Mutual Funds Day 1: Setting a Goal!
The first question any Financial Advisor gets from his client is: “Which SIP should I choose?”. The clients are more worried about “what to buy” rather than “why to buy”.
Honestly, you cannot blame them. There is a deep-down need for Instant Gratification. The clients need results and that too instantly. They may be an engineer, a business owner, a doctor, or an expert in their field — but they prefer the shortcut when it comes to making money via stock markets.
The secret to getting the highest Return on Investments is to define the “WHY” part first. The only way to do that is to define your Financial Goal. This goal could be ultra short term say 3 months to even a long term say 20 years.
“Most people overestimate what they can do in one year and underestimate what they can do in ten years.”
― Bill Gates
A Goal is like drawing a border on a canvas. You are outlining the boundaries properly so that your painting fits perfectly. The same is the case with Financial Goals. You are allocating a time value to your fund requirements.
Most often we see clients keeping their financial goals open-ended. That is not a good idea, because it won't motivate or inspire you to do the hard work. Only if you set a timeline, your efforts will have a purpose.
A Goal could be financial like “Generate 1 Crore in 5 years” or it could be materialistic like “Buy a home in 5 years which has a value of 1 Crore”. Even if your goal is non-financial like “Child’s Education”, “Buy a Car”, “Plan a vacation”, “Retirement”, “Marriage”, “Pension for Parents”, “Life Insurance cover for self & spouse” — a Financial Advisor will always ask you to define the monetary equivalent to it.
For example, Buying a Car means nothing unless you define what car you would like to buy when you would like to buy, and at what price. So these 3 factors are equally important
- What
- When
- Price
Now the same person can have multiple financial goals. You might have to plan for the “Child’s Education” as well as their “Marriage”. You might have to “Buy a Car” as well as “Buy a Home”. How will you handle this?
The only option is your prioritize what you want first. Give weightage to the most pressing need based on their time urgency. It is not simple, but it is doable.
Example
- Buy a 10 lakhs car in 2 years.
- Buy a home of 1 crore in 5 years.
- Child’s education expense of 2 crore in 11 years.
- Retire with 10 crores in 20 years.
Now all these goals look absolutely fabulous on the paper. The important question remains — how to achieve this?
The answer is “It has to be funded by your primary source of Income”. To make money, you need to put money into work.
In the above example, you invest 1.25 lakhs per month for 5 years. The annual returns are estimated to be 13%.
The total amount invested by you = 75 lakhs. The final value of your investments = 106 lakhs. This includes a capital appreciation of 31 lakhs.
29% of the final investment value came from returns. 71% was your active contribution.
If we were to do the same example for 11 years, the numbers look surprising.
Total invested = 165 lakhs
Value of investments = 367 lakhs
Capital Appreciation = 202 lakhs
When the period increases, the returns generated by the fund will exceed your original capital.
55% of the final investment value came from returns. 45% was your active contribution.
As the 3rd example, let us look at a period of 20 years.
Total invested = 300 lakhs
Value of investments = 1432 lakhs
Capital Appreciation = 1132 lakhs
Almost 80% of the final investment value was contributed by the returns. Only 20% of it was contributed by you actively.
The more time you give, the greater the final fund value. A concept called as “power of compounding” is in play here. Even though you had a target of generating 10 Crores in 20 years, you generated 14 Crores — that is the power of passive income.
Honestly, nobody will have the vision to set goals 20 years into the future. But we all can try setting financial goals 1 to 3 years with high accuracy and 5 to 8 years with medium accuracy.
Before you even start investing, work on the goal setting. Even if you take 1 to 2 months to set the goals, it is okay. If you are single, consult your parents for advice. If you are married, set the goals with your spouse. Brainstorm and then set timelines for your dreams.
Selecting the investment vehicle is secondary, your Financial Advisor can do that for you in 1 to 2 days. They will have access to countless calculators, Algorithms, Mathematical modeling, and even AI models to find the funds.
