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Sep 14, 2012, 11.10 AM IST
While people tend to keep their goals in mind while planning their investments, it is also essential to take into account the rate of inflation, advises Harsh Roongta of apnapaisa.com.
While people tend to keep their goals in mind while planning their investments, it is also essential to take into account the rate of inflation, advises Harsh Roongta of apnapaisa.com. Although, it is difficult to calculate the exact range of inflation, just taking into consideration a general rate of inflation will help, added Roongta.
Here is the edited transcript of the interview on CNBC-TV18.
Q: The first rule of financial planning everyone says is fixing the goals but what a lot of people don't take into account while fixing this goal is inflation. When you actually calculate the returns, especially in life insurance or maybe in real estate what is the best way to account for inflation because that is suddenly turning out to be a key determinant with inflation trending at 10%?
A: This issue of not taking inflation into account is something that affects both your goals and the way you calculate your returns. People normally plan for their child’s education. Let us assume, your child is 4 years old and if you were to calculate the education cost today, it would cost Rs 20 lakh.
Since you need this money 14 years later, you cannot plan to just accumulate Rs 20 lakh. Even assuming a 10% kind of inflation in education cost, the cost is going to climb up close to about Rs 76 lakh. You therefore, need to plan for Rs 76 lakh. Otherwise, you are not going to be able to fulfil that goal probably. That is one big error that most people make.
Q: What is the thumb rule for accounting for inflation, do you take today's inflation as annual inflation rate and how will you discount inflation?
A: Typically, you have to take an estimate and it could be different for different kinds of cost. When I am estimating education cost, it could be a little higher than the general inflation. For our clients we like to take about 8%.
But, if you take specific costs like medical costs or education costs, it could be around 10%. Estimating that you could go a little wrong with actual inflation, the very fact of including inflation will make sure that you don’t go hugely wrong.
Q: If one's child is around 4 years of age and if the parent is planning for Rs 20 lakh as the child's education cost and is currently putting aside around Rs 2 lakh annually and inflation is not accounted for, how can the parent rejig the investment plan to account for inflation?
A: The good news is that even if one roughly takes about 8% inflation that Rs 20 lakh figure in about 15 years of time will be around Rs 64 lakh, given the fact that the caller already has Rs 2 lakh. I presume they are primarily in equity, if not then over a period of time you should move it into good largecap equity funds. You need to review the existing portfolio and keep that balance 10% in a good debt instrument. I would recommend PPF given that the value is not very high here.
For the balance typically, you can invest Rs 7500 every month, out of which you can put Rs 6,700 in largecap equity fund and the balance around Rs 800 in PPF every month. I think that should take you through, as far as this goal is concerned. I would think that you would also need to do an overall planning.
But, as far as child’s education is concerned, I think that should be quite sufficient. The funds that I would recommend could be in India blue chip or HDFC equity ; I would suggest you to have just one of them because you can opt for others to meet other goals.
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