I generally plan for goals which are further than 7 years from now. I am clear on the instruments I can invest – namely Mutual funds, Gold bond funds, Stocks, FD and RD – I generally use a combination of these tools to arrive at an investment plan. With these constraints how do I invest for a goal?
First things first, any goal has to be SMART (Specific, Measurable, Achievable, Relevant, Time Bound).
Ex: I want to invest for my son’s graduation which will happen 10 years from now, which costs 5L presently. Given the goal is SMART, let me show you how I plan for this goal.
5L is present cost, in 10 years it will cost more – because of inflation. So to know the cost 10 years from now, I need to know Education inflation in the country now. You can check any economics websites like (numberbasket.com / tradingeconomics.com) and make an assumption. Remember this is an assumption and you should check if your investments and your assumptions are not too far off from each other. Based on above websites, I am making a decent assumption of 6% inflation for education.
So here is the data,
Time period (N) – 10
Inflation (I) – 6%
Present cost (PV) – 5,00,000 INR
So in 10 years, it’s simple to know what would be the value required, you can use excel to do the calculation easily as shown here. (Arithmetically it is Future Value = PV *(1+ I)^N) )
Now what we should do is to plan to invest monthly so that in 10 years, I have ~9L. So here I need to make some assumptions again – Whats the return of instruments I invest in (after tax). Assuming I will invest in a combination of mutual funds and RDs, I will assume an after tax return of 9% per year (very conservative estimate) to arrive at my monthly investment. Again, we will use excel sheet to calculate this 🙂
So you need to invest 60K per year (or monthly 5K) to achieve this target of 9L in 10 years with a return assumption of 9% after tax. Now you create a combination of instruments you want to fetch this interest rate and set up an automated plan to invest for this goal. The automated plan is the key here – as Hero Honda advertisement said “Fill it, shut it, forget it” 🙂
Finally, make a check every year if you are nearer to the goal or further and make compensations. Simple isn’t it?
