Step by step guide to goal based investing

May 7, 2018 . Ashwini Arulrajhan

Most of you save without attributing those savings to specific requirements you may have. When you save towards specific goals or aspirations it is called goal based investing. You may have multiple goals in mind. Some short term, some long term, some less important and some others more pressing. But what happens when you actually get down to planning for them is that you may get bogged down by the complexities. Here we tell you how breaking down the process into simple steps will take you one step closer to your goal.

To plan or not to plan

We all know some events will certainly happen, like education or retirement. But we seldom plan for them. Take retirement, for instance, it is the least planned for goal. This happens with other important life goals as well. As you near the goal, you may simply want to get done with the problem in hand, not considering whether the financial decision is prudent. It could be taking loans with high interest rates or withdrawing from long term investments, which could very well be avoided had you planned.  Being prepared will not only leave you in a better mental state but you will also be able to squeeze in other less important goals which you may have otherwise given up on.

For some, the idea of sitting down to plan for the long term may seem daunting. Multiple goals with narrow timelines may give you the jitters. You’re not sure whether you’ll be able to meet all these goals without compromising on your existing lifestyle. Many a time, you are put off by the enormity of the amount needed for your goals. And in turn, you may want to postpone dealing with it or you may just give up on a few goals. But it might turn out that they are very much doable! Being invested in the right instrument in a planned manner will make sure you achieve your goals.

Taking one step at a time

We’re going to break down the process of goal planning into easy steps.  This simple guide will help you plan your future better.

Step 1: Identify your goals

Identifying goals may seem like an effortless task. But it is the first and most important step in goal planning.  All of us have life goals, such as education, marriage and retirement. Make a list of the goals. Rope in your short term, less important goals as well. It may be a foreign trip you want to take in the next year or an expensive gift for a special someone. Whatever it may be, if it is important to you, it deserves a place in the list. Distinguish your long term goals from short term ones and draw a timeline for them.  Depending on their importance, some of them can even be pushed farther in the timeline, if you are unable to save up for them now.

Step 2: Quantify your goals

The next step is where the monetary aspect comes in. It is not enough if you know that you want to retire by the age of 55. You also need to envision the kind of lifestyle you want and will be able to afford when you do so. So for every goal, you need to know the approximate money you will need to accumulate. If the goal is education, you have to find out how much it is going to cost. You do not have to be worried about how much your goal will cost 5 years or 10 years later. Figure out the amount you will need in today’s value and then account for inflation. Inflation for the long term can be assumed at around 6%. You can make use of  these calculators for the purpose.

Step 3: Figure how much you have already saved for the goal

Now that you know how much you need for your goal, the next step is to figure how much money you to need to set aside for the goal. Even before giving a structure to your investments, you would have still saved up some of your surplus. After leaving aside some money for emergency purposes, you can then tag these investments for different goals. Older investments can be used for nearer goals and vice versa.

Step 4: Find out how much you have to save to achieve the goal

After that is done, you get to down to calculate how much you need to invest over and above your existing investments. Based on how far or how close your goals are, you need to have realistic return expectations. If your goal is long term, you would put a good chunk of your money in equities and let it grow. A realistic expectation would be to take the real GDP growth (over the past few years) and add an average of last few years’ inflation. For example, if GDP is 6.5% and inflation is say 6%, a 12-13% return expectation is realistic. For shorter time periods, you would have to save using lower risk instruments such as FDs or debt funds with lower return potential. A return assumption of 6-8% annually would be prudent.

Based on the return assumptions, you will have to calculate how much money you need to start investing now to reach your goal. The calculators linked above will help you do that. You can always talk to your advisor to get into more details.

The amount you need to invest may look huge, in some cases. But remember, your earning capacity is not going to remain the same. The calculation assumes that you invest a constant amount throughout the tenure. Stepping up your investments will make a major difference to the corpus you can accumulate. For instance, a SIP of Rs.5000 run for 10 years with a return of 12% will amount to around Rs.11.61 lakhs; whereas if you step it up by Rs.2000 every year, you will end up with Rs. 27.08 lakhs.

Step 5: Build a portfolio using the right instruments

The final step is to choose the right instruments for investing based on your risk appetite and number of years left for your goal. The right balance between the two will ensure that you don’t take too much risk just so that you reach your goal nor do you fall short of your goal because you let your money lie around in low-risk alternatives like FDs for long time periods. Return generating capacity of different instruments is one of the important factor to consider. But that does not mean you invest in risky instruments in the hope of reaching your goals faster. You should know where taking risk will pay off and where it might bite you.  

The best way to start off goal planning is to save up for retirement. Even if you do not have a good estimate of what you need, the power of compounding when you start early, will work wonders for you. This will provide you the much needed confidence in the benefit of goal planning.


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