Very often, I have seen ‘experts’ suggesting client to continue SIPs till she reaches her financial goals. Honestly, I don’t subscribe to this idea.
I strongly believe that distributors should recommend their clients to shift their entire corpus in risk free asset class at least 18-24 months prior to their goals. In addition, distributors should recommend their clients to discontinue their SIPs in equity funds and invest incremental SIPs flows in debt funds having exposure to high quality debt instruments. In fact, distributors should take this into account while making financial plans for their clients.
To make this point, let us do some number crunching. Assume that a client has been investing Rs.10,000 in equity funds to accumulate Rs.30 lakh in 12 years to fund her daughter’s education. A fund with CAGR of 12% could have helped her save Rs.31.9 lakh in 12 years. However, assume that if her tenure of 12 years were to end on April 2020, she could have made just Rs.22 lakh at CAGR of 7.82%, a shortfall of Rs.8 lakh due to the sharp decline in equity markets.
Let us look at various scenarios:
|
Fund Name |
No. of instalments |
Investment amount in Rs. |
Value of investment as on April 1, 2020 in Rs. |
XIRR (%) |
|
Fund 1 |
144 |
14,40,000 |
23,33,027 |
7.82 |
|
Fund 2 |
144 |
14,40,000 |
21,21,049 |
6.31 |
|
Fund 3 |
144 |
14,40,000 |
23,93,385 |
8.22 |
|
Fund 4 |
144 |
14,40,000 |
20,80,412 |
6 |
|
Fund 5 |
144 |
14,40,000 |
21,02,699 |
6.17 |
The above data suggests that the client is nowhere close to her goal despite continuing SIPs for 12 years due to a sharp decline in market.
Whereas, if she had invested in equity funds through SIPs for 10 years and shifted the accumulated corpus at 7% in a risk-free asset, she could have achieved her goal easily.
|
Fund Name |
No of instalments |
Investment amount in Rs. |
SIP value as on April 1, 2018 |
XIRR (%) |
|
Fund 1 |
120 |
12,00,000 |
28,84,232 |
16% |
|
Fund 2 |
120 |
12,00,000 |
26,62,273 |
14% |
|
Fund 3 |
120 |
12,00,000 |
25,69,646 |
14% |
|
Fund 4 |
120 |
12,00,000 |
25,75,220 |
14% |
|
Fund 5 |
120 |
12,00,000 |
27,48,173 |
15% |
Note: If the future value from above table is invested @7%, investor could have made at least Rs.30.5 lakhs by April 2020.
You may consider continuing SIPs for 10.5 years or 11 years for investors with high risk appetite.
SIP value after 10.5 years:
|
Fund Name |
No of instalments |
Investment amount in Rs. |
Value as on October 2018 |
XIRR (%) |
|
Fund 1 |
126 |
12,60,000 |
28,98,145 |
14.30% |
|
Fund 2 |
126 |
12,60,000 |
28,45,877 |
14.00% |
|
Fund 3 |
126 |
12,60,000 |
25,17,428 |
12.10% |
|
Fund 4 |
126 |
12,60,000 |
27,47,049 |
13.50% |
|
Fund 5 |
126 |
12,60,000 |
28,24,514 |
13.90% |
If she shifts her investment to a risk free asset class @7%, the new future value would be approx. Rs. 32 lakhs, Rs.31.5 lakhs, Rs. 27.8 lakhs, Rs. 30.4 lakhs and Rs. 31.25 lakhs respectively depending on choice of fund.
SIP value after 11 years:
|
Fund Name |
No of instalments |
Investment amount in Rs. |
Value as on April 1, 2019 |
XIRR (%) |
|
Fund 1 |
132 |
13,20,000 |
31,63,536 |
14.30% |
|
Fund 2 |
132 |
13,20,000 |
30,40,614 |
13.70% |
|
Fund 3 |
132 |
13,20,000 |
28,45,733 |
12.70% |
|
Fund 4 |
132 |
13,20,000 |
30,89,910 |
13.90% |
|
Fund 5 |
132 |
13,20,000 |
30,51,274 |
13.70% |
The new future value would be approx. Rs. 33.84 lakhs, Rs.32.5 lakhs, Rs. 30.44 lakhs, Rs. 33.05 lakhs and Rs. 32.6 lakhs respectively.
काह कामरी पामडी, जाड़ गए से काज
रहीमन भूख बुताइये, कैस्यो मिले अनाज
जिस प्रकार ठंड भगाने के लिए कम्बल मिले या मखमल उसकी परवाह नहीं की जाती ,उसी प्रकार निवेशक को सिर्फ अपनी ज़रूरतों पर ध्यान केन्द्रित करना चाहिए न कि एसेट क्लास पर.
Vinayak Sapre is author, trainer and financial coach. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
