Once we have set financial goals for ourselves like buying a house, car etc, we need to estimate the financial resources that we need and the time horizon we have to garner the requisite financial resources.
By Shyamali Basu, Senior Vice President & Head – Products & Marketing, HDFC AMC
In a cricket crazy nation like India, we often come across cricket aficionados debating if chasing targets in one day internationals is better than setting them, especially in crucial games. Some argue that setting targets (batting first) is preferable as batting first, without a target to chase, results in relatively less pressure on the team. On the contrary, others argue, that batting second (chasing targets), although more stressful, increases the likelihood of victory as having a specific target to chase means that innings can be planned better. Whether we like cricket or not, we do something similar to setting and chasing targets in our lives.
Our aspirations and desire to upgrade our lifestyle ensure that we constantly keep setting ourselves ambitious targets to achieve. By setting higher standards for ourselves, we avoid a status quo and at times, avoid mediocrity from creeping into our lives. Emotional side of our brain in a way sets targets for the logical side to achieve. While aspiring for new and better things can be done at the speed of thought, actually acquiring them requires financial resources. Where financial resources are not available at the given point in time, one needs two additional tools in the form of financial planning and time to fulfil one’s aspirations.
Just like in cricket, a team cannot practically chase 1000 runs in 50 overs, unrealistic steep targets or aspirations can only pile emotional and financial stress on us. While in cricket, one cannot decide the target to be chased, thankfully in real life we can set realistic and reasonable aspirations by curbing our emotions. Having realistic and reasonable aspirations is the first step to ensure that we lead a fulfilling life by meeting our aspirations.
Once we have set financial goals for ourselves like buying a house, car etc., we need to estimate the financial resources that we need and the time horizon we have or time we may realistically take to garner the requisite financial resources. While one can easily opt for a loan and buy a car or go for a vacation overseas, almost immediately; taking the debt route to fulfilling aspirations encourages impulsive purchases and also erodes your wealth over time owing to interest paid on such loans. An advisable way of fulfilling aspirations is by investing through SIPs in mutual funds, keeping the target amount and time horizon in mind. For instance, instead of opting for a car loan and buying a car immediately, one can invest ~ Rs 11,600 per month through SIP in an equity oriented mutual fund scheme for 3 years and use the accumulated corpus of Rs 5 lakh to buy the car at the end of tenure. (Assuming CAGR of 12 per cent).
Bigger aspirations will need a higher SIP amount and longer tenure to create a large enough corpus to meet the goal, as longer tenure magnifies the power of compounding. For example, an of SIP ~ Rs 43,500 per month in an equity oriented scheme for a period of 10 years could create a corpus of Rs 1 crore required to buy a house (Assuming CAGR of 12 per cent). Short term goals, like going for a vacation abroad after 12months, can be met by opting for SIPs in debt funds like Ultra Short Term Debt Fund, Short Term Debt Fund etc.
In cricket, games can be won by teams batting first or teams chasing depending on various factors. However, when it comes to fulfilling aspirations and dreams, we always need the team chasing the target i.e. logical side of our brain whose reliable player is financial planning to win games (fulfil our aspirations) by creating the necessary financial resources in time.
Disclaimer: The above figures are assumptions and used for illustrative purposes only. The views expressed are author’s own views and not necessarily those of HDFC Asset Management Company Limited (HDFC AMC). The views are based on publicly available information and other sources believed to be reliable. Past performance may or may not be sustained in future. HDFC Mutual Fund/HDFC AMC is not guaranteeing returns on any investments. Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
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