What is the purpose of investing? The answer is obvious, to meet certain financial goals. Naturally, we all have dreams or as per the millennial lingo a ‘bucket list’, which we want to tick off before reaching old age… be it a foreign trip or purchasing your own house. But how do we achieve it?
Here is where the goal-based approach comes in. The idea is simple---investments are made with the objective of attaining specific goals. Once the goals are set, it is easier to get an idea of how much investment is required to meet those goals. Goal-based investments work because otherwise one might fall into a trap of generating the maximum returns without having an eye on the goals.
“Investing for an emergency fund, or a holiday next year is not the same as investing for retirement. The investment choices you make, have a direct connection to the purpose you are investing for. The purpose guides the investment duration and the asset allocation you choose. And therefore the funds you invest in would depend on the goal,” says Sanjiv Singhal, Founder and COO, Scripbox.
He added, “Financial goals are largely determined by your life goals such as deciding to retire by a certain age or preparing to send your child abroad for education. The amount of money required for such goals is determined by the current cost (example: current monthly expenses in the case of retirement and the cost of education today) and when you want to achieve them. Thus, how much you need to set aside today and every month until the goal is achieved will be determined using the those two metrics as well as inflation and the expected rate of return.”
The goal-based approach to investment is simple.
First, one needs to ask oneself what goals one is investing for. This requires a lot of thought and planning. One also needs to prioritise more important goals. Even before one starts goal-based investments, one needs to ensure that one’s risks are covered adequately through insurance. Once the goals have been identified with a time frame, the next step is to select specific investments to meet those goals and start the investment process. It is also important to review those investments on a regular basis and make any adjustments if required.
Let us take a simple example. Suppose, you need Rs 25,00,000 in another 10 years. At an assumed rate of return of 10% per annum and an assumed annual inflation of 10%, you would need to save Rs 12,2024 every month. If you have 15 years to your goal, you need to save Rs 6,031. Goal-based investments also brings in focus how important it is to start investing early to achieve a particular goal.
Goal-based investing has definite advantages. One has a clear idea of how one’s investments are helping them to meet a certain goal and hence it helps to bring discipline to the investment process. Goal-based investments also tend to dissuade an investor from overreacting to market fluctuations and taking impulsive investment decisions.