Article

Goal-based investing: How does it work?

11 May 2017 Nutan Gupta

New Page 1

Goal-based investing is just a new way of approaching wealth management. It focuses on investment from a more goal-oriented outlook. You have specific goals in mind that you want to achieve at the end of your investment tenure. And all your investment would channelize in a direction that leads you to that particular goal. There could be a variety of goals you would want to invest for. This could be saving for your child’s education, buying a new home, gifting your spouse on your silver jubilee or saving for retirement.

How does it work?

Traditional form of investing involved people who used to invest their hard-earned money for returns. But, they were not sure about the returns and their investment plan was designed to be risk-oriented. This means their investments had the potential to perform better than the market but wouldn’t be enough for meeting a goal.

Goal-based investing works towards compensating for this. It aims to outperform the market keeping in mind your threshold for risk. For example, you are 30 years old when you decide to start saving for your retirement. You intend to retire when you complete the age of 60 years. Let’s assume you are currently earning Rs. 65,000 and you are willing to invest Rs. 12,582 towards your retirement plan. Even if you calculate the expected inflation at 5% per annum and expected return on investment at 7% per annum, you would have saved a massive corpus. At the end of the tenure, you would have saved for yourself a sum of more than Rs. 1.6 crore.

In goal-based investing, all your individual asset pools are stitched together to focus on your specific goals. To explain this with an example:

Goal

Retirement

Education

Asset Allocation

10% equity, 90% fixed deposits

50% equity, 50% fixed deposits

As you can see, goal-based investing would provide you an asset allocation that supports your goals and helps you achieve them in real time. The risk here is viewed in terms of out-performing the market. It is instead viewed in proportion to how short you would fall in achieving your goal. It will help you get back on track to meet your goals in time.

A short-term goal must have investment in safer options like debt funds. Long term goals like retirement or college education of your new-born kid can have investments in high-risk-high-return type of investment assets. Once you are clear about your goals, a goal-based investment plan can be made. This could be customized according to your risk profile and time taken to achieve your goal. Since, this can be different for different goals, you need to plan this very meticulously.

How should you respond to this?

The best way to tackle this is to know exactly what you need. Be clear and define your goals. Do you know how much amount would you need to renovate your home? Do you know what would be the cost you would have to spend for your child’s marriage? Do you know how much savings you would need after retirement?

Think about all these questions and take into consideration all the factors affecting it. This could involve taking into account the economic condition as well as the inflation among other factors. A good goal-based financial planning would help you answer all of this. This would help you see tangible progress towards your goals. Avoid making impulsive decisions as per market conditions.

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Goal-based investing: How does it work?

11 May 2017 Nutan Gupta

New Page 1

Goal-based investing is just a new way of approaching wealth management. It focuses on investment from a more goal-oriented outlook. You have specific goals in mind that you want to achieve at the end of your investment tenure. And all your investment would channelize in a direction that leads you to that particular goal. There could be a variety of goals you would want to invest for. This could be saving for your child’s education, buying a new home, gifting your spouse on your silver jubilee or saving for retirement.

How does it work?

Traditional form of investing involved people who used to invest their hard-earned money for returns. But, they were not sure about the returns and their investment plan was designed to be risk-oriented. This means their investments had the potential to perform better than the market but wouldn’t be enough for meeting a goal.

Goal-based investing works towards compensating for this. It aims to outperform the market keeping in mind your threshold for risk. For example, you are 30 years old when you decide to start saving for your retirement. You intend to retire when you complete the age of 60 years. Let’s assume you are currently earning Rs. 65,000 and you are willing to invest Rs. 12,582 towards your retirement plan. Even if you calculate the expected inflation at 5% per annum and expected return on investment at 7% per annum, you would have saved a massive corpus. At the end of the tenure, you would have saved for yourself a sum of more than Rs. 1.6 crore.

In goal-based investing, all your individual asset pools are stitched together to focus on your specific goals. To explain this with an example:

Goal

Retirement

Education

Asset Allocation

10% equity, 90% fixed deposits

50% equity, 50% fixed deposits

As you can see, goal-based investing would provide you an asset allocation that supports your goals and helps you achieve them in real time. The risk here is viewed in terms of out-performing the market. It is instead viewed in proportion to how short you would fall in achieving your goal. It will help you get back on track to meet your goals in time.

A short-term goal must have investment in safer options like debt funds. Long term goals like retirement or college education of your new-born kid can have investments in high-risk-high-return type of investment assets. Once you are clear about your goals, a goal-based investment plan can be made. This could be customized according to your risk profile and time taken to achieve your goal. Since, this can be different for different goals, you need to plan this very meticulously.

How should you respond to this?

The best way to tackle this is to know exactly what you need. Be clear and define your goals. Do you know how much amount would you need to renovate your home? Do you know what would be the cost you would have to spend for your child’s marriage? Do you know how much savings you would need after retirement?

Think about all these questions and take into consideration all the factors affecting it. This could involve taking into account the economic condition as well as the inflation among other factors. A good goal-based financial planning would help you answer all of this. This would help you see tangible progress towards your goals. Avoid making impulsive decisions as per market conditions.