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Plan your financial life with purpose – the importance of Goal based Investing

Updated: Mar 20

Your stock/mutual fund portfolio is doing well and you are happy it has beaten the market.


But what next?

Are you going to liquidate the investment in the name of booking profits or continue to stay invested? If you redeem your investments, what will you do with the money? I am sure you will pause to think over. So, will majority of the investors who are clueless what to do with their investments. For most investors, picking the right stock or mutual fund is crucial for successful investing. If you say, my portfolio has beaten the benchmark, it doesn't bear much weight. But if you say, I bought a nice house, educated my kids well and have a good retirement kitty all done through goal based investing, then it makes a lot of sense. Effective goal planning is the medium that connects your wealth and your objectives/desires, whatever you call it. Here, we are referring to financial goals, goals that can be accomplished with money.

One of the crucial parts of the entire financial planning exercise is goal setting. Financial Planners dedicate a lot of time with clients in defining and setting goals. Everyone has financial goals, the usual ones like buying own house, children education & marriage, foreign travel, etc. However, majority of the people do not consciously strive towards achieving them. Clearly defining and setting goals is the first step towards turning desires into reality. Here is how it can benefit your financial lives:

  1. Provides clear direction:

A dream is just a dream. A goal is a dream with a plan and a deadline Harvey Mackay.

Financial goal setting not just means defining your goals. It needs to be given a time frame and a cost is attached to it after taking into account the effect of inflation. This provides a clear direction to a goal. For example, suppose you say “I want to buy a plot of land and build a vacation home in Alibaug.”A goal not clearly written and defined is just a mere wish, as stated earlier. Now, suppose you redefine it “I want to save Rs.50 lakhs to buy land & build a vacation home in Alibaug over the next 10 years. For this purpose, I intend to create this corpus by investing in equity mutual funds through the SIP route every month over the next 10 years assuming a 10 per cent return p.a.” This was a simple hypothetical example. For any goal to be clearly defined, you thus need to ask yourself

(1) How much money would you need to achieve your goal (in current costs)?

(2) How much will it cost in the future taking into account inflation?

(3) How much time is left to save & invest for the goal

(4) How much do you need to start investing today to achieve the goal assuming a reasonable rate of return?

  1. Offers a perspective: Once a cost is attached to any goal, the focus is clear on working in a particular direction towards achieving the target corpus. If you consider the above example of accumulating Rs.50 lakh fund over a period of 10 years, you can analyse how much current savings can be contributed and how much needs to be collected over 10 years. Goal setting thus provides a clear perspective between the current & future savings and how to bridge the gap.

  2. Helps to prioritise: There are need based goals like buying a home, retirement, etc. which you cannot compromise on. The more you delay, the more it becomes difficult to achieve them. Then, there are the aspirational ones like buying a BMW, travel abroad, which people desire to accomplish. There are too many goals, especially in the working years and allotting resources to all of them can be a tough job. Allocating a major portion of the savings to just one goal can affect other important goals. Goal setting thus helps to prioritise in order of importance. In doing so, you may realise that you need to postpone some of the lesser important goals. For e.g., saving more for your retirement would be a priority in your 50s then building a vacation home. Goal setting thus helps to strike a balance between various goals so that the crucial ones do not suffer and affect other major areas of financial life in the future. It also provides a reality check that some of the goals may not be achievable (at least in the present situation) vis-a-vis the limited savings on hand and savings need to increase to accommodate all the goals.

  3. Returns are secondary: During times of sickness, you do not go to the chemist first and then approach the doctor. Likewise, in goal based investing, the starting point is not about choosing financial products which offer the best returns. It is about clearly defining and prioritising your financial goals. A clear focus is then established on how to go about achieving them. Expectations are thus set in terms of accomplishment of goal rather than earning high returns. For an investor, the focus shifts from tracking short term returns to tracking the goal itself.

  4. Helps in the right asset allocation: The choice of investment depends upon the time horizon of a goal. For a short-term goal (usually less than 5 years) financial planners recommend fixed income options to invest in, like bank deposits, recurring deposits, etc., For long term goals (usually more than 5 years), equities (shares/mutual funds) are recommended, as the volatility evens out during the long term horizon of a goal. Goal setting can thus help in choosing the right asset allocation depending upon the time frame of goals to be achieved.

Goal based investing is not just about defining financial goals and allocating resources to them. It is an ongoing process and one needs to do a periodic check-up whether they are on track. The crucial thing is to not lose focus. Further, goals are dynamic and can change at various life stages. For instance, birth of a child changes financial priorities. So, it is important to revisit your goals periodically.

Like we have personal & professional goals which inspire us to succeed in life, financial goals motivate us to invest prudently and stay the course till they are achieved. It is a sure shot way to convert dreams into reality!

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