We all have goals in life that we want to achieve. Having goals gives us a sense of purpose. But remember, a goal without a plan is just a wish. This adage applies aptly to our financial lives as well. We need to focus on our financial goals before we invest in different investment options, such as mutual funds.

Without a well-thought-out plan, our financial goals may remain mere aspirations. It’s not enough to simply want to achieve something - we need a roadmap for getting there. Because, at the end of the day, we will need money to make our dreams come true. To bring our dreams to life, we need more than mere aspirations; we require a carefully planned and systematic investment strategy like goal-based investing.

What is goal-based investing?

Goal-based investing is investing in a manner such that we reach our financial goals in a planned and comfortable manner. These goals can be buying a home, planning for retirement, or saving for children’s higher education.

While at it, investors wish that their investments consistently deliver highest possible returns. While we would like all that to happen, it is imperative that we shift the focus from just chasing after returns to focusing on one’s financial goals. Notably, these goals aren’t static; they can evolve with time and circumstances.

How does one develop a goal-based Financial Planning strategy?

Here are the key steps:

Identify Financial Goals: Determine the specific financial goals you intend to achieve. These can range from purchasing a house, planning a world tour, arranging for your child’s overseas education, funding a wedding, or retirement.

Estimate the Financial Requirements: Understand the current cost of each goal, and account for inflation to get a realistic future estimate.

Establish a Time Frame: The timeline is vital as it informs the pace and risk profile of the investments. The financial goals can be classified into short-term (within three years), medium-term (three to five years), and long-term (over five years).

Evaluate Risk Tolerance: Understanding your risk appetite is crucial as it influences the composition of your investment portfolio. High-risk instruments like equities may suit long-term goals, whereas low-risk options could be ideal for short-term objectives.

Select Asset Classes: Based on your time frame and risk tolerance, select the appropriate asset classes. Short-term goals might be best served by debt offerings, while a mix of hybrid and equity offerings could be useful for medium to long-term goals. Seek expert advice if you’re unsure.

Regularly Review and Adjust: Monitor your portfolio at regular intervals to ensure it remains on track. Changes may be needed if goals or risk tolerance evolve over time.

SIPing to Success

Systematic Investment Plan or SIPs are integral to successful goal-based investing as they facilitate regular, small-scale investments towards each goal. Over time, as income increases, SIP contributions can also be proportionally adjusted. For instance, to amass Rs 50 lakhs in seven years, considering a 6% inflation rate and a 15% expected return, a monthly investment of Rs. 34,409 is required. SIPs play a pivotal role in mapping out the exact savings and investment strategy for achieving financial goals.

In conclusion, goal-based investing, with its systematic and stress-free approach, is a robust strategy for wealth creation and goal achievement. Each financial objective becomes an achievable milestone, leading us gradually towards our dream future.

Hemant Pandya, Managing Partner - Greenedge Capital Advisors Pvt. Ltd

Disclaimer

Equities can fluctuate and carry risk. A long-term approach and professional financial advice are recommended when considering investment strategies discussed in this article.