Raghav is in his 30s and is aware of his financial challenges; he would need a lot of money to meet his family’s future needs including children’s education and retirement corpus. He wants to plan sufficiently but the problem is not his financial capacity or his acumen in managing his investment portfolio but his inability to predict future levels of inflation and interest rates.
Financial planning is all about financial readiness, to being able to meet the events as and when they happen at future dates. Raghav’s daughter is two years old currently. Assuming she would pursue her MBA 20 years from today, an amount of Rs. 50 lakh may be needed for studies then after factoring inflation at 10% year-on-year. He plans to retire at the age of 55 and wants to prepare a corpus. He has to choose the right asset class.
The major problems here are: the inflation percentage to be considered for needs such as education, hospitalisation in case of any untoward incident, and day-to-day living including purchase of household items; the bank interest rates 20-30 years from today; and the retirement corpus to be created.
There is a lot of inconsistency about what the government, through its monetary policy announcements, has been projecting on the inflation and interest rates front over the years. While the CPI (consumer price index) is publicised as being in the range of 2% to 4% in the last couple of years the effect of this low inflation is neither visible nor the benefits been enjoyed by the common man.
If an individual who was 40 years in 1997 had assumed that the deposit rates in 2017 would be 12% (this was the FD rates prevailing then), that assumption would have been a blunder.
The government and the Reserve Bank should be able to provide consistent and reasonable percentages of future interest rates and inflation levels that would help in financial planning. Of course it is not easy to predict, but the accuracy levels can be at least 75% wherein the financial calculations would be manageable than going haywire.
For the overall economy it would be a big disaster if the government does not have clarity on these critical aspects. The health of an economy is more pronounced if the citizens are able to meet their commitments with little financial stress. In this context, investing in real estate helps. One can sell the land or seek a reverse mortgage loan on self-dwelling property.
Whether the government comes to your rescue or not, you have to be ready because there is no substitute for financial readiness.