Long-Term Goal Planning

Long-term financial goals Greater than 10 years Vital Inflation Returns Important because inflation is important Taxation Important because inflation is important

Inflation in India: Some Real Numbers Jan 1995 to May 2014

Permanent loss in capital

We need to be practical! We cannot expect more because we cannot invest enough!

Returns do not matter!

Understanding the nature of stock market returns

Sensex Total Returns Index: 1979 to 2013

Negative returns: 4 periods out of 32 Lowest return: -11% Highest return: 50%

Negative returns: 2 periods out of 30 Lowest return: -2% Highest return: 45%

Negative returns: 1 periods out of 28 Lowest return: -2% Highest return: 36%

Negative returns: 0 periods out of 25 Lowest return: 3% Highest return: 30%

Negative returns: 0 periods out of 20 Lowest return: 8% Highest return: 26%

Negative returns: 0 periods out of 15 Lowest return: 12% Highest return: 21%

Negative returns: 0 periods out of 10 Lowest return: 15% Highest return: 20%

Sensex Total Returns Index: 1979 to %

S&P 500 Total Returns Index: 1871 to 2013 Source: 12%

Sensex Total Returns Index: 1979 to 2013

S&P 500 Total Returns Index: 1871 to 2013

Normal Distribution Source:

68% of values are within 1 standard deviation of the mean 95% of values are within 2 standard deviations of the mean 99.7% of values are within 3 standard deviations of the mean

Mutual Fund Star Ratings Source: MorningStar.com

Sensex 1979 to year CAGR Transformed Distribution: Square Root 14% +/- 4%

Return expectation Equity allocation  60% Debt allocation  40% Equity expectation  10% (after tax) Debt expectation  6-7% (after tax) Portfolio expectation 10%(60%) + 7%(40%) = 8.8% (approx.) Investments are assumed to start simultaneously

Years to goal Present cost Inflation Post-tax rate of return of portfolio8.8.00% Future Cost Amt invested so far Post-tax rate of return on current investment Future value of curr. Inv. Annual increase in monthly invest. % Initial monthly investment required Annual increase in monthly invest. % Initial monthly investment required Goal Planner

Anatomy of a bull market

Asset Allocation Finding the balance between risk and reward How much should my equity exposure be? Should it decrease with age? Farther the goal, higher the equity exposure?

Portfolio with 50% equity and 50% debt

Asset Allocation

Maximum Loss: worst case scenario

Higher risk does not imply higher return! Return Risk Standard Deviation

Higher risk does not imply higher return!

Asset Allocation Time FrameConservativeModerateRiskyMad-Max < 5 YearsFD/RD~ 10% Eq 30-40% Eq> 60% Eq 7 YearsFD/RD10-20% Eq40-50% Eq>60% Eq 10 yearsFD/RD40% Eq>60% Eq100% Eq Years<40% Eq60% Eq80% Eq FD/RD 100% Eq >15 Years< 60% Eq60% Eq80% Eq FD/RD 100% Eq Time FrameConservativeModerateRiskyMad-Max < 5 YearsFD/RD~ 10% Eq 30-40% Eq> 60% Eq 7 YearsFD/RD10-20% Eq40-50% Eq>60% Eq 10 yearsFD/RD40% Eq>60% Eq100% Eq Years<40% Eq60% Eq80% Eq FD/RD 100% Eq >15 Years< 60% Eq60% Eq80% Eq FD/RD 100% Eq

Sensex Total Returns Index: 1979 to 2013

S&P 500 Total Returns Index: 1871 to 2013

S&P to 2013

Sensex 1979 to 2013 Annual Returns

Sensex 1979 to 2013 Annual returns

Sensex 1979 to year CAGR