Account for inflation and the real value of money when setting financial goals

You might have Rs1 crore, as of today’s value but the real value of money 15-20 years from now will be different


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I am 35 years old and work in a multi-national corporation. My goal is to have a corpus Rs2 crore: Rs1 crore for my son’s higher studies, which is 15 years away and Rs1 crore for my retirement, which is 20 years away. Please suggest a suitable plan for the same.

—Bhaskar Pandya

It is good that you want to plan for your son’s higher education as well for your retirement. Generally you don’t find the focus for creating a corpus when the goal or the need for money is far away. This is also true for retirement planning. And when it dawns on you, it is quite late and you end up scrambling to create the kitty by pushing yourself to either work more or put your capital to risk to earn at a faster rate. Early planning helps not only in creating the desired corpus in a systematic manner but it also ensures you take less risk. It also gives you the benefit of power of compounding, which comes out in its true colour only in the long run.

For your financial goals, you need to start saving regularly and be disciplined about it. The recommend way to steadily accumulate wealth over long term is a systematic investment plan (SIP) in mutual funds. Here, a fixed amount of money is debited from your bank and invested in the desired scheme. The schemes can be decided based on your risk profile, which is a function of your risk capacity and risk appetite. 

Generally, if you are a long-term investor and a young person, which is applicable in your case, then higher allocation to equity is recommended. But this is subject to your risk appetite, i.e., how comfortable you are with taking risks. The rationale of having equity exposure is to earn a return higher than inflation, which an asset class with high degree of safety may not provide and hence the need of asset allocation and portfolio diversification. 

The portfolio mix can be a combination of debt and equity investments. Within debt category you can consider long-term bonds, Public Provident Fund (PPF), debt mutual funds; and equity exposure can be via mutual funds, which could have a combination of large-cap, mid-cap and balanced funds. 

If your target is Rs1crore for your son’s education after 15 years and another Rs1 crore in 20 years for retirement, your savings would have to be Rs40, 000 per month for the next 20 years, assuming a return of 10% per annum.

However, you need to be careful as the targeted amount is not inflation adjusted. You will be having Rs1 crore, as of today’s value but the real value of money at that time will be different based on the average rate of inflation over the next 15 to 20 years.

So, for example, if inflation is assumed to be at 7%, the education corpus of Rs1 crore in today’s value of money would be Rs36.24 lakh. The same holds true for retirement corpus—the real value of Rs1 crore today would be Rs25.84 lakh after 20 years. This is what you need to careful about. And if this requires extra savings, you should be gearing towards it, subject to your cash flows and ability to save.

I need money for my father’s surgery. He does not have an insurance and I need Rs5 lakh for the procedure. What kind of loans can I take?

—Mahesh Modi

It is always recommended to ensure your insurances are in order even before you start your investments. It is the insurances, whether life or health, which ensure that your financial plan is not disturbed by some unexpected event.

In this case, if your father had medical insurance, this event could have been avoided as it would have ensured the costs were reimbursed. But as you don’t have any health insurance cover, you will have to either dip in to your financial assets or take a loan.

First, evaluate your existing assets and check if any investments can be redeemed without impact on valuation or any taxation impact. To do this, you should do a cost–trade-off analysis, i.e., compare the interest cost versus the earning loss of investment, and then pick the best option.

But in a scenario where you don’t have an option of redeeming investments and you need to go for a loan, then the options are limited as you would have to go for a personal loan, which is expensive—the interest rates are typically between 11.50% and 19.50%. The loan amount and the tenure will depend on the banks or the financial institution’s eligibility criteria. Also, you will also not get any tax efficiency on this loan, i.e., the interest will not deductible against income.

Surya Bhatia is managing partner at Asset Managers.

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