SET GOALS FIRST, THEN INVEST

In today’s complex financial environment, investing money judiciously is becoming more and more challenging. That’s where financial planning can play an important role in helping you achieve your investment goals. Having a financial plan in place and a strategy to implement it allows you to allocate appropriate sums for your different needs and requirements.

In other words, financial planning can go a long way in helping you make informed money management decisions to secure your financial future. A financial plan also lays down the allocation of savings across various asset classes to achieve an appropriate risk-reward balance. There are certain basic requirements for approaching financial planning such as defining and setting quantifiable goals, incorporating risk management, understanding the effect of each financial decision and being realistic in terms of expectations.

Defining goals i.e. short-term, medium-term and long-term is critical as it helps in directing the entire effort towards achieving them. Moreover, your investment goals signify what you want to achieve for your family and yourself. Some of the important goals that most of us have include creating a corpus for children’s education and marriage, buying a house, and planning for retirement. Once the goals are established, you must assign a time horizon to each of these goals and quantify them.

This process helps you in deciding ideal asset allocations i.e. invest in debt and debt-oriented instruments for your short-term goals, hybrid options for your medium-term goals and equity and equity-oriented options for your long-term goals. Once the asset allocation is determined, you should focus on selecting investment options that are diversified, transparent, flexible, tax-efficient and have the potential to deliver healthy returns. This is where mutual funds score over traditional investment options like fixed deposits, bonds and debentures. The next step should be to work out the amount that needs to be invested to achieve these individual goals based on an assumed rate of returns. Of course, the assumed rate must be realistic as higher expectations can cause disappointment and a gap in what you may end up accumulating and what you may need after your defined time horizon.

While starting the investment process early and in the right manner is important, it is equally important to monitor its progress. Therefore, it helps if you create a separate portfolio for each of the goals. This ensures total control over your investment and the progress made towards achieving your goals at all times. Remember, if you have a common pool of investments for all your goals, there is every possibility of utilising more money on some of the goals than what you may have originally planned to allocate. This could impact your ability to fulfill other important goals over time.

Another advantage of following a goal-based investment approach is that it makes it easier for you to handle volatility in the stock market. It is quite common to see investors abandoning equities during market downturns. Similarly, many investors start investing aggressively in them when the stock market does well. Needless to say, such haphazard decisions often result in investors either making their portfolio too conservative or too aggressive. While investing conservatively exposes them to the risk of not being able to earn positive real rate of returns, investing aggressively exposes them to the risk of losing a part of their capital.

However, when you follow a goal-based investment approach, you are able to tackle these situations in a much better way. Knowing that you have time on hand to achieve your long-term goals helps in tackling market volatility without losing focus on them. For example, if you are investing in equity funds for your retirement planning, which is say 20 years away, there is no need to for you to panic on account of the market volatility today. In fact, if you are investing in a disciplined manner through SIP, you will be able to turn this volatility to your advantage by benefiting from “averaging”. In other words, investments made during the market downturns in a disciplined manner enhance your portfolio returns in the long run.

As is evident, goal-based investing can ensure investment success on a consistent basis. Moreover, it makes the entire investment process quite simple, yet effective enough, so as to ensure that you have enough money at different stages of your life.