Most individuals buy financial products randomly without a proper plan, i.e buy financial products without giving much thought whether they are going to help them in meeting the goals. Most of us have different financial goals like educating our children, daughter’s marriage, buying a house, create wealth and planning for comfortable retirement etc. We have to achieve these things from our savings, but savings alone may not be enough. We have to plan how to invest these savings so that we are able to meet the goal. Goal based investing is a planned and disciplined approach to save money to achieve personal financial goals. Setting financial goals for our investments will give those investments a purpose and will make it easier to choose our investment vehicles.
Types of Goals: Before starting our investment process, financial goals have to be sorted into short term goals, medium term goals and long term goals. We need to prioritize our goals so that we can save for the ones we find most important.
- Short to medium term Goals: Monthly needs, school or college fees, emergency needs, payment towards insurance premium, clear debts etc.
- Long term Goals: Children’s education, buying a house, funding children marriage, wealth creation to a defined level, retirement etc.
Process involved in Goal based investing:
- First step in goal based investing is to identify our financial goals, their time frame and how much will it cost today if we want to fulfill our goal.
- We have to determine the future cost of our goal, as the cost of goal may not be same in the future due to rising inflation and also higher cost of living. So we have to calculate our future cost of goals.
- Then we have to evaluate our current financial status and develop a plan of action, i.e how much we need to invest to reach our goals at a particular rate of return. Choosing the right asset class depends on the years required to meet our goal.
- After implementing our financial plan, we have to review our progress, reevaluate and revise our plan as per changes to our financial status.
Primarily, the asset class we choose depends on the time required to meet our goal. Apart from saving, investing and fulfilling dreams, one should ensure that they have adequate cover for life and health, and also plan accordingly for taxes.
How to plan to reach our goals?
Most people decide to start saving and investing regularly but forget to make the investment on a timely basis or postpone investments. To meet our financial goals effectively, we have to invest our money wisely and regularly. There are different types of Mutual funds that help to achieve our objectives like childrens’ education, dream house, retirement, meeting liquidity requirements etc. There are different mix of products available in mutual funds where we can park our short term funds for liquidity needs and long term funds for wealth creation. Choosing the right fund is the first step in achieving our financial goals. The choice would depend on tenure of investments, willingness to take risk and liquidity offered.
Systematic investment plan (SIP) in Mutual Funds is a systematic way to invest small amounts regularly to create a lump sum amount in the future. It is always easier and better to make small investments at regular intervals rather than make one large investment at one go. Also SIP’s can be automatically debited from the Savings Bank a/c. Thus, without remembering, investments are made every month. A SIP can be started in any Mutual Fund Scheme like Equity, Balanced, Debt, or Liquid, but it depends on the investors time frame and risk taking capability. Rupee cost averaging and power of compounding works better if we choose to invest through SIP in the long run.
For short term Liquidity requirements: If your goal is short term, like meeting monthly expenses, clear dues in near term, payment of insurance premium etc. then liquid/ Ultra Short term mutual funds are a good option as these funds invest in fixed return instruments of short maturities. Their main aim is to provide a high level of safety and earn a modest return.
Medium term: Can invest in balanced funds- If you are looking for meeting medium term goals like children education, marriage expenses etc, balanced funds would be the best option as these funds divide the corpus between debt and equities. Because of lower exposure to equities, the balanced funds returns carry lower level of risk than equity funds and offer steady returns
Long term: Can consider investing in equity oriented mutual funds: Investors in their 20s and 30s and for those whose retirement is a good 25-30 years away can invest aggressively in equity funds to meet their long term goals like buying a house, wealth creation and retirement. Equity funds are risky but they also have the potential to give high returns. In the long term, equities tend to outperform all other asset classes and are more tax efficient.