maintain. Note that the typical financial planning process assumes that people will by and large plan for typical goals such as children’s education, marriage, own retirement etc. I find this a completely unsuitable way of doing things as the life of each individual is unique and needs to be catered as such.

So what is HELP then? As I said, the starting point is to take stock of your life in terms of where you are today and what are your dreams as a family – individually and collectively. So if you are a family of 4 with two teenaged son and daughter, your dreams could look like this when you are 42 years old :-

  • Son wants to take up a career in Bio technology, daughter wants to be a film maker.
  • Your wife is 38 and gave up her career for her kids 10 years back – she now wants to open up a boutique of her own in the next 3 years.
  • You are interested in starting your Consultancy practice by the time you are 50 and for that you need to be financially independent.
  • All of you like travelling and want to take a domestic vacation every year apart from short trips and also an international vacation every alternate year.

The idea of HELP is to bring out these life goals and lifestyle choices clearly, so that it can be determined what kind of financial support these would require and how can that be organized. Yes, the last part will involve financial planning but it will be in a very different way than just how to buy MF through SIP etc. 

As I said, I have provided HELP to several people and all these were people who have approached me after reading my blog. Some examples will make interesting reading:-

  • Advised a Colonel in Indian army as to how he could fulfill his dream of migrating to Canada in a teaching role.
  • A software professional in Kolkata was worried about longevity of job and worked out an alternate plan should such an event occur.
  • Got several people started on building a stock portfolio from scratch.

Note that in all of these cases, the people already had a financial plan made through a SEBI accredited Financial planner but they were not happy with their life and lifestyle.

The question that will definitely be asked is why am I the right person to do this? Let me start by giving some background of myself :-

  • BE in Computer Science & Engg from Jadavpur university, Kolkata in 1986.
  • PGDM from IIM Calcutta in 1988, with major in Marketing and Systems.
  • Overall experience of 30 years plus, 27 years in regular corporate roles and nearly 3 years now in my Consultancy practice.
  • I have worked almost entirely in the software services and BPO space.
  • Have worked as a CXO for 15 years plus, nearly half of this in 2 publicly listed companies.
  • Lived in Kolkata, Delhi, Chennai and Hyderabad besides having travelled widely all through the world for my work.
  • Have been financially independent since 2014 and writing a blog since 2015 June. The blog has had views in excess of 3.5 lacs till date.
  • My daughter is BE from BITS, PGDBM from XLRI and working in a Consultancy firm now. My son is in his final year at BITS, doing a dual degree – Msc Maths + BE in Computer Science.
  • I am associated with helping students in career counselling for Engineering / MBA.
  • Am in the Hyderabad panel for IIMC admissions.

I believe in the Indian context, I am one of the few people who are able to deliver a service such as HELP. This has been proven by the 10 situations where this is done.

So if you are interested in knowing more about this, how do you get started? Well, the first step will be to write to me at expressing your interest to avail of this. I will then ask a few questions over mail to assess your current situation and then we can have an introductory call. After this I will let you know if I can do this for you and what will it cost.

Typical duration for the complete exercise is 1 month, with 2 interactions over phone per week and costs can range between 20000 and 30000 for the first year. Yearly reviews after first year will be 25 % of the year 1 costs.

If you reach out to me, do not get offended on my inability to take you up ( if that happens ). I am doing this to add real value to the lives of the people and therefore cannot spread myself too thin.

Look forward to hearing from some of you – believe me, your life will undergo a serious transformation once you go through this exercise.

Children’s marriage – a financial goal?

In one of my earlier posts I had written as to why I do not consider the marriage of my children to be a life goal for me. I believe, they have been brought up in a way such that they can select their own partner for life when the time comes. Yes, as parents we will be supportive of it and may also interact with the families of their would be spouses according to the prevalent social norms but, neither my wife nor me, think that we have to initiate the process of finding a bride or groom for our children.

Some of the feedback I have received to the post is a pointer to what is wrong with our societal mindset till today. Sample some of this :-

  • If the girl is not having a good education, she may want to get married at the age of 22 or so. People saying this need to realise that if a girl is being brought up from her early childhood to simply get married after a perfunctory graduation, she is hardly going to have the motivation to do anything else in life. In this day and age, we as parents need to give wings to our girls, not shackle them with chains so early in life.
  • If a son is unable to find a suitable life partner on his own, it is the responsibility of his parents to do that for him. Well, I have no real issues with the parents taking an initiative in this matter as long as it is just for facilitation. Unfortunately, in most cases it turns out to be deterministic and two people, who have little going for themselves in terms of compatibility, get married to each other largely because their families are fine with it. The consequences, often, are quite disastrous.
  • Others said that while it was good in principle for the children to foot the bill of the marriage, how will they do it at such an early age etc. My thoughts on this are very simple – fund the marriages of your children to your heart’s content, as long as you can afford it without affecting what else you desire in life. If you are having a grand wedding but do not have enough money for your retirement years, then there is a lot wrong in how you are thinking through your decisions.

Having gone through those above, let us examine why I think it is a good idea to fund the marriages of children through them. We live in a very different world and social milieu today as compared to even 10-20 years back. At these times the parents were taking complete responsibility of their children till they got married and this included higher education as well as marriage. The underlying assumption was that the children, in turn, would take care of their parents, at least financially, when the time arrived. Today we dare not depend on such hopes as parents and therefore need to look at things with a lot more objectivity and logic rather than just filial emotion. The other thing that has changed is the cost of both higher education as well as marriage. Even 15 years back a B school degree used to cost about 3 lacs, today the same figure is close to 25 lacs. A degree in Engineering with associated expenses has gone up from 2 lacs to 16 lacs plus in the same period. So if you are sponsoring just the first graduation degree of your child you are probably paying more than what our parents paid for all these together.

Coming to the issue as to whether the children can fund their own marriages at such a young age. Well, I think that no son should marry till he is about 28 and this can probably be 25 or so for a girl. This will give then 4-6 years of working life which can be quite adequate to save up for the wedding. Of course, if they are paying a high student loan then the idea should be to pay it off first. Also, if you have the bandwidth as a parent to sponsor either a PG education OR the marriage, I will say choose the first.

I will write other posts on typical wedding costs and how these could possibly be funded by the children, but for now, let us look at a situation where you want to foot the bill. As long as you are being reasonable about the spending according to your own financial bandwidth there is nothing wrong with it. Unfortunately, Indian weddings today have become a spectacle of unmitigated desire to show off money, promoted by mindless and rather vulgar consumerism. I have seen many parents go completely out of the way, in order to show up their relatives and neighbours. At the end of the day, such reckless expenditure cravings often have rather sad endings.

My own experience here will not be out of order. I had worked for about 5 years and a bit when I got married to Lipi. Though I lived a good life as a bachelor in Delhi, I did manage to save a fair bit in those years. In 1993 the world in India was a different place and weddings were expensive affairs but not exorbitantly so yet. In order to comply with my mother’s wishes about how the wedding should be done, I ended up spending most of my accumulated savings and was quite happy to do so. I remember being so broke that Lipi had to sponsor the train tickets for our honeymoon in Panchmarhi. I never thought anything about spending for my wedding as my father had spent a lot of money for my education and those of my sisters. Yes, they were less expensive then but his salary as an Engineer in SAIL was also not a lavish one. 

So coming back to the core issue, is the marriage of your children a financial goal for you? Yes, if you want it to be but look upon it as the least priority item, after your own retirement and children’s education. If you have enough money, do what you want with it. However, if your children are unable or unwilling to take responsibility for their lives when they are 26-28 years of age there is a basic issue. Also, if you have brought up your daughter letting her think she just has to complete her graduation somehow and marriage is her only real goal in life, there really is a huge problem.

Coming to my children, I do hope they will choose their own partners when they want to get married. I will fund their marriage to the extent I deem logical but if they want to indulge in crass consumerism, they can foot the bill on their own. By then, they should be doing rather well in life and will be able to afford it quite well anyway.

Goal based planning – how it can go wrong

I have never done any goal based planning in financial terms myself, even though I agree with the general principles. My belief has been that you need to be clear about your life goals and invest in the 3 portfolios of debt, MF and stocks as much and as well as you can. In my interaction with my blog readers I often come across examples where some goal based planning has been done in a very sub-optimal manner.

Let me share a scenario with you that I encountered in the last week only:-

  • Ajay is 44 years old and his son Raja is 10 years. Ajay wants to have 40 lacs at current prices for his son’s graduation and PG education.
  • As Raja will go to college in 8 years, the financial planner wanted to put the entire amount in debt, so that the money will be available risk free.
  • As Ajay wanted 40 lacs in current prices this meant putting 50 lacs in debt funds. As you can imagine most of his current assets were now locked in debt funds.
  • The other goal Ajay has is retirement in about 12 years which can be met through his PF, Superannuation, LIC policies and SIP of 30000 every month.

Now you are probably thinking why am I not in agreement with the financial planner here. The reason is a lack of understanding of the goal itself. Let us now take a look at things in a more detailed manner, like what the financial planner should have done.

  • Assuming that Graduation and Post graduation require equal money, Ajay needs 20 lacs in 8 years and another 20 lacs in 12 years.
  • Even in Graduation it will be 5 lacs each year and not 20 lacs in the first year.
  • Therefore keeping 40 lacs in debt when you have 12 years is really not making sense.
  • Ajay should simply put 10 lacs in debt funds and put the rest in equity MF over a period of time. If he wants to be more conservative he can look at Debt funds for graduation and Equity MF for post graduation.
  • This will free up some of his current resources. He will need to do a SIP of about 20000 as opposed to putting 20 lacs in debt funds.

Goal based investing cannot just be a mathematical exercise of applying the formulae and calculators. It needs some knowledge about real life scenario and application of that knowledge in meeting your investment goals.

I hope you would have taken care of these things while planning your goals.

Children’s marriage – a life goal?

When I was in college doing my Engineering and later on my MBA, my sister was engaged in doing her MBBS. One of the hot topics of discussion that my parents were often subjected to was when they were planning to get my sister married. This was despite the fact that she was doing a professional course in Medicine which would not be over till she was about 24 years old. My parents and I were asked about my marriage about a few years later, after I had done my MBA and worked for 3 years or so.

I was reminded about the above as I was recently having a discussion with my friend about the life goals I had and he pointed out that my children’s marriages did not seem to figure in them. When I told him that it was not really one of my life goals, we went into a rather long debate about whether it should or should not be a goal in life. I am happy to say that by the end I was able to bring around my friend to my viewpoint.

Now do not get me wrong – I am quite clear that marriage is an important step in the lives of my children and they should definitely have it as one of their goals in life. I will be happy to offer my opinion on it and even organize stuff for the marriage, financially or otherwise. However, I do not see it as my responsibility to decide when they should get married and who they should get married to. They are already adults, taking many important decisions on their own, and I hope they will be able to take the right decision at the right time in this issue too. I will be more than happy to be a guide to them, as I have always been, but I am quite certain that I have been able to bring them up in a manner which will enable them to take this responsibility and do it well.

Most Indian parents, unfortunately, take it on themselves to decide who their children should marry, when it should happen and how the marriage should be conducted. In fact, a lot of our social evils stem from this as the expectations from both sides are set at an absurdly high level and, more often than not, lead to disillusionment and problems. Marriage today has become an occasion for both the groom’s and the bride’s side to show off their actual or perceived status and a display of consumerism, sometimes in a vulgar way. A lot of the associated social evils are a direct consequence of this.

Another issue that comes out clearly is how we still differentiate between out sons and daughters even in this day and age. When I explain my views on children’s marriage the most common reaction is – ” well that is ok for your son but surely you need to need to think of getting your daughter married?”. My answer to this is simply that unlike most others, I genuinely do not differentiate between my son and daughter. I have brought them up in exactly the same manner and have the same expectations from both of them. My life goal for them is to help them grow up into well educated and capable individuals who will be able to do well in life for themselves and others. Fortunately, both my children are well on their way to achieving this and once they do my goals will be achieved. Of course, I want them to marry, have a family, do really well in their careers etc. But, these are their life goals and not mine.

At the end of the day, if I have not been able to inculcate the right values and attitude in them, then I have failed as a parent. Whatever they choose, as long as they live happily with their choice I am quite happy with it too. Even in the unfortunate situation that they are not happy, it is something that they will be responsible for. As parents we can always offer our opinions and guidance, but it should be in a neutral manner, not to be taken as an imposition. My daughter will probably get married in 5 years time and my son in 8-10 years time. I feel quite confident that by them they will be completely capable of a good decision in terms of their life partner.

To complete the story of me and my sister – she got married after completing her MBBS and internship, to a fellow student of another Medical college in Kolkata. Though my brother-in-law is not a Bengali, we were very happy at the marriage and it has really turned out well for them. They currently live in UK. My marriage to Lipi was made somewhat complex by the fact that she was from a different caste, but all ended well and has remained so for the last 22 years and more.

So is children’s marriage a life goal for me? No way, though I do hope they are as happy, or possibly even happier, than my sister and I.

Your MF investments – understand the impact

I had wanted to follow up the post of yesterday by outlining some practical strategies that investors might follow in order to mitigate the risks associated with MF investments through SIP in a highly volatile market over years. However, on seeing a few posts in Facebook groups which are clearing misleading people, it seemed to me that it will be worthwhile to spend some time in giving a concrete example.

Before I do that, let me state the surmise of the arguments presented by people who want others to continue doing SIP as if nothing has happened. Firstly, it is said that over the long term the market volatility will cease to matter. For example, if you look at an MF performance for the last 20 years or so, this can be demonstrated. As an academic exercise this is intellectually flawed as it takes only one set of data point available for the Indian markets. As a practical advise, it is useless for doing the same thing when situations have changed dramatically, without any reassessment of the situation, is hopelessly inadequate. Secondly, the crux of the argument is equities are still the best bet, even if the XIRR of your investments done through SIP is in deep red. This seems completely lopsided to me. Simple reason is this – money does not have a different class based on the asset class it is invested in, you need to base your investment decisions on a clear basis of asset class relative returns, not on some romantic notions propounded by blog writers.

So let me take an example in the real world to show you how there is an impact. We will take a situation where a person starts investing in 2008, so that his money has had the best chance to grow through SIP. The following is the example background:-

  • In 2008 Ravi wanted to invest in MF through SIP for his son Ajay who was 3 years old at that time. Ravi estimated he would need the money in 15 years, which was sufficiently long term for equity returns to do well.
  • Estimated costs in 2008 for an Engineering course in a private college was 5 lacs. Ravi took 12 % educational inflation and arrived at a cost of 27.36 lacs in 2023, when he would need the money for Ajay.
  • His planner told him that with a 12 % XIRR, he would need to invest 5478 Rs per month in order to reach his goal.
  • Ravi started his investment in mid 2008 by doing an SIP of 5500 Rs in a popular diversified equity fund, which seemingly had the least volatility when compared to it’s peers.

Most of us know what happened to the markets from 2008 till today so I will not get into details regarding those. For much of the time Ravi had concerns about getting a 12 % XIRR but his worries were allayed greatly in 2014 when the spectacular rise in the markets made him think that he will achieve his targets 2-3 years earlier.

Cut to the present – let us see how things stand now and how will it affect the future. 

  • From 2008 till now, the XIRR of his fund has been a mere 7 % and this may actually get worse in the coming months.
  • His investment value is currently pegged at 6.52 lacs, assuming 71/2 years of investment time.
  • If we take his son’s age to be 10 1/2 years now and start with a base figure of 6.52 lacs, how much will Ravi need to invest if he has to reach the goal of 27.36 lacs in the next 7 1/2 years?
  • If Ravi still assumes a growth of 12 % his monthly SIP will be 8362 Rs.
  • If he is more conservative now and wants to take 10 % XIRR for the current value growth and future SIP then he will need to put in 10538 Rs every month.

This is the impact in real financial terms, never mind what people tell you otherwise. You need to do this exercise for yourself in order to understand how you have been impacted and how your investment needs to change in future for achieving your goals.

In the next post I will get back to what can possibly be done for existing investors.

Do you have a financial goal in next 3 years?

The current state of the markets will have all kinds of investors worried as the cuts to their portfolios have been rather brutal. It also does not look like abating soon as the conditions both global and local, do not present a pretty picture for the next 2-3 months. The investors who are the worst affected are, of course, people who were hoping to redeem from their equity portfolio in this year or the next 2 years.

OK so let us assume you are in a situation where you had pretty much achieved your target figure for a goal like your child’s college education by end 2015. Based on your financial planner’s recommendation you had thought of shifting some amount from equity to debt over the next 3 months or so. This would have ensured that the amount would be largely safe and available when the goal came around in 2017 or 2018. But as they say, “man proposes God disposes”, and in the case of investors the market certainly did not let your plan come to fruition. So what is to be done now?

Let us make the example a little more specific, so that all of us can understand it better. Assume that the money was planned for an Engineering college starting July 2017. You had planned for 20 lacs overall and your portfolio had reached close to that level by 2015 October. Thereafter things went really wrong and you are now having only 13 lacs in your portfolio with more downside quite a possibility. In order to tackle this situation, you will first need to understand the cash flows in question and then look at possible strategies.

The cash flows then – even though the course fees and associated expenses may cost 20 lacs over 4 years, you do not need to have this cash at one go. This is something very fundamental but most people do not understand it. Breaking down the cash flow by semester and assuming there is a 10 % cost escalation every year ( take 15 % if it is BITS ), the cash outflow plan that you need to manage will look like this:-

  • 2.5 lacs in July and December 2017.
  • 2.75 lacs in July and December 2018
  • 3 lacs in July and December 2019
  • 3.3 lacs in July and December 2020
  • Total expenditure for the course including inflation within it is 23.1 lacs

The deployment of cash from your resources seems much simpler now. You only need to arrange for 2.5 lacs in July 2017. If you are working in a job or business, it should be possible to save up this much money over the next 18 months. Even if you are not working, you will have the option of redeeming some of your debt instruments to get this done, under the assumption that equity markets have still not recovered by then.

What about December 2017 and thereafter? Well, you can continue in exactly the same manner. There is nothing like paying for the goals from your active income. Believe me, I have done it for my children so far and that is the best way. I am not saying that you should not invest for your children’s education or other goals, just that there are other ways of achieving that objective also.

What you must not do is panic and shift to debt by selling at a wrong time in the market. That will destroy your wealth like nothing else will. Your portfolio may be down 40 % today but the loss is really a notional one, it is only when you convert it into an actual loss by selling you have made sure that no recovery is any more possible.

I hope this has given some peace and succor to all of you who have been worrying about the imminent financial goals. At a broader level, forget this whole silly business of having different portfolios for different goals and shifting from debt to equity 3 years before the goal etc. These are completely senseless ideas which sensible people must avoid.

If you want to know more about it, just read through the posts in my blog on the 3 portfolio strategy.

Creating a Financial Plan – A real life case study

Of late I have been approached by a few readers with the request of creating a financial plan for them. I believe that the resources available in this blog should be adequate for making a plan for most people. However, the current plan that was made for a person just this week will probably be of interest to many readers. Note that, only the name of the person has been changed, everything else is his real life situation.


Ajay Narang is a software professional working in Bangalore. He is 31 years old and has recently got married. Ajay has only invested in some FD and Insurance schemes as of now. He does not have any investments in equity and his debt investments are limited to PF and a couple of bonds. Ajay now realizes that with growing family size and responsibility, he needs to focus on his investments for funding the goals he will have in the next 2-3 decades. He wants to get a financial plan done, in order to get a handle on the investments needed for achieving his goals.

Life Events for Ajay:

In a discussion with Ajay, the following life events were charted out:-

  • Birth of first child in 2018.
  • Purchase of his first car in 2020.
  • Birth of second child in 2021.
  • Current home loan to be over by 2034.
  • College admission for first child in 2036.
  • College admission for second child in 2039.
  • Retirement from regular work in 2040.
  • Purchase of second house in 2040.
  • Marriage of first child in 2043.
  • Marriage of second child in 2046.
  • Ajay expects to live till 2065.

Financial Goals for Ajay:

Based on his life events the following financial goals have been worked out for Ajay:-

  • College education for the first child is assumed to be 10 lacs at current prices. Assuming an educational inflation rate of 10 %, goal amount needed in 2036 will be 74 lacs.
  • College education for the second child is assumed to be 10 lacs at current prices. Assuming an educational inflation rate of 10 %, goal amount needed in 2039 will be 98.5 lacs.
  • Current annual expenses are assumed to be 4.2 lacs for Ajay. With an inflation rate of 7 %, his expenses in the first year of retirement (2041) will be 22.8 lacs. For a 25 year corpus with zero real rate of return, the value comes to 5.7 crores.
  • The second home Ajay is looking at will cost about 50 lacs today. Assuming an inflation rate of 7 %, the cost in 2040 will be 2.71 crores.
  • Marriage expenses of first child are expected to be 10 lacs at current prices. Taking inflation at 7 %, this will amount to 66.5 lacs in 2043.
  • Marriage expenses of second child are expected to be 10 lacs at current prices. Taking inflation at 7 %, this will amount to 81.5 lacs in 2046.

We now have a clear picture of the financial commitments that Ajay has over the years. With these inputs it will now be possible to look at a possible investment plan for him.

Before getting into that Ajay should take term insurance of at least 1 crore as his current insurance cover of 7 lacs is clearly not adequate. His Jeevan Anand policy can be made paid up as that money can be used for a term plan with some surplus for investment.

The investment plan is being done from scratch as the current investments are not much.

Meeting the Goals:

Based on the substantial goal amounts that we are talking about for Ajay, it will be important to note that Equity based investment needs to be the main route to meeting the goals. At this point of time, and for the next 19 years the home loan EMI will form a substantial part of his expenses. Also, as his family grows and he has children, his expenses will also grow in a commensurate manner.

Based on the above, a better approach will be to see how much he can invest logically and then look into which of his goals can be met and how. We will be making the following assumptions:-

  1. Ajay’s salary will increase by 8 % annually, so in essence his take home salary will double every 9 years. When he retires he will be getting about 7.5 lacs a month. This is not unrealistic but he may have to change his job a couple of times and re-skill himself along the way.
  2. From an investment perspective, we will enhance the investment amount per month by 50 %, every 5 years. This is possible as with increasing income, the proportion of investible surplus normally keeps increasing.
  3. In the initial period we will be investing only in equity and only through Mutual funds. After 5 years there will also be investment in debt through PPF. The PF will continue as usual and will be one of the key components of the retirement corpus.
  4. Right now Ajay has about 35000 to invest every month. Plotting the investible surplus by the logic outlined above we will get the following investment amounts for each 5 year block:-
    1. 2016 to 2020 – 35000 per month only in equity
    2. 2021 to 2025 – 52500 per month , 12500 in PPF and rest in equity
    3. 2026 to 2030 – 70000 per month, 25000 in PPF and rest in equity
    4. 2031 to 2035 – 105000 per month, 25000 in PPF and rest in equity
    5. 2036 to 2040 – 140000 per month, 25000 in PPF and rest in equity

How will the equity investments in SIP grow over a period of time. For the sake of being conservative we will take the long term XIRR for equity MF to be 10 %. With this assumption the following growth is likely to happen over the time period from now till Ajay retires in 2040.

  • The first lot of SIP of 35000 for 25 years will grow to 4.68 crores
  • The next lot of SIP of 5000 for 20 years will grow to 38 lacs
  • The next lot of SIP of 5000 for 15 years will grow to 21 lacs
  • The next lot of SIP of 35000 for 10 years will grow to 72 lacs
  • The final lot of SIP of 35000 for 5 years will grow to 27 lacs

So the total corpus at the end of 2040, in the retirement year for Ajay will be 6.26 crores from this route. Each of the PPF accounts will generate 46 lacs in 15 years. As we plan to continue the first for 20 years the total amount from these will be more than 1 crore.

Finally the PF amount will get to 2.66 crores with it being continued for the next 25 years.

With these figures in place, let us now look at how Ajay is placed, based on his overall goals, the funding required for them and how these can be met. While a method of deployment is suggested here, it is important to understand that the market levels will fluctuate in a long period such as these. Obvioisly, it does not make sense to redeem equity in a poor market. So if in the year of a goal, the market level corrects significantly, look to meet the goal from Debt instruments – in this particular case a withdrawal from PPF will be the appropriate choice.

Note that the total future cost of all the goals put together is 11.61 crores. As against this the total investment after growth in 2040 is equal to about 10 crores. However, this will not be a problem as we have been conservative in our assumptions and part of the corpus will continue to grow beyond 2040.

Deployment for meeting goals:

In general all goals will be met by redemption of equity MF unless there is a particularly poor year in the market, where an withdrawal from PPF or even PF may be considered.

MF Portfolio:

Dilip will need to create a portfolio of 4 mutual funds. The types and suggested funds are given below:-

  1. Large cap MF such as ICICI Focused Blue Chip / Franklin Blue Chip / SBI Blue Chip
  2. Multi cap MF such as ICICI Value Discovery / Franklin Prima Plus
  3. Mid cap MF such as HDFC Mid cap opportunities / ICICI Mid cap
  4. Small cap MF such as DSP BR Micro cap fund / Franklin Smaller companies

For the initial 35000 Rs, start with 10000 Rs in the first two and 7500 Rs in the others.

Stock Portfolio:

Ajay will have enough funds after about 5-10 years to start building a stock portfolio. Though this is not strictly required as part of his financial plan, it will serve as a hedge for any unforeseen events in his retirement. I have deliberately not put a figure for it as Ajay can experiment with this, based on his interest, and put as much of his surplus available to this as he wants to do.

I hope most readers would have found this useful and will now be able to assess how their financial planner is helping them create an appropriate plan. Will he happy to hear from you through comments and Facebook Messenger.

Retirement calculators are part of the problem, not solution

If there is one phrase that dominates any discussion in the space of personal finance it is ” Retirement planning”. Children’s education comes close but cannot quite match up to it. A lot of discussions in all financial blogs center around this topic and there are a myriad of calculators that are a source of endless use and debate. I think most of the retirement calculators do not serve the purpose they are built for as they do not give you a real picture of how your finances will be in retirement.

Do not get me wrong here – a lot of people have put in a lot of man-hours in building these and as an academic exercise I do not have any quarrel with these. It is just that in computer terms the usage of these calculators can be characterized as GIGO – Garbage In Garbage Out. I will explain why I say so but before that let me explain briefly how most of the retirement calculators work, so that people not familiar with their operations will get an understanding of the same.

Most retirement calculators work in the below principle:-

  • They ask you to look at your current expenses and come up with an annual figure say X.
  • The next step is to ask you what % of this will you be expected to spend in retirement. Let us say you get Y.
  • Y will be projected into the first year of retirement with the current inflation rate to arrive at a figure Z.
  • You can now divide Z by a safe rate of return from debt instruments ( let us say 7 % ) to arrive at the corpus needed at retirement, say W.
  • To arrive at the corpus W, you may now use an SIP calculator which will give you the monthly SIP amount, say V.

I know that many of the financial planners, whether offering paid or voluntary services would have advised you in exactly the same fashion. You are also religiously investing the SIP amount every month, thinking that you have got all of your retirement worries dealt with. Sorry to spoil the party here, but you really have not. You may be way off the mark, either way, and even if the investment amount is correct it is purely fortuitous, not because of the calculations or approach.

Why do I say this? Let us start at the beginning. You simply cannot take a % of your current expenses, project it to your retirement year based on inflation and say that will be your expenses in retirement. In order to take away the subjectivity, let me discuss my specific situation with the approach of the financial planners and retirement calculators.

  • My current expenses in this FY will be X. Most advisers and calculators will say that I need to plan for at least 70-80 % of these expenses. 
  • Such generalizations unfortunately do not work. In my case about 50 % of my current expenses are due to my children. When I retire, let us say in next 8 years or so, these costs will definitely not be there.
  • I plan to shift to a lower cost city like Kolkata, from the current high cost city of Hyderabad.
  • I plan to travel more for the first 10 years of my retirement and take up some hobbies.
  • You will see from the above how hopelessly inadequate the retirement planning process and associated calculators are to deal with my situation, indeed to deal with any real life situation.

Obviously, in some cases you will be saving less and that is a problem as you will simply not have enough money in your retirement years. However, even if you are saving more than required, it may be a bad idea if it is preventing you from doing the things that you want to get done today.

Apart from estimating retirement expenses, the way most planners estimate the corpus is also wrong. It makes no sense to imagine that we will put all our money in a 7 % FD or similar instruments, There are far better ways of doing this and if your financial planner is unaware of those or lazy to do some real work, do not do business with him.

Now that we have understood the problem and what will not work, how can we get into a workable solution? I will address this in the next post.

How do you meet your goals with illusive equity returns?

One good thing about writing the blog is that I get to interact with different kinds of people. Some are new and keen to learn, others have been investing for some time and are looking for specific inputs, yet others are more interested in challenging what I have to say. I am pretty ok with the last as it gives me a good chance to increase my own knowledge. One of the aspects that I have debated with many people is on the nature of equity returns and it worries me that most people still do not get it in entirety.

To illustrate the point let me ask you this – if you have been investing in equity through Mutual fund SIP route for the last 5 – 7 years, what would be your XIRR today on those investments? Given the levels the markets reached yesterday, it is a fair bet that for most funds the XIRR over the whole period would not be in double digits. However, only about 2 months back when things were looking infinitely more positive, the talk would have been about 15% XIRR and putting all money into equity etc. It may be a scary exercise but check out how your portfolio value has fallen over the last few weeks itself. Of course, most advisers will tell you to continue your investments and say that it will recover its value over time.

The simple truth is no one can predict the markets in the medium term and the long term can be really long. If you have started your SIP in the halcyon days of May 2014 when the government change was there, it may take a fair bit of time for your portfolio to get out of the negative XIRR zone. This is not to say that we should stop doing SIP, in fact quite the contrary as SIP really works well in exactly the type of market we are having today. What matters though is that we take care to understand the illusive nature of equity CAGR and plan things accordingly.

One of the simple things to understand is what kind of returns should we estimate from equity investments when we are making a financial plan and investing for our goals? I have always felt that 12% is probably the magic figure irrespective of what the markets are indicating currently. A higher figure is possible but difficult to sustain and at a lower figure you will need to invest huge amounts for your goals. The other thing to understand is that this money may really not be available when your goal is at hand. Suppose you wanted to but a car costing 12 lacs today and have been doing a SIP for the last 5 years. Today when your goal time frame is reached, your SIP value does not match up to this figure. 

The so called experts will tell you that you could invest in debt for a 5 year goal, or that you could redeem equity and transfer to debt 3 years before your goal etc. With due respect to all and certainly no malice, I really feel these suggestions are not worth the paper they are written on. Due to the illusive nature of equity returns it is really impossible to time these strategies and if you are trying to do this, it is really as bad as timing the markets. So what should you be doing then?

We need to embrace the uncertainty of equity returns by doing these few things:-

  • Bank on equity only for a goal if we are prepared to be flexible on it. So in the car example, your goal should be ” I want to buy a car in 5-7 years time and will invest 10000 per month assuming a return of 12%”. Aim for your goal in 5 years but be prepared to wait longer if need be.
  • Most of your goals may not have such in built flexibility. In such cases you can over estimate your goal amount, see to it as to how your goal can be met through debt investments you have or consider mobilizing money through short term loans etc.
  • If you have one time money available for something that you plan to spend in the future, consider doing it today. Let us say you want to go on a family vacation in 5 years that will cost you 6 lacs. Now you can do a SIP for that with an associated risk that things may not work out when the time comes, or you can put 3-4 lacs in debt and hope it will grow sufficiently in 5 years to get close to the amount. A much better way will be to stretch yourself financially, go and enjoy the vacation today with some flexibility and then keep investing for your other goals.

I hope most of you got the point of the post and would be glad to have feedback. In the next post, I will talk of a specific example of children’s education as a case study and show how we can manage things better.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

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