It’s a known fact that none can create wealth without investing in the equities; simultaneously, it’s difficult to predict the equity market in the short-term, but it becomes more predictable with an increase in time horizon. The inherent volatility of the equity market may be risky for the short-term of fewer than five years. The equity investment is best suited for investors to meet their long-term financial goals like children’s education or their marriages or to have a comfortable retired life. With the help of an excellent financial planner’s advice and suitable asset allocation, one can achieve expected returns; and meet specific financial goals.
An example of Mr. Ram, who wanted Rs. 7 lakhs for his son's education in 2009, started a Systematic Investment Plan (SIP) in 1999. Monthly SIP of Rs. 2868 was required, but he started with Rs. 3000 of SIP by assuming a reasonable return of 13% per annum. He got a return of 20% from 1999 to 2008 and reached Rs. 7 lakhs at the beginning of 2008. Greed overtook rationality, and Mr. Ram wanted to catch the market rally and continued with his equity investment. But between January 2008 and March 2009, when the fund was required, it was down by around 50%. Many times we come across such situations.
As per conventional wisdom, one should start shifting the accumulated corpus from equity to debt as approaching his/her financial goal. It is wise to shift the entire corpus from equity to debt, ideally to liquid/short term debt for at least 1 to 2 years before the actual need by way of Fixed Maturity Plan (FMP) or switching.
One has to take the maximum advantage of the power of compounding by investing in equity during the accumulation period, switch immediately after reaching the desired corpus 1 to 2 years before the actual goal to protect any fall from the equity market and stop the erosion of generated wealth. Whatever path is chosen, irrespective of the time horizon, it is wise to realign the portfolio to debt to protect the amount generated over a period to meet the specific goal.
In our case study of Mr. Ram, it would have saved his wealth and helped him to meet his investment goal of paying the fee for his son's education had he switched the corpus from equity to debt in 2007 after reaching his desired goal amount of Rs. 7 lakhs without participating in the market rally.
By Team Wealth ATM
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