The recent volatility in the stock market, triggered by global and domestic factors, has made investors jittery. It has also highlighted the fact that the market mood can change rapidly and torpedo your critical financial goals if you are not protected adequately.
The US-China trade war, a geopolitical conflict between the US and Iran, and domestic factors like consumption slowdown and FII withdrawal due to additional tax have all added to investors’ worries. Experts, however, are not too concerned. “There is no fundamental problem with the economy. The current consumption slowdown is cyclical and the same could be over in the next 12-18 months,” says Ankur Kapur, Founder, Plutus Capital. Tanwir Alam, Founder & CEO of Fincart, concurs. “Regular correction is good for the market’s health. Investors should take advantage of this by using the systematic investment plan (SIP) and systematic transfer plan (STP) route,” he says.
The recent correction, however, has reiterated the danger that the changing market moods can pose to your goals. This is because goals are planned on the basis of certain assumptions, and if these go wrong, the final outcome can be very different from what you were expecting. If the actual returns from the investment are far lower than the projected returns, your goal will be in jeopardy because your accumulated corpus will fall short of your requirement. For instance, if you invest Rs 10 lakh in an equity mutual fund, assuming a CAGR of 15%, you will expect Rs 40 lakh in 10 years. However, if the CAGR turns out to be just 10%, you will amass only Rs 26 lakh at the end of 10 years.
Most experts continue to project 15% CAGR for equities in the long term and they may be right. However, there have been several instances in the past when the 10-year CAGR has been below 10% (see chart). At present, the figure stands at 9.57%. During 2002-3, the 10-year SIP CAGR was in the negative. Similarly, if inflation assumptions go wrong, they can play havoc with your plans. For instance, consider the goal of your child’s higher education in 10 years. If the current education expense is Rs 20 lakh and you assume an inflation rate of 5%, the cost will grow to Rs 32.5 lakh. However, if the actual inflation shoots to 8%, the goal cost will rise to Rs 43.2 lakh.
Need for a buffer due to sliding SIP returns means that you could fall way short of your required goal corpus. So, you will need a bigger cushion.