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Goal Based Investing - How to Get Your Strategy Right

Goal based investing

Goal Based Investing - How to Get Your Strategy Right


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March 18, 2020

By : Bajaj Allianz Life

Goals give us direction, vision, motivation and clarity. To achieve success, we must first set goals or life would be similar to riding a directionless boat. Just as in other aspects of our life, it’s important to set goals in our financial life.

Goal based investing and savings can breathe new life to an otherwise haphazard savings and investment plan. If you can master goal based investing, you can become your own financial planner or even do a better job if your strategy is right.

If you have asked yourself: "What am I saving and investing for?" And found an appropriate answer, you probably already have a goal based investing strategy in place. However, having a strategy in place is only the start, you need to implement it and be consistent to derive its benefits. Here are a few tips and tricks to help you succeed in goal based investing.

What is goal based investing?

Goal based investing is based on the premise that financial planning is more effective when you work towards achieving a goal rather than chasing returns. A goal based investment strategy first creates a personalised financial goal according to the investor’s age, income, expenses, savings and risk appetite.

Then, based on that personalised goal and the time period available to achieve the goal, an approximate amount is calculated while taking inflation, expenses and other investments into consideration. Also, one needs to calculate the amount that must be invested regularly (monthly, quarterly, half yearly or annually) to build that corpus in the predetermined time frame.

The next question the investor may ask after that is: Where to invest money? Again, the answer to that question will be based on your desired corpus size, timeframe and risk appetite.

What is the objective of goal based investing?

The primary objective of a goal based investment plan is to meet personal, lifestyle and family goals with a long-term investment strategy. The goal may be purchasing a house, a foreign destination tour, children’s education or marriage, building a retirement corpus or even philanthropy.

A goal based financial plan doesn’t necessarily have to be long-term; it can be a short-term plan as well. The objective of a goal based investment strategy is to give you a well-defined, realistic and workable financial goal to ensure success.

Benefits of a goal based investment strategy

1. Gives you clarity and focus

Every goal based investing strategy starts with the question: Why am I saving and investing for? Saving and investing is a sacrifice. You sacrifice the pleasures of spending today for a better tomorrow, and if you lack motivation, you are likely to discontinue your investment plans.

Goal based investing gives you a clear picture of what your financial goals are. Therefore, you know that the pleasure or satisfaction of the thing that you are investing for far outweighs the ordinary pleasures that you have sacrificed today. For example, if you are saving and investing for a home by denying yourself a foreign holiday today, you know that you are on the right track. The focus and dedication to reach your financial goal also gives you financial discipline and better money management skills in the process.

2. Better investment management

Since your investment plan has a purpose when it’s based on a goal, you are more likely to stick to your plan. You will also remain unaffected by market movements and avoid making impulsive decisions that could jeopardize your financial goals. Choice of funds or asset allocation in ULIPs are also more effective and optimized when it is based on well-defined goals.

Investment horizon is an important factor in selecting the right ULIP fund. With a goal based investment plan, you already know the investment horizon, whether its short, mid or long-term, therefore it’s easier to select the right fund.

Finance experts recommend that for short-term goals between 1-2 years, you need to allocate in debt and fixed-income funds. Mid-term goals, considered between 3-5 years, call for a balanced mix of debt and equity funds. Long-term goals, those with an investment horizon of more than 5 years, can have maximum exposure in equity ULIP funds. The same principles also apply to the selection of investment options.

3. Invest less, achieve more

Identifying your long-term investment goals helps you start early and gives you enough time to build a sizable corpus by investing less. A 1 crore corpus may sound formidable at first glance but can be easily attained if you start with a goal early and invest regularly.

4. Takes the guilt out of spending

Imagine taking your family out for a Sunday and feeling guilty about spending Rs. 5,000 on dining and entertainment. Why should you feel guilty about spending the money that you have worked hard to enjoy the pleasures of life with your loved ones? With goal based investing, you don’t have to worry and feel guilty about spending your money for the simple pleasures of life because you are saving and investing for the long-term.

Unless you have discontinued your investment plans due to impulsive spending, there is nothing to worry about. Even if you had a setback you shouldn’t feel discouraged and continue your investments again if you have a long-term investment horizon.

5. Freedom from debt stress

Goal based investing is an effective way to free yourself from the vicious circle of “debt and desire.” Whether you desire a car; an exotic holiday; a home of your dreams; or a big fat wedding for your child, you have to rely on borrowing. Irrespective of the size and purpose, debt has an element of stress to it.

Compare that with having cash in your bank account to fund all these things. There is peace of mind and freedom in knowing that you don’t have to borrow to meet your financial goals. Goal based investing makes that possible.

Steps to goal based investing

Goal-based investing is a step by step process. Here are a few basics to get you started.

Step 1: Identify and quantify your goals

Start by identifying your financial goals and timeframe available to reach that goal. If you have more than a single goal, divide them into separate buckets of short-term, medium-term and long-term. Then, talk to a financial adviser or research on the capital you require to reach that goal. If you plan to buy a 3 BHK flat after 10 years in your city, you must at least be able to calculate an approximate value while taking inflation and real estate pricing dynamics into consideration.

Step 2: Calculate how much you can save and invest

Once you have quantified your goals (i.e. decided on the capital you want to reach) and figured out the investment horizon, it’s time to calculate how much you can save from your income to invest. If the monthly outflow for the investment is higher than what you can save, you may have to cut down on nonessential expenses.

Don’t forget to maintain an emergency fund with enough cash or a fixed deposit that is able to meet your expenses.

Step 3: Choose your investment instrument

When you speak of goal based investing, it’s not always about the long-term. Human beings have short-term needs and goals as well. For instance, upgrading your TV, home repairs and improvement and holiday are short-term goals that you can save and invest for. Short-term goals such as these may have an investment horizon of 6 months to 3 years.

How to get it right

You know everything about goal-based investing and are ready to start now. But to get it right, there are a few rules that you should always keep in mind and follow them religiously. Here are a few important ones.

• Be absolutely sure about your goals – You must introspect carefully to identify your goals and time horizon before you start. Be absolutely sure about what you want and that you will take all measures to get there.

• Be accurate – Don’t rely on ballpark estimates because it can go wrong. If you are planning to send your child to a medical college, consult a parent whose child is studying in one to get all the details. Take the rate of inflation into consideration when you calculate the investment goal according to the time horizon.

• Know how much you can invest – Be realistic about your capacity to save and invest based on your income, expenses, loans, other investments, etc. Don’t forsake important investments plans such as those for your retirement in the process.

• Determine the average rate of return – When you calculate the average rate or return for a ULIP or mutual fund, refer to the weighted average of returns. Also, remember that rate of return is based on expected compounded annualized growth rate (CAGR).

• Decide on equity exposure – Don’t put all your eggs in one basket. You can invest in both equity and debt instruments to reach your investment goal. Your equity exposure should be depending on your investment horizon.

• Consider your risk appetite – Your capacity to bear financial risk is an important factor in deciding the investment instrument and portfolio distribution. When investing in ULIP, if your risk appetite is high and you have a long-term horizon, you can have more exposure to equity funds. On the other hand, if your goals are short-term, your fund allocation must be more debt-oriented.

• Review regularly – You need to review your investment portfolio regularly to ensure that you are on track with your goals. Not only you can switch funds, you can also top-up your investment for higher returns if your ULIP portfolio is performing well.

Remember that it’s important to have the right mind-set if you want to succeed in goal based investing. Patient, perseverance and consistency are essential and indispensable virtues in this method of investing.

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