Goal-based investing definitely works for you: Just give it a shot

There’s always a purpose behind every investment. Have you ever asked the question: What am I exactly investing for? If the answer is Yes, goal-based investing (GBI) is for you.

GBI is relatively a new investment approach that’s gaining mindshare among investors. The primary objective of GBI is to help investors meet their personal and lifestyle goals for long-term investment horizon. These goals could be children’s higher education, children’s wedding expenses, retirement planning, buying a house, luxury holidays and philanthropy. Every individual’s financial requirement varies based on multiple parameters such as financial goals, risk appetite or time horizon which makes the role of GBI even more important, given that it follows a highly customised approach of investing.

It is also to be noted that an approach of beating the market and gaining maximum return does not necessarily always work because of multiple factors like stock selection, entry/exit timing, macro-micro economic situation, sector performance and company performance. These factors may impact the returns at the time of need.

Now, goal-based investing significantly helps address this by putting your goals at the centre of the advisory, planning and investment process. By doing so, it makes certain that your goals are met with more certainty and accuracy.

One can initiate goal-based investing by following these steps which I will explain in detail.

Identify your goals

Quantify your goals

Figure how much you have already saved for the goal

Find out how much you should save to achieve the goal

Build a portfolio using the right instrument

and a broad timeframe for them. This first step is extremely important in knowing your financial needs along with indicative timelines. It also helps divide your goals in three primary stages -- short-term, mid-term, and long-term categories. To a 30-year old investor, priority for retirement planning may be completely different from a 50-year old investor.

Once you have identified the goals, consult your financial adviser and find out how much each goal will cost at the time of investing. Try to be as sharp as possible and do not forget to keep your lifestyle choices in mind. Post this; add reasonable inflation rates to arrive at final cost at the time of the need (i.e. future). While calculating the inflation, it is advisable to consider higher rate. Once this exercise is done, you will be able to quantify your goals.

The next step is figuring out how much you have already saved. These investments can be in the form of fixed deposits, mutual funds, gold, real estate, money back insurance or bonds. You can invest this surplus money in different goals, at the same time; strictly keep a separate money kitty for contingencies. Your financial adviser can assist you in streamlining and structuring your investments.

The fourth step is to find out how much more you should save to meet your financial targets. Based on risk assumption, inflation and duration of your investments, the returns could vary. You also need to consider that investments may increase or decrease in future. For instance, post home loan closure, you will have additional funds at your disposal to invest.

Once you have identified your goal, quantified your goal, figured out how much you have saved, and how much more you want to save, it is time to build your portfolio with right investment instrument to achieve the set financial goals. There are two major financial instruments which are considered for investments: A. Equity and B. Debt. You can seek your financial advisor’s assistance to decide on investment composition across instruments on the basis of your risk appetite, investment corpus and timeframe. It is advisable to have more equity exposure if you have longer time horizon for goal achievement. Low risk instruments such as fixed deposits, NCD and bonds also give handsome returns if chosen wisely.

The success of GBI is measured by how well the growth of the portfolio has matched against the defined goals.

The benefits of GBI are many-folds:

It helps avoid impulsive decision making because the end goals are defined. A lot of effort and planning even before the investment begins that brings clarity to the investor.

It helps protection against market fluctuations. The purpose of GBI is more than garnering maximum returns and as long as it meets the defined goals the investor should not worry about market fluctuations.

It helps build greater commitment and delivery. GBI brings sincerity in investors because of clearly defined goals and planning.

It brings peace of mind, as the investor is not pulled in the mad rush of frequent fluctuations and the pressures of the market.

Last but not the least, with my experience in financial markets and financial planning process, my only advice to investors would be to not get carried away with random advice, do a thorough due diligence, take professional advice and invest wisely. GBI puts individual investor’s need at the core. This YOU-First philosophy asks what you need, how much you need, by when you need and accordingly help deliver results.

Give it a try. It works!