Most of us invest without realising why we are investing. It sounds ironical, isn’t it? But it is true.  We actually plan our vacations more meticulously than our investments.  We don’t have goals linked with our investments and hence we do not have any benchmark for comparison. By goals I mean we do not categorise our investments into different time spans like short, mid and long term funds. For example, if we have a lump sum to invest we should plan for an amount, which will be available to us at a short notice. Medical emergencies and other contingencies and investments in fixed deposits or cash or liquid funds are called short-term funds. Anything like a plan to buy a car or a vacation falls into a category of a mid-term fund requirement. One can typically invest in bond funds or large-cap funds for a minimum period of three years to five years.

Funds that envisage more long-term requirements are called long term funds. For example, children’s education, their marriage or annuity corpus for ourselves, fall under this category. These funds are usually for a period of five years or more with careful fund selection and periodic review. You may need professional help to plan and execute mid or long-term investments goals. Any requirement for creating wealth actually envisages long term investing.

SIP is the best method for meeting goal-based wealth targets, whereas for lump sum investments it is best deployed through STP route. STP will multiply your wealth and lower the chances of any loss of capital.  However, keep in mind that SIP investments should follow a diversification into different asset classes and tenures.

Many a times I have ask my clients why they are investing and usually the answer I get is that they have some surplus funds, which they want to deploy into some investment instrument until some better avenue is available.  This got me thinking that one works hard to accumulate wealth and  have a  plan for accumulating wealth. However, they usually do not have a plan or goal in mind to invest this hard-earned money. I will illustrate this with an example. Let’s say I want to change my car three years later and know that today’s cost of the new car is Rs10 lakh. It is obvious that the price will increase in three years and maybe the Rs10 lakh car will cost `11 lakh then.

Here is where the power of goal planning comes in. If I start an SIP today for Rs20,000 because that’s what I can afford without straining my finances for three years into an equity fund, which gives me a conservative 12 per cent return per year then I would have put in Rs7.2 lakh as capital and get an amount of Rs8, 62,000 at the end of three years. This can be used to pay a down payment on the new car and the rest Rs2, 38,000 can be financed by a vehicle loan.

My loan burden goes down substantially with the maximum down payment. The reason I have taken an example of an SIP of Rs20,000 and not of Rs30,555, which is Rs11,00,000 divided by 36 months is that I have to consider my affordability as well.

One can start an SIP of any amount. I wanted to illustrate the goal-based planning and the discipline of setting a sum aside each month for a future goal. Also, the power of compounding is evident here giving me a tidy sum of Rs1,42,000 in three years taking quite conservative estimates. 

However, a word of caution - the return has been estimated and not a certainty although this was just an example of how an investment based on goal planning is achieved. The same principle can be used to plan almost any future expense, be it children’s education, marriage, buying a house or for retirement. If you have multiple SIPs running, plan as per your goals. What I mean is that an SIP meant for retirement has to have a different fund investment. The return expectations are higher and so is the possibility of a lower loss as the tenure increases. Even a lump sum investment can be planned, keeping in mind the goal and the duration. One can also have a combination of lump sum and an SIP investment for meeting one’s goals.  Happy Investing!

The author is a wealth advisor and Founder, Tangerine Ideas