Ladder 7 Financial Advisories offers financial planning services to individuals to achieve their life goals.
A holistic plan is drawn up after understanding the income/ expense pattern, past investments, their specific situation, the time horizon, risk appetite etc. Tax, Estate, risk management issues are looked into and built into the plan. In short, this is a complete plan which is focused on achieving the clients’ goals in the best way possible.
29 August, 2016
Getting goals right is important before jumping to investments
We work for 35-40 years of our life, spending most of our waking hours working for a living. We do everything so that the cherished goals we have in life may be achieved. Now what are the goals we have? The typical ones are a house of our own, vehicle, travel, children’s education, retirement. We also have a few which can be only called dreams. In that category comes a holiday home, a world tour, a hospital in one’s home town, children’s education abroad and the like. We seldom stop to think in this whirl of life about which of these goals and which ones are dreams. Also we need to distinguish goals and understand really which of these are high priority goals and which are medium or low. Many of these are surface goals.
We all want to be happy, experience success & achieve our potential. The problem with the goals mentioned above is that they may not necessarily address the deeper needs of people. Since we are going to spend the greatest years of our life working, it better be work where we derive pleasure, where we feel achievement & self-actualisation. But not many people think of life in these terms. Life for most is a fairly humdrum existence, where the base surface goals look like real ones and their entire effort goes in fulfilling them. For such people, life is dreary & devoid of any true fulfilment, achievement.
Hence, it is first important to get clarity on what exactly we would want to do in life. What is it that can make us happy? What would mean success, achievement & fulfilment for us? What is our potential and what can we achieve if we were to unlock it? These are important questions which very few address. In most cases, people don’t even think about these.
That is why we have problems in life. When we don’t get that sense of achievement, we look for external props to buoy us up. This in one of the reasons why people buy multiple cars, residences, indulge in conspicuous consumption, go on world tours etc . – to show the world that they have arrived and savour a sense of achievement. But this success, sense of achievement is external and the feeling is ephemeral. The feeling of something missing keeps coming back.
It is important for all of us to keep the regular goals that are important for us - like the home, children’s education, retirement etc., while at the same time including those that will make us happy & make our life worth living. Such goals may mean pursuing a passion, doing a job that one truly enjoys, working towards a worthwhile goal like building a hospital in one’s hometown. Once the goals have been clarified, prioritised & ideally set on paper, the planning can start.
But before starting on the planning, we need to clarify when the goal would come up – the timelines involved. We also need to come up with an estimate of how much money would be required for the goal today. If we know this and we have an estimate of inflation for the period for that goal, we can project the amount required when the goal would come up.
Now that we have the goals, the timelines and the estimate of how much is required for it, we need to come up with an appropriate portfolio which would help in achieving those goals. For short term goals – goals of less than 3 years, we would need to allocate in debt oriented instruments only, to ensure that there is no volatility, which can jeopardize goal achievement. There would be no tax advantage derived in any debt based instrument for less than a three year investment period. But investing in a debt fund would have two benefits: One, it can be cashed out ( after the exit load period ), anytime without penalty, unlike in an FD. Two, if the goals gets postponed & gets extended beyond three years, one would automatically get advantage of long-term capital gains taxation, which brings the effective tax rate to below 5%.
The other instrument to look at for short term goals is an arbitrage fund. It has the risk profile like a debt fund but is subject to equity taxation. Equity taxation for over one year is nil. Due to this, it would be an ideal instrument for a period above one year. However, it has the potential to offer about 6-7% returns only, which will be tax free beyond one year holding period.
For longer tenure goals, the options available are many. But before rushing to create a portfolio, we would need to assess the risk profile of a person. People inherently have a certain propensity to take risk and have a commensurate return expectation. On this basis, they can be classified as conservative, moderate or aggressive and various shades in between. It is important to take this into account as a portfolio that does not match the investor profile to the portfolio constructed, runs the risk of the investor panicking when the markets turn volatile and investor cashing out in panic, undoing an otherwise good portfolio.
The other concept to understand is Risk capacity, which shows the recovery capacity of the client to emerge from any shock to the portfolio. Typically, young people would have more risk capacity as compared with older ones. Also, those who have a higher asset base would have higher risk bearing capacity.
The risk tolerance of an individual will decide the investment mix, also called asset allocation. Once that is decided, the amount in equity assets, debt, property, gold and other assets are decided. Appropriate review of an existing portfolio & rebalancing would be necessary, based on what is already there in one’s portfolio.
New allocations would be based on the surpluses available. For salaried employees, the cashflows are predictable and monthly SIPs are an ideal way of investing in both equity & debt instruments. The instrument of choice for building a longterm corpus for meeting future goals would be mutual funds. However, other instruments also come in handy. PPF is an useful instrument for accumulating money for any longterm goal like retirement/ children’s education. Sukanya Samruddhi Scheme is a wonderful scheme if one has girl children & want to accumulate for their education/ marriage. EPF & other retiral benefits are to be used for retirement funding. NPS is another low-cost tool that helps in accumulating for the retirement phase.
Equity oriented instruments are integral to any portfolio as it is these instruments which helps in getting excellent inflation adjusted, real returns. No portfolio works well forever. To achieve good results from a portfolio, especially one which has equity components, regular monitoring & review of the portfolio is essential. This regular monitoring will also help in finding out whether the portfolio is performing as well as it should & whether one is on course to achieve the goals, in the given timeframe.
Getting all these right is essential to achieve the goals. If all these appear a bit technical & looks like a lot of work, one could always approach a professional advisor, who could assist with these.