Last Updated : Oct 30, 2018 07:53 AM IST | Source:

Tips to ensure a market crash doesn't adversely impact your financial goals

In real life, assumptions of linear price movements do not work.

Nikhil Walavalkar @nikhilmw

Make a plan, execute it and keep reviewing it say the experts when it comes to achieving financial goals. But the life is not linear. A market correction can wipe out your investments quickly and drill a big hole in your kitty making your financial goals appear far away. What should you do in such circumstances?

Consider this situation – an individual has started investing in equity funds three years ago. He has a financial goal due two years from now. The plan was to grow money in equity funds and shift them into bond funds after the end of three years. The expected growth from equity funds was 12 percent. But in the last three years he has earned around 8 percent. And the markets are in a downward spiral. Now as per plan, if he decides to start shifting his equity funds to bond funds, he would accumulate less than what was projected in his financial plan. If he remains invested in the equity fund, the future is even more uncertain. What should he do?

Most financial plans are built using a few assumptions. Some assume 12 percent returns from equity funds for 10 or 15 years. Some assume 15 percent rate of return on equity investments for same time periods. But stock markets are not bound by your assumptions. CY2008 saw more than 50 percent fall in key stock market indices. There are time periods when we see large and quick falls. Investors are going through something similar in stock markets. Over past one year mid cap funds lost 11.91 percent and large cap funds lost 1.17 percent. That has made many worry about their financial plans.

“This is a real life situation wherein the assumptions go wrong and the saver stares at a challenging situation,” says Suresh Sadagopan, founder of Ladder7 Financial Advisory. If you have a large allocation to equity funds, then you will be definitely affected. Take a stock of the situation. Write down all your financial goals and see how you have allocated your investments for each of these financial goals. Most of the times investing in a mix of bonds and stocks makes sense. If you have allocated some money to bonds and bond funds, which are aimed at achieving a financial goal which is due after a long period of time, you can use those funds for the near term goal, Suresh Sadagopan adds.

For example, you may have two goals. Buying a car two years from now, for which you may have accumulated money for last three years. The second goal is of retirement 20 years from now. If you have been investing in bond funds or some other fixed income option for your retirement, you can consider dipping into it to fund your car purchase.

“If you decide to sell your equity funds now, you will be booking your losses. Instead hold on to your investments in equity funds. Over a longer period of time, they will reward you well,” says Pankaj Mathpal, founder and CEO of Optima Money Managers. You must also increase your investments in the interim period so that you may accumulate money closer to the desired fund value. You may want to do some rebalancing within the asset class, he adds. For example, in good times many investors overestimate their risk appetite. Such investors end up investing large chunk of money in mid cap and small cap focussed funds. But when the tide turns they realise that they can’t stomach volatility. Such investors can shift their investments in multicap or large cap focussed funds depending on their risk profile.

There are a few goals such as buying a car or a foreign vacation which can be modified or postponed due to inadequate funds. You may choose to buy a smaller car or a lower variant of the car if you do not have adequate amount of money. You may choose to tour Thailand instead of Europe. You may also wait for some more time till you accumulate enough money. “But a few goals are not like that. You cannot postpone your daughter’s education. Nor you can ask her to take a break. They must be funded,” says Suresh Sadagopan. In such a circumstances, you may want to withdraw money allocated to some other goals. But when you do so do not forget to replenish that money at the earliest possible, he adds. The equity funds you allocated for the near term goal, should be allocated to long term goal with necessary additional investments.
First Published on Oct 30, 2018 07:53 am

tags #Planning

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