Based on your assumptions, many things could change. Suppose you address 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 a month. But assuming a 15% rate of return, you can accumulate the necessary funds by investing $15,000 a month.
Being conservative or aggressive, even with one data point, can lead to a drastic change in your financial plan. So how do you make sure that the different numbers you assume are optimal?
“A financial plan is never precise. You should continue to make changes to it regularly, at least once every three years, as investment and economic trends change,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories and a Sebi-registered investment advisor (Sebi-RIA).
We spoke to investment advisers and mutual fund distributors, who were making financial plans before the Securities and Exchange Board of India (Sebi) introduced new regulations segregating advisers from distributors, on assumptions they would use to help the client to achieve their goals.
Inflation: Investment advisers assume different inflation rates depending on the target. If an investor wants to save for a child’s education, many advisers assume 8-10% inflation, since the cost of education has risen at that rate each year. The same happens if an investor wants to have a fund for medical expenses in the future.
For retirement, they use 6-7% as the annual inflation rate. “For short-term goals, in some cases, it might not even be necessary to take inflation into account. For example, someone is saving to travel a year from now or buy property in the next two years,” said Deepesh Raghaw, founder of PersonalFinancePlan, a Sebi-RIA.
Some suggest that investors should look at their lifestyle to determine the rate of inflation. “For this, you have to calculate spending on travel, leisure activities, high-end gadgets, designer clothes and merchandise, etc., and see how spending has grown over the last two or three years,” said Arvind Rao, an accountant. public. and founder of Arvind Rao & Associates.
Rate of return: Investors typically use a combination of equity and debt to achieve their financial goals. Most advisors assume a 10-12% return on capital. “If you’re conservative, you can keep the rate of return on stocks at 9%, since there’s a long-term capital gains tax. Also, as you get closer to the goal, your capital allocation should decrease,” said Melvin Joseph, managing partner at Finvin Financial Planners, a Sebi-RIA.
Advisers note that long-term average stock returns have been falling. “In the decade of 2001-2010, most planners considered the average return on capital to be 15-18% based on historical data,” said Malhar Majumder, a Kolkata-based mutual fund dealer and partner at Positive Vibes.
Debt investment includes different categories of mutual funds, fixed deposits and provident funds. In the current interest rate environment, most planners assume 6% returns on the overall debt portfolio.
Life expectancy: This is crucial when planning for retirement. The longer you assume you’ll live, the more corpus you’ll need to retire.
“According to census data, life expectancy in India is around 69 years. But it is an average of rural and urban data. Most people in metropolitan areas have access to medical infrastructure. That is why we assume a life expectancy of at least 85 years,” said Joseph.
Advisors prefer to use 85-90 years as life expectancy so retirees can live off the corpus they have accumulated.
Revenue growth rate: Even for advisers, this can be tricky. It is difficult to guess at what rate the customer’s revenue will grow each year, as it varies from industry to industry. It also depends on the job function and seniority.
Each expert assumes a number based on their 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 off the mark. With experience, you will be able to optimize them.