Are
your assumptions realistic?
The long-term performance of the stock market and equity funds shows that equities can generate spectacular returns. While the Sensex has given annualised returns of 15.69% in the past 10 years, some equity funds have enriched investors with annualised returns of over 20%. Similarly, real estate investments in emerging suburbs have grown 10-12 times, while gold has generated a return of 20% since 2003. Spectacular, no doubt, but don’t expect these investments to give a repeat performance.
The stock market rally between 2003 and 2008, which saw the Sensex rising from 3,000 points to over 22,000, was unprecedented. As the economy slows down and the growth in corporate profits dips in the coming years, the stock market is likely to churn out a comparatively muted performance. Your returns will depend on how the economy fares (see graphic). Likewise, rising incomes and wealth creation had led to a real estate boom that doubled property values in 3-4 years. Now, you can expect barely 7-8% appreciation in a year. Gold prices, which shot up from 4,800 to 32,000 per 10 g between 2003 and 2012, may not exhibit the same bullishness again.
This is the new normal and the returns assumed in your financial plan must align with it. The investors who have assumed higher returns from these investments might be faced with a shortfall when they reach their financial goals.
Don’t blame only the market downturn if you miss the target. Investors can go wrong in their projections even if the returns are assured, as in the case of fixed deposits. Your bank may be offering 9% on fixed deposits, but the post-tax yield could be lower. In the 30% tax bracket, it will be only 6.3%. Make sure you take the tax impact into account when you calculate the returns from an investment. This rule should be kept in mind for all investments other than long-term equity products, life insurance policies and other tax-free options.
SAKINA BABWANI ETW131021
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