At the beginning of the year 2020, Nifty started around 12,000, later fell to around 7,500, and then rebounded to around 14,000 by the end of the year. No one predicted that a pandemic would cause such stock market volatility at the beginning of 2020.
As retail investors, we do not have control over the fluctuations in the stock market. The stock market is not concerned about how our portfolios are performing. Sometimes it might be the case that we need to access our funds well before we achieve our desired returns.
We are not in the markets to time them through urgent buying and selling. Timing the market can be a futile exercise. We just want to beat inflation to earn enough for our retirement kitty, children’s higher studies, and maybe, for that down payment on a home.
We can create a plan and work to attain our financial objectives. We should consider making a strategic financial plan to save money for studying abroad, to take a trip to Goa, or purchasing a laptop.
Retail investors like us are increasingly finding our goals effectively telling us which investment is best suited for us.
We all have dreams and desires, but most of us do not plan our investments following our goals. Instead, we invest chaotically. Goals give us clarity, motivation, and vision. Goal based investing adds focus and direction to an investment.
Goal based investing refers to a structured, well-thought-out process for investing in which you know the purpose of each rupee invested. It evaluates your current assets, asset allocation, spending patterns, risk profile, short term, medium-term, and long term goals, and creates a financial road map considering all of these objectives.
A goal-less investment is similar to a ship navigating in the wide-open sea with no knowledge of the destination. If we don’t know where we are headed, any road would be sufficient to travel. In the same way, If the direction we are headed is not aligned to our financial goals, the risk is that we may end up in a place where we did not intend to be.
According to research by Morning Star, planning aids investors in generating more wealth. Goal based planning can result in a 15% increase in utility-adjusted wealth.
Our goals determine our risk appetite. Financial advisers consider the average risk in all our goals and account for the portion of our total assets needed to achieve each of them, to arrive at our overall risk profile.
A valuable practice, when investing with goals, is to shift funds to more stable asset classes from the high-returns and riskier assets closer to the deadline. This lets us optimize our earnings while there is time, and avoid last-minute disappointments at losing our money when we are ready to use it.
1. Freedom from debt stress and helps us achieve Financial Independence
The vicious cycle of “debt and desire” can be broken with goal-oriented investing. To get the house of our dreams, a car, an exotic vacation, we might have to rely on borrowing. Debt, no matter how big or small, can create anxiety.
It would be much simpler to cover all of these costs if we had cash on hand. Knowing we won’t have to unnecessarily borrow money to achieve our financial goals gives us peace of mind and independence. Goal based investing enables this to happen.
We can align our investments with specific time-bound financial goals, which helps us achieve financial independence.
2. We can achieve more by saving less
Identifying our long-term investment goals allow us to get started early and build a sizable portfolio while investing less. A corpus of one crore may appear intimidating at first glance, but it is easily achievable if we set a goal early and invest regularly.
3. Goal based investing help in better Portfolio Diversification
We can earn better returns if we match each rupee of our investment to a financial goal. We will almost certainly use a variety of investment products to achieve our goals. This allows us to diversify our portfolio, lowering our risks while increasing our long-term wealth creation potential.
4. General Spending becomes easier due to Goal based Investing
We are saving and investing for the long term following our goals, we don’t have to worry or feel guilty about spending our money on the simple pleasures of life when we use goal based investing.
There is nothing to worry about unless we have abandoned our investment plans due to impulsive spending. Even if we had a setback, we should not be discouraged and should continue our investments if we have a chance.
5. We get better at Investment Management
If our investment strategy has a purpose and is based on a goal, we are more likely to stick to it. We also become immune to market swings and avoid making hasty decisions. Different time horizons and risk tolerances are appropriate for different types of investment options. Goal based investing makes it easier to choose an investment option because we already know what we want to achieve and how much time we have to do it.
6. It Gives our Investment a real purpose.
When we have additional money, we may wonder how to invest, how much to invest, and for how long. Goal based investing answers these questions because we know exactly how much money we will need and when it will be required to achieve our goals, which allows us to figure out how much we will need to invest. Goal based investing can help us build wealth by ensuring we meet our financial goals.
Age-based Investing is a simple rule of thumb. According to the rule, the number 100 minus your age equals the ideal asset allocation for your age. As an example, if you are 25 years old, 100 minus 25 equals 75. If you have Rs. 100 to invest, you should allocate Rs. 75 to equity and Rs. 25 to debt instruments.
Age-based investing is very broad. It might not be appropriate for everyone. The most serious flaw in this approach is that it combines everyone based on their age and ignores their unique life circumstances. Even if two people are the same age and have the same life circumstances, their risk perceptions, goals, and liabilities may differ.
The goal based strategy is more dynamic and tailored to our specific needs, rather than following a thumb rule. Goal based asset allocation is extremely personal. As a result, it will consider your expected returns, risk tolerance, and expected returns.
Before we set our financial goals, we should first assess our current financial situation. We must decide what our money must accomplish in the future.
There are 3 types of financial goals:-
The following are the basic steps of the goal based investing we can get started with.
Step 1: Determine the financial goals.
Defined goals assist us in keeping track of our investments and in churning them when the time comes. We may have multiple objectives, and as investors, we must prioritize our objectives and invest accordingly.
Step 2: Make a monthly and yearly budget.
We must create a monthly budget and estimate how much money we can save in a month to invest. Saving in a disciplined manner entails knowing how much we can invest and staying within our budget at all times. Overspending our budget means less money will go toward our long-term goals and our financial planning will be disrupted.
Step 3: Understand the risk-taking capacity.
Knowing our risk appetite makes choosing the right asset class weights. It will also help us avoid stressful nights when the markets are volatile. We need to take the right amount of risk based on our characters. Too much risk might mean unable to withdraw funds when we 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.
Step 4: Select the investment vehicle.
Once we know our goals, the amount of money we can invest, and our risk appetite, we can move on to allocating our investment corpus to the different asset classes. Asset classes include equities, bonds, real estate, commodities, etc.
One of the most relevant instruments for retail investors in goal-based investing are exchange-traded funds or ETFs. These conveniently let us partake in the returns the markets afford. They come in a range of products such as equity ETFs, bond ETFs, and gold ETFs, and a retail investor can pick them according to the goals she has.
ETFs being passive funds are lower in cost than mutual funds, ensuring we have a larger portion of our money earning for us rather than paying for administrative charges.
In Tavaga, it is all about ETFs, but those who do not have a Demat account can always take the help of index mutual funds and save for one’s goals.
Goal based investing calculators might not be an ideal choice. Every person’s risk appetite and goals are very different from others. Investors must collectively use their risk appetite and goals while selecting and providing a weightage to various financial instruments.
Tavaga helps in simplifying the goal based investing process through a mobile application. Tavaga assists its clients in achieving their investment objectives at a reasonable cost, through customized advice and portfolio performance. It helps in identifying our goals, budgeting our goals, risk assessment process which is highly gamified with no referent to complex financial terms, the timeline required for each goal, and helps us choose a basket of ETFs as our investment vehicle.
With goal-based investing, we are relieved of the need to scour the news for changes in the markets overnight or jump to buy or sell stocks. Once we allocate our funds, we can sit back and let them take their course.
We need to keep in mind that having the right mindset is crucial if we want to succeed at goal based investing. The virtues of consistency, perseverance, and patience are required for this method of investing.
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time.
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