Equity investments may not be the solution for all your financial goals

Timelines are the most essential thing one should keep in mind while planning for financial goals. But, one generally tends to forget this in looking for the highest returns, be it in planning for short or long-term goals.

Tarun Birani, founder and chief executive officer, TBNG Capital Advisors, said, “The volatility that the equity market faces makes it a risky investment in the short run. Hence, equity investments, in the long run, are far more profitable and consistent, making them appropriate for achieving long-term goals."

When you invest in equity for short-term goals, you take a lot of risk, and the risk-reward ratio may not be in your favour. Thus, if you are a seasonal investor, you should avoid investing 100% in short-term equity.

How to plan for short-term goals: Planning begins with setting financial goals that should include short-, medium-, and long-term goals. Short-term goals usually fall within the timeline of 6 to 18 months. Stable investments such as debt or fixed income instruments that are not easily stirred by market volatility are best to meet short-term goals. Although these investment avenues typically offer lower rates of return, they are highly liquid and give investors the flexibility to withdraw money quickly, if needed.

Anup Bansal, chief investment officer, Scripbox, said, “You can break short-term goals into quarterly, monthly, weekly and daily goals. Suggestions to manage such goals would be investments in a combination of liquid funds, bank flexi-fixed deposits and bank savings accounts."

Bansal added that if you were an aggressive investor, you could look at a small allocation to equity in the range of 10-20% of the required short-term goal value.

“However, a large allocation, such as a 100% equity investment for up to three-year-long goals, is not suggested," he said.

Goals between three and five years: This time horizon falls under the short- to medium-term category. Experts suggest it is always better to shift entirely to debt about two years before an important goal is to arrive. Col (retd) Sanjeev Govila, chief executive officer, Hum Fauji Initiatives, said if the funds required for meeting a goal were being met through equity, the shift should gradually start about three years earlier and be shifted fully in the next year. This is why a period of anything less than three years is not recommended for using equity to meet the goals.

“While four to five years is still acceptable to some extent to take equity for a goal, there, too, a combination of debt and equity would be preferable to start with, and one could have a higher proportion of equity, like the aggressive hybrid funds, at the time of starting," said Govila.

Birani added, “You could pick options such as a mix of equity and debt funds on the basis of your risk tolerance and suitability for a period of three-five years. Dynamic asset allocation funds are also an option. For shorter durations, one can consider short-term debt funds. One can meet goals expected to materialize in six months to one year through a mix of arbitrage and short-term funds, which have a maximum maturity period of 91 days and safeguard you from the risk of capital loss."

Goals between five and seven years: This time horizon can be considered a reasonable period to plan for equity for your goals, though the ideal still remains more than seven years. Also, if the period for the goal is more likely between five and seven years, the entry time can matter.

“For instance, in today’s market conditions, planning for a five-year goal entirely on equity investments may mean we are betting on the markets remaining high for two years before the shift of equity to debt starts," Govila said. “One should know that no concrete science or algorithm can lay down precise time periods for which equity is better for meeting goals. It depends a lot on many factors, including your risk profile, risk capacity, the criticality of the goals, and alternative avenues available to meet such financial goals, etc."

Mint takeaways: If you invest for the short-term in equity (mutual funds or stocks) or have no financial goal in mind, the disappointment can be lower returns or even erosion of your capital. Hence, goal-based financial planning and risk management processes help in achieving one’s goals. It is best to work with a financial adviser who can plan with you, construct a portfolio, suggest products and actively monitor your financial health to have no financial worries.

Raj Khosla, managing director, MyMoneyMantra.com, said, “When you save for very short-term goals, the focus should be on savings and not on returns. In any case, a higher return from equities will not make a material difference in such a short period."

“A systematic investment plan (SIP) of ₹10,000 in a debt fund that gives 6% will grow to ₹1.24 lakh in 12 months. The same amount put in the equity fund that gives 12% will grow to ₹1.28 lakh. The extra ₹4,000 is not worth the risk you will take when you invest in equity," he said.

“Equity investments should ideally be for long-term goals that are more than seven to eight years away. They are the best vehicles for young people to save towards retirement," added Khosla.