From the time he was a young boy, Girish had a singular goal – owning a house. He had seen his parents struggle to pay the rent on time, even though their apartment was small and cramped for the family of four. So, when he completed his MBA and began working at at 24, he began creating a plan which would help him achieve his goal by the age of 30. Girish approached his dream through the lens of goal-based investing and it helped him stay focused, putting him on the route to success. So what is goal-based investing and how can you apply it to achieve your own dreams?
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A simple yet effective approach
When you consider saving or investing to fulfil a certain goal, the first thing you must take into account is the future value of the goal. For instance, in Girish’s case, he dreamt of owning in a locality where the property price of the house he desired was Rs. 30 lakhs. However, since his goal was 6 years away, he calculated the possible value of a home 6 years hence considering aspects such as inflation and development. That is when he realised that his goal’s value, in the future, would be around Rs. 1 crore. So, when he started investing for his goal, he began investing with the aim of building a corpus of Rs. 40 lakh, and supplementing it with a home loan at the time of purchase. With a monthly investment in an equity mutual fund scheme, Girish managed to make his dream come true.
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Steps you should follow
Let us take a look at the steps Girish followed to achieve his goal. Investors with a specific goal in mind can follow the same to attain success via savvy investing.
1. Identify Your Goals: First and foremost, you need to be sure about the goals you are working towards. For every individual, there may be a variety of goals they are focusing on, at any given time. For instance, while Girish did want to own a house by 2022, he also wanted to purchase a car by 2025 and send his parents on a foreign trip in 2028. Once you identify your goals, prioritize them, based on the value and the time horizon, to make the process simpler.
2. Create Buckets for the Goals: Once you list down your goals, bucket them into short-term, medium term and long-term as this will help you pinpoint the investment strategy required to achieve them. Short-term goals would require fulfilment in 6 months to 2 years, medium term would be between 3 to 5 years and long-term goals have a horizon of 7 or more years.
3. Allocate your Funds Wisely: Now you know both, your goals and the timelines in which to achieve them. Here comes the important part of the equation – asset allocation. You need to create portfolios based on your financial goals, risk appetite, time horizon and return requirements and choose from debt, equity or hybrid funds. So, for your long-term goals, you can invest in equities and work on reducing the allocation as you near the completion of your goal. This approach will help reduced the risk of market volatility on investment. As the goal near transfer the corpus to a debt or a conservative hybrid fund.
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4. Girish chose a mix of equity and hybrid funds as he needed high returns to fulfil his medium-term goal. He also diversified his holding across equity funds like small cap, mid cap and large cap, to mitigate risk and optimise returns.
5. Review and Rebalance Frequently: If you think you can sit back and relax after asset allocation, you are wrong. To ensure that your portfolio is performing in line with your requirements, you must review and rebalance it at regular intervals. It is advisable to undertake this task once every year.
While Girish had set himself a mammoth task, he managed to achieve his goal through diligent goal-based investment planning. He is continuing to follow the same to meet his other goals, like purchasing a car, planning a foreign trip, and even retiring early. You can also follow the above-mentioned steps and work towards achieving your goal in a realistic manner, without stressing out regarding your finances unnecessarily.
