All of us have some financial goals, both short and long-term. Some people want to save for their
retirement, some want to buy a car or a house, some want to fund their children’s education, etc.
Usually, all of us individuals save for these goals. We set aside a part of our earnings for certain
financial goals. But is the saving enough?
As per the RBI, the targeted inflation rate in India is set at 4%. It means every year the value of your
Rs. 100 decreases by 4. Rs. 100 today will be worth Rs. 96 a year from now, Rs. 92 two years from
now and so on. The savings you make for your goals 10 years from now will have constantly keep
falling in value year after year, eventually making you save more than what you receive in 10 years.
The better route to plan your financial goals is to do it through goal-based financial planning. This
means planning your expenses, saving a certain amount, and investing that amount based on your
financial goals and time horizon.
Suppose you have additional savings of Rs. 30,000 every month that you want to invest to buy a car
worth Rs. 75 lacs within the next 15 years. For this goal, you will have to invest your monthly saving
of Rs. 30,000 at an annualized rate of 13% to reach the investment corpus of Rs. 75 lacs in 13 years.
Not knowing your goal will lead you to not know your return objectives and holding period, which
further leads to poor financial planning.
Glide Path Investing is another method in which investors can plan for their goals. Glide Path is a
formula used to determine the asset mix until maturity. The formula is based on the number of years
before the target date. As the investments approach the target date, the formula suggests allocating
more towards fixed income securities like bonds and less towards riskier equities. Thus, investors
have a more stable portfolio towards the end when they actually need the money.
How is Goal-Based investing different?
When investors go for direct investment without goals, they choose various mutual funds or
investment managers who constantly try to beat the market. Beating the market involves taking
more than market risk which increases the volatility of your investment. This might result in you not
being able to withdraw your money when you need it because of a shortfall in the portfolio due to
losses. The unsatisfied investor then has to delay his goals for some time or take loans to meet the
When it comes to goal-based investing, investors know their investment horizon and the returns
they need to get to achieve the goals, and they need not outperform the market. Goal-based
investing is relatively more stable in providing you returns because you can alter your portfolio if
your goals change. You can go for a more or less risky investment if your risk-taking capacity
changes. If you want to achieve your goals faster than what you wanted earlier, you can invest in a
fund with higher returns, instead of staying committed to one fund.
Steps in Goal-based Investing
Define your Goals
The first step towards successful goal-based investing will be to set your goals
in material terms. An example for a material goal will be – I need Rs 50 lacs in 10 years to fund my
child’s masters’ degree. Or you want to buy a house for Rs. 2 Cr. in 15 years. Such concrete goals
help you know how much you need to invest, at what percent returns, and for how long.
Defined goals help you track your investment better and also help in churning the investments when
the time calls for it. You might have multiple goals and an investor needs to prioritize within his goals
and invest accordingly.
Make a Budget
We know all of you are doing your monthly saving but achieving financial goals
requires discipline. You need to form a monthly budget and estimate how much you can save to
invest in a month. Based on the monthly investment capital you can know your required rate of
return provided the time horizon.
Saving in a disciplined manner means knowing the amount you can invest and constantly staying
within your budget. Overshooting your budget will lead to lesser money going towards your future
goals and disturbed financial planning.
Know your Risk-Taking capacity
Knowing your risk appetite makes choosing the right asset class
weights easier. It will also help you avoid stressful nights when the markets are volatile. You need to
take the right amount of risk based on your characters. Too much risk might mean unable to
withdraw funds when you need them because of the losses related to volatility. Too little risk would
mean fewer returns and unable to fulfill the goal in the required time frame.
Risk-taking capacity depends on several factors including age, education, dependants, liquidity
needs, financial situation, investment horizon, etc. An investor might have a high willingness to take
risks but a low ability to take the risk at the same time. the ability to take risks should always be
given preference over willingness to take risks.
Invest in Right Asset Classes
Once you know your goals, the amount of money you can invest, and your risk appetite, you can move on allocating your investment corpus to the different asset classes. Asset classes include equities, bonds, real estate, commodities, etc.
Every asset class has its risk-return characteristics. Equities provide the highest return but are
considered high risk. Bonds are a source of consistent cashflows but a low return provided a low risk.
Gold is usually used as an inflation hedge and a means for liquidity. Based on the steps you followed
above, choose the risk asset allocation for you or you can take advice from SEBI registered
investment advisors like Tavaga.
Track your Investments
The final step will be to track your investments and their returns at least
every 3 months. If your investments aren’t performing as per your expectation, then churn the
portfolio to match your expectations with the asset returns. Constantly monitoring your investments
helps achieve the goals on time and avoid chances of unfortunate surprises.
This article discussed how goal-based investing can help investors achieve their desired return with
the least amount of stress. The 5 steps of goal-based investing provide a guide as to how you should
go through the whole process. Taking the help of an investment advisor is never a bad idea as that is
their job. Discipline is the foremost quality needed to achieve the returns that satisfy you.
Goal-based investing helps you adapt to a sophisticated lifestyle. It prevents you from running into
debt because of the need for money for certain goals of life. Through goal-based investing one can
save and invest more by tweaking their budget and investing as per goal requirements. Goal-based
investing is the way to go as it helps one sustain a healthy goal-oriented life.
Disclaimer: The above information is for educational purposes only. Stock market investments carry market risk. Please talk to your investment advisor before investing.