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In Pune, Shaunak Potdar planned to buy a dream house worth Rs 85 in a chic location in the city. But due to impending uncertainty and without an expected increase this year, he has reduced his plans to realistic levels. “The current employment situation has abolished my plans. A high-value loan will not be prudent at this time, “he says. Now he is considering a cheaper option in the suburbs.
In the National Capital Region, aspiring student Mallika Singh is reevaluating her choices. Singh was due to begin his master’s degree in journalism at one of the best universities in the United States in June. However, the closure in the United States has delayed the start of the course and the university is even considering changing the initial delivery of online course content. But Singh is wary of spending $ 98,000 (almost Rs 74 lakh) for online education. “This is not what I had requested. If you go online, you will not allow the same experience, “he says.
Market crash near the target may alter your plans
Both SIPs initially had a good run, but the stock collapse in the past year was affected.
The illustration above assumes Rs 10,000 monthly SIP in a multi-cap fund for the time periods mentioned. The first final SIP values are from January 1, 2008 and January 1, 2009, respectively. For the second SIP, the final values are those of February 20, 2020 and March 23, 2020, respectively.
In photo:
Shankar Mallapur, 59, Mumbai
COVID impact:
His retirement savings have been beaten just five months before he retires. Its exposure to stocks was almost 40% before the markets fell. The correction eliminated almost Rs 25-30 lakh from his savings.
Your plan:
Wait for the markets to recover. Despite the loss, he believes a capital allocation is necessary to ensure that the savings last a lifetime.
These are not isolated cases. There is a pandemic of broken dreams and interrupted plans. The stock market crash is not the only reason. Wage cuts, job losses, and changing circumstances are forcing Indians to rethink their financial goals. Weddings are postponed, big buys are in the background, and retirements are re-planned.
In photo:
Shaunak Potdar, 34, Pune
COVID impact:
He was looking to buy a property worth Rs 85 in a prime city location with a home loan. But he has changed the plans after the uncertainty about salary increases.
Your plan:
Go for a smaller house in the suburbs worth Rs 60-65 lakh that will not require a very large loan.
Those most affected are those with critical financial goals in the next 2-3 years. You have very little time left to increase your goal savings or re-plan your strategy. This week’s cover story looks at how you can find a way out of the ongoing storm. Whether you’re nearing retirement, hoping to finance your child’s education, or about to buy a home, we’ve provided you with the roadmap to safety.
In photo:
Mallika Singh, 22 years old, Noida
COVID impact:
She was scheduled to start her master’s degree in journalism at a United States university in June. But the lock has delayed the start of the course and you can now switch to online mode. You are not interested in paying $ 98,000 (Rs 74 lakh) for an online course.
Here plan:
Ask the university to postpone your admission to the next academic year if normal course delivery is not feasible.
Retirement problems
The vagaries of the market can alter the optimistic assumptions of the returns, leaving the final result much less acceptable. The recent accident is a wake up call. The mood of the market can abruptly change and ruin your math goals if you are not adequately protected. Imagine a situation where you are building a Rs 3 crore kitty for retirement 20 years away. You assume a TACC of 12% of a heavy capital portfolio, requiring you to leave Rs 32,000 per month to reach your destination. But a year before D-Day, the tank market shrinks dramatically and you are staring at a portfolio CAGR of 9%, which translates into a deficit of over Rs 1 crore.
Investors who are very close to retirement have limited time to rebuild their savings. The immediate concern would be to protect savings and ensure short-term liquidity needs. Rohit Shah, Founder and CEO, Getting You Rich, says: “Start building a liquid position in your portfolio to meet your needs in the first few years after retirement.” This money can be held in liquid funds or in federal banks. Part of the retirement kitty can be invested in the Senior Citizen Savings Plan to earn guaranteed income.
Those who are about to retire do not necessarily have to retreat to a corner, planners argue. A market correction should not be the end of the road. Retirement planning goes far beyond the specific date on which one ends one’s working life. “Retirement planning doesn’t really end with retirement,” says Suresh Sadagopan, founder, Ladder 7 Financial Advisors. “It is an ongoing exercise that spans another 20-30 years. From a longer-term perspective, the current scenario doesn’t really matter, “he insists.
That is why Mallapur is not giving up its capital investments in a hurry. “I can wait 2-3 years for the market to recover,” he says. Having invested in stocks for over 20 years, Mallapur knows one or two things about the nature of the beast. His experience tells him that the markets tend to surprise to the downside from time to time, but have the ability to bounce back.
At the same time, he feels that this is not the time to venture. “Given my situation, there is no point in investing more in equities now,” he says.
Ajay Vaidya, a merchant marine officer, agrees. Although he has another 5-6 years to retire, he barely has 10% of his portfolio assigned to stocks. He has been investing in stocks for more than 20 years, but he believes that it is not wise to invest too much in stocks at this stage of life. Vaidya does not want to rely on stocks in retirement, intending to live primarily on a source of income from a combination of bank deposits and rental income from the property. You are right to be cautious, but you would do well to hold a portion of the equity to ensure that inflation does not outlast savings.
In photo:
Ajay Vaidya, 59, Mumbai
COVID impact:
He will retire in five years. It was not much affected by the market decline because exposure to equities was less than 10%.
Your plan:
Stay away from equities and live on interest income from bank funds and retirement rentals.
Ensuring a smooth landing
If your goals are within walking distance, your immediate concern would be to ensure that you don’t run out any further. Many would be tempted to transfer money to cash or fixed income options. This makes sense if the milestone is 3-12 months away. But if you are facing a deficit and have an 18-24 month window, there are better ways to get out. A one-time bullet withdrawal can be painful at a time when the stock market has fallen 20-25%. To avoid a blow to your body, gradually withdraw as you get closer to your milestone.
In fact, a calibrated output not only helps avoid a sudden bump near the milestone deadline, but also helps reap the benefit of any subsequent rebound. History shows that markets tend to recover quickly even from deep cuts. Arun Kumar, Head of Research at FundsIndia, notes: “In the past, since the 40% decline point, it has taken two years for the markets to recover to the previous high level, on average.” The shortest recovery took six months, while the longest took more than three years (see chart). Undoubtedly, the front-line indices have recovered almost 22% from the low of March 23, although it would be premature to say that the markets have hit bottom.
How soon will your portfolio recover?
In the past, markets took an average of two years to reach previous peaks.
If your target expiration date falls within the next 12-18 months, an STP (systematic transfer plan) or SWP (systematic retirement plan) is the right approach. Start a SWP of your equity funds or an STP in a secure liquid fund. This would allow the corpus to benefit from a rebound in share prices over the next 12-18 months. “A gradual exit will ensure that the market recovery is not lost until such time as you need to finance your goal,” says Amol Joshi, founder of PlanRupee Investment Services. Achieving 80-90% of your desired target body is better than completely leaving with a deficit of 30-40%.
Realign goals and disbursements
For certain close goals, it is definitely necessary to go back to the drawing board and redraw the contours of the plan, feel experts. Kalpesh Ashar, founder, consultants and financial planners of Full Circle, acknowledges that some will have to consider redefining the goal itself.
“Consider adjusting target disbursements with more realistic and achievable targets. There is no point in compromising your current lifestyle in pursuit of a high-value, rigid goal, ”he says.
For example, your child’s planned higher education abroad will require a significant outlay. Children’s education is a non-negotiable goal for most parents, perhaps even more than their retirement. But you may not be able to accumulate the planned corpus in the current scenario. In this environment, the temptation may be to dive into your retirement body to fill the void. This is not advisable. Instead, consider taking an educational loan with the child as a co-borrower. “Taking an educational loan to cover any possible shortfall in the required corpus will give you a break,” Shah says.
In addition, parents will have to seriously re-evaluate the prospects for their pupils to pursue higher education abroad. Since most countries are teetering under a crippling slowdown and facing acute unemployment, it will not be easy for foreign graduate students to find work. Like Singh, hundreds of students slated to start the next academic year at foreign universities face an uncertain future. Consider whether it will be safer for your child to wait a year and then reapply for the next academic year, Asher appeals. “If you can’t find a job on time after completing your degree, it can have a big influence on your finances. It may be a good idea to delay it for a year and in the meantime get a quality work experience on the go, “he suggests. Singh has now asked the institute to consider allowing admission to be postponed for one year.
For non-negotiable targets that are within walking distance, you may have no choice but to liquidate certain investments not assigned to that target. While liquidating investments, consider the value of passive assets such as insurance. Shah recommends that investors look carefully at the profit and value embedded in multiple insurance policies. “Consider delivering suboptimal traditional life insurance plans that can yield latent value. The redemption value can be assigned to the target and allow more time for the capital portion of your portfolio to recover, ”says Shah. However, the salvage value of a life insurance policy can be very low in the initial years, so consider the compensation carefully before opting for it.
Also, if you have a high exposure to gold, consider reserving some gains on this asset. Gold has appreciated significantly in the past two years. Soaking in EPF money should be the last resort as it disrupts the compounding effect. But if the momentum comes to an end, taking an advance against the EPF body is better than taking an expensive personal loan to finance short-term needs. You are allowed to make tax-free withdrawals of up to three months salary or 75% of the balance in EPF accounts, whichever is less. For critical expenses like child and marriage education or home loan repayment, higher withdrawals are allowed.
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