Based on your assumptions, a lot could change. Suppose you are targeting a corpus of ₹1 crore after 15 years, and assume a 10% rate of return from a systematic investment plan (SIP) in equity mutual funds, you will need to invest ₹24,000 per month. But if you assume a 15% rate of return, you can accumulate the required funds by investing ₹15,000 per month.
Being conservative or aggressive even with a single point of data can make a dramatic shift in your financial plan. How then do you make sure that the different numbers you assume are optimal?
“A financial plan is never exact. You need to keep making changes to it regularly, at least once every three years, as economic and investment trends change, ”said Suresh Sadagopan, Founder of Ladder7 Financial Advisors and Sebi Registered Investment Advisor ( Sebi-RIA).
We spoke with investment advisers and mutual fund distributors, who were making financial plans before the Securities and Exchange Board of India (Sebi) introduced new regulations separating advisers from distributors, on assumptions that ‘they would use to help clients achieve their goals.
Inflation: Investment advisers assume different inflation rates depending on the goal. If an investor wants to save for a child’s education, many advisers assume 8-10% inflation because the cost of education increases at that rate every year. The same is true if an investor wishes to have a fund for medical expenses in the future.
For retirement, they use 6-7% as their annual inflation rate. “For short-term goals, in some cases it might not be necessary to even factor in inflation. For example, someone is saving to travel in a year or buy a property in the next two years, ”said Deepesh Raglaw, founder of PersonalFinancePlan, a Sebi-RIA.
Some suggest that investors should examine their lifestyle to determine the rate of inflation. “For that, you need to calculate spending on travel, leisure activities, high-end gadgets, branded clothing and merchandise, etc., and see how the spending has grown over the past two or three years,” Arvind said. Rao, chartered accountant. and founder of Arvind Rao & Associates.
Return rate: Investors typically use a combination of equity and debt to achieve their financial goals. Most advisors assume a return on equity of 10-12%. “If you’re conservative, you can keep the rate of return on stocks at 9% because there is a tax on long-term capital gains. Also, as you get closer to the goal, your equity allocation should go down, ”said Melvin Joseph, Managing Partner, Finvin Financial Planners, a Sebi-RIA.
Advisors point out that average long-term stock returns are falling. “During the decade 2001-2010, most planners considered the average return on equity to be 15-18% based on historical data,” said Malhar Majumder, Kolkata-based mutual fund distributor and partner by Positive Vibes.
Debt investing includes different categories of mutual funds, fixed deposits and provident funds. In today’s interest rate environment, most planners assume returns of 6% on the overall debt portfolio.
Life expectancy: This is crucial when planning for retirement. The longer you think you will live, the more you will need a large body for retirement.
“According to census data, life expectancy in India is around 69 years. But that’s an average of rural and urban data. Most metro dwellers have access to medical infrastructure. That’s why we assume a life expectancy of at least 85 years, ”said Joseph.
Advisors prefer to use 85-90 years as their life expectancy so that retirees can live off the body they have accumulated.
Income growth rate: Even for advisers, it can be tricky. It is difficult to presume how quickly the client’s income will increase each year as it varies from industry to industry. It also depends on the function and seniority.
Each expert assumes a number based on his experiences. Most advisors say it’s more important to focus on making a plan and executing it.
It doesn’t matter if your assumptions are wrong. With experience, you will know how to optimize them.
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