Strategy for meeting goals

Moving money from equity to debt in the last stages of any financial goal ensures that the corpus does not erode suddenly due to a fall in the stock market

Mangesh has been a client of a long time. He is an aggressive risk-taker and believes in high allocation to equities. When we had started the planning exercise in 2015, some of his goals, such as overseas higher education for his child was due in late 2020. Since the funds were required for a medium-term period of five years, we had planned for a monthly systematic investment plan in balanced funds. He initially wanted a more aggressive selection, but after a discussion, agreed on our recommendation. 

In the last review in 2019, his daughter had already secured admission to a very prestigious overseas university. The balanced fund earmarked had also done quite well, and the amount required in 2020 had already been achieved. We recommended the balanced fund should be shifted by way of systematic monthly transfer to the liquid fund of the same fund house over the next 12 months. This would ensure there is no risk to the corpus. We had a brief discussion and were able to convince him to do the same. The plan was put into effect, and fortunately, most of the shift had already happened before the March market crash. If the market stays at the same level, there may be a small non-material gap that can be easily be met from Mangesh’s other sources. Mangesh is naturally very happy. 

Thanks to the “Mutual Fund Sahi Hai” most investors are aware of the need for doing a SIP in an equity mutual fund. However, very few investors are informed about an equally pressing need for tapering their investment into a debt mutual fund as the goal comes near. 

Let’s look at some numbers. Say, your daughter needs to go for higher education after 10 years, and you estimate the current cost at Rs 10 lakh, which will become around Rs 20 lakh in 10 years. You have been told that if you make a monthly SIP of Rs 10,000 in the Nifty index, it should give you the required amount.

Over 10 years and 120 instalments, you would invest Rs 12 lakh in the Nifty 50 index. The worst possible outcome of this exercise would be that your investment would grow by a minuscule one per cent a year to only 12.58 lakh. And this is the situation if you had started 10-year SIP on March 23, 2010, and encashed on March 23, 2020, when Nifty had reached a low point of 7,603. Unfortunately, if you sold one month earlier, you have had Rs 20 lakh in your hands. Alas, at that time, you did not factor in a massive fall in just one month. 

If only you had done two things during the same 120-month SIP:

• Take stock at the end of 8 years and transferred the balance (around 14.50 lakh) in 24 equal instalments into a liquid fund; and 
• The balance 24 instalments of Rs 10,000 were made in the same liquid fund, you would have ended up very close at Rs 19 lakh (9 per cent a year). There can be many other such combinations. 

The relevance of debt, thus, becomes essential in case of such situations.

The writer is a Sebi-registered investment advisor