In corporate cafeterias and family gatherings across India, money talk is inevitable. The most common questions revolve around the "best performing mutual fund" or the "right time" to enter the stock market. According to equity analyst Prasenjit Paul, this market-first obsession is a flawed approach that leads to anxiety and poor decisions. True financial well-being, he argues, begins not with what the market can give, but with calculating what you personally need to achieve your life goals—your Required Rate of Return.
The Pitfall of Chasing Market Performance
Building a financial plan based on expectations of market returns, like the Nifty 50's 20% gains, is like constructing a house on sand. This mindset, prevalent among Indian investors fixated on maximizing returns, hides a dangerous trap. In the quest for the highest gains, investors unknowingly accept the highest possible risk, irrespective of their personal suitability. They become slaves to market moods, akin to driving at 100 km/h simply because the car can, not because the journey requires it.
This product-centric approach creates a vicious cycle. When the inevitable market correction arrives, these investors panic. With no anchor, they watch their wealth erode and often sell at the bottom, locking in losses. Their strategy, built on getting the "maximum," exposes them to maximum volatility and disappointment.
The Goal-First Framework: Calculating Your Required Return
The solution lies in a personal, problem-centric approach. The Required Rate of Return is not linked to the Sensex or Nifty. It is a unique number derived from a simple, personal equation that considers three factors: your current savings, the future cost of your financial goals (adjusted for inflation), and the time you have to achieve them.
Prasenjit Paul illustrates with a common scenario. Suppose you need ₹50 lakh for your child's higher education in 15 years. You have ₹5 lakh already invested and can save ₹15,000 monthly. The math shows your portfolio needs to grow at a Compound Annual Growth Rate (CAGR) of approximately 10-11% to reach the target.
This 11% becomes your financial compass. Knowing this specific number transforms your relationship with investing. The pressure to chase risky micro-cap stocks or volatile sector funds promising 20-30% returns vanishes. You can construct a balanced, perhaps "boring," portfolio of equity and debt aimed steadily at that 11% return with significantly lower risk. The goal shifts from beating the market to reliably meeting your personal milestone.
Calm in the Storm: How Required Return Changes Investor Behavior
The difference between market-first and goal-first investors is stark during a market crisis. The market-chaser is in constant chaos, comparing their portfolio's 15% gain to a neighbour's 30%. They have no benchmark except more.
In contrast, the goal-focused investor possesses a calm assurance. Their central question is personal: "Is my portfolio on track to meet my goal?" Having calculated their required return—say, 12%—they likely took only the necessary risk. If their portfolio sits at a 14% return before a correction, they have a buffer. They might even see a market fall as a rebalancing opportunity, not a reason to flee. For them, daily Sensex volatility is irrelevant as long as their goals for a house, wedding, or retirement remain achievable.
Paul likens the Required Rate of Return to a speed governor for your wealth. With SIP books at record highs and many new investors conditioned by a long bull market to expect 15-30% returns, knowing your personal "speed limit" is crucial. If your plan requires 12% to retire comfortably and a bull market pushes your returns to 18%, it's a signal of "excess speed." A disciplined investor would book profits and shift excess gains to safer assets like debt or fixed deposits. The market chaser, however, sees 18% and gets greedy, doubling down at the peak.
Paul concludes that financial planning in India must evolve from being product-centric to problem-centric. Investors spend too much time analyzing financial products and not enough analyzing their own lives. The next step is to work backwards: define the goal, calculate its future cost, and determine the timeline. Once you know your Required Rate of Return, investing becomes less like gambling and more like precise engineering. It becomes predictable, effective, and, most importantly, boring—which is exactly what you want for your life's savings.
Prasenjit Paul is an equity analyst at Paul Asset and fund manager of the SEBI-registered 129 Wealth Fund. He is also the author of bestselling books on stock market investing.
