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How to invest based on your short term and long term goals

12 Sep 2023

Why are equities critical for your long term goals? To understand this point, let us look at the example of how Wipro would have created wealth since 1980 if you had just bought 100 shares in 1980 and forgotten about it.


YearCorporate ActionNumber of Shares1980First Year (Investment Made)10019811:1 Bonus20019851:1 Bonus400198610 for 1 Stock Split4,00019871:1 Bonus8,00019891:1 Bonus16,00019921:1 Bonus32,00019951:1 Bonus64,00019972:1 Bonus1,92,00019995 for 1 Stock Split9,60,00020042:1 Bonus28,80,00020051:1 Bonus57,60,00020102:3 Bonus96,00,00020171:1 Bonus1,92,00,000


If the above numbers look quite mind boggling, it is only because it is actually mind-boggling. If you had Rs.10,000/- (not too much to ask) to spare in the year 1980, you could have easily bought a Bajaj Scooter. Instead had you bought 100 shares of Wipro at a price of Rs.100, you would have invested a sum of Rs.10,000. Over the last 37 years, your 100 shares would have grown to 1.92 crore shares (you heard it right), without any additional effort from your side. At the current market price of Rs,284, your Rs.10,000/- investment in Wipro in 1980 will be worth a whopping Rs.545 crore today. That is why equities are so powerful in the long run. In annualized returns terms, that works out to a CAGR of 42.9% consistently over the last 37 years. That is the power of equities in the long term.


But the majority would have preferred buying the Bajaj Scooter..

There are conditions to the argument. Firstly, an individual must have really had the vision to give up on the Bajaj scooter and opt for buying equities. Secondly, not every share that you buy turns out to be Wipro. In fact, in 99% of the cases it will not turn out to be a Wipro. Even in the 1% cases where you stock turns out to be Wipro, you do not have the patience and the financial wherewithal to wait patiently for 37 years. So is there a middle path to creating long term wealth using equities, in spite of all the constraints mentioned above.


Diversified equity SIP can be a way to bridge this gap..

If you had done an equity-SIP in any of the diversified funds over the last 20 years you would have easily earned around 15-16% annualized returns. Here you do not have to worry about stock selection. You just need to focus on a quality diversified equity fund and allocate a fixed sum each month. How much will that translate into? Let us assume that you have just started working at the age of 24. If you were to start a 30-year SIP today with jut Rs.10,000, then over the next 30 years you will invest a total of Rs.36 lakhs in the SIP. Assuming that the fund gives annualized returns of 15% on an average, your corpus will be worth a whopping Rs.7.11 crore at the end of 30 years. That is the power of compounding in equities over the long term. Obviously long term goals need your money to work hard for you and hence equity could be your best bet. When you start off at the age of 24, you have over 35 years to retirement. Hence equities will be your best bet to create long term wealth.


But what about my goals with shorter time frames?

There is a basic rule you need to follow in these circumstances. Any goal that is due in the next 3-5 years should have a predominant component of debt. In fact, goals that are less than 3 years must have a greater proportion of liquid funds and short term funds in their portfolio. Also when the goal is maturing within 3 years, the debt funds should be favouring more of G-Sec funds as there could be a liquidity cost to most of the corporate debt instruments. Typically, debt and liquid funds should be used to match up shorter term goals that have a maturity of less than 5 years with only a small proportion of equities. For goals that are longer in tenure, one can look at a larger proportion of equities.


Apart from managing goals, it is also about managing liquidity..
There is a very interesting aspect of liquidity management that needs to be understood in this goal based investing. Let us assume that you are planning your retirement goals after 30 years or your child’s post-graduation expenses after 20 years. Surely, both these are long term goals and hence must contain a larger proportion of equities. But till when should you take a risk on equities? Your SIP unwinding plan should actually start at least 2-3 years prior to your actual goal date. So if your goal matures 20 years from now then you cannot wait till the 20th year to unwind your investments. You must look at being liquid well before the actual due date so that your corpus is not put to any liquidity or volatility risk. The shift out of debt and liquid funds should happen well before the actual need for the goal arises.
Goal based investing forms the crux of investing. You should avoid the temptation to invest in stocks at random. Let your investment be tied towards a goal. It does not matter whether the goal is short or long term. That is what goal based investing is all about!

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