Yesterday I got a query asking ‘are these the right funds for reaching my goals’? I just saw the numbers and realized that for many people it is necessary that they use a Goals calculator..because their math is not as strong as it needs to be.

Let me reproduce the query – I answered it in ‘The Money Show’ on 25th April, 2008 – with Avanne in ETNOW.

Query:

I am 40 year old and currently investing in the following fund. I need to know whether my fund is good or needs to be changed as some of the AUM has become very large and it worries me that i will not get good return in the future. Could you please review and let me know if any change needs to be done for my portfolio. If yes then let me know the fund which needs to be changed and also do i need to add any more fund in the existing portfolio.

Six Goals, very clear. Six funds chosen, and I have no comments on the funds chosen. His choice, but surely not a bad choice at all.

Now come to the IRR that he needs to achieve each of these goals. You will see the innumeracy.

He expects to get 11% cagr in daughter’s MARRIAGE goal AND 45% cagr in son’s education goal. This seems to have happened because he has not seen the impact of ‘n’ in the formula. Son’s education is goal number 2. Goal number 3 is the goal to buy a car. Here he is expecting to get 8% cagr – which should be possible with lesser equity – anyway as the goal is less than 10 years away. I would suggest only about 30% in equity for a goal that is 8 years away.

In the next 3 goals – including retirement – he needs an IRR of 22% to achieve those goals. Clearly not tenable.

My advice to this person would be simple. Do a 10% increase in the SIP amount on an annual basis, and these 3 goals – son’s marriage, retirement, and daughter’s higher studies will all be easy to achieve.

Why should a 40year old assume that his income will not go up in the next 18 years? It will, and he should keep investing.

What I did not understand is how can one person have different return expectations from different schemes? Well I do think the numbers have been arrived on a random basis and not on a scientific basis. Imagine same SIP amount for same period and expectation of Rs. 1 crore and Rs. 2 crores from another fund? Yup Innumeracy.

Goals which are 7-8 years away require a nice big dosage of debt into them – 8 years is too short to take a chance with equity. The slow, steady bull run from 2009 till today has lulled us into believing that ‘equity is like PPF – but it gives 12% return’. Not true. Go and read the number of blogs that I have done about equity returns and standard deviation.

It is not the lower avg that kills you. It is the standard deviation!!