This is true for investments too. Most investors find themselves short of funds when they try to tap
into their savings / investments on the proverbial rainy day. If you talk to any financial
advisor or a seasoned investor, the one thing that they will say is – ‘it all begins
by defining your investment goal’. Having an investment goal ensures that you don’t
scatter your money all over the place and avoid doing things without thinking about them.
On the other end of the spectrum are investors who think too much about investments but are too
confused to make a choice and start investing. This is counterproductive too as the more you
delay your investments the lesser opportunity you give yourself to create wealth.
Goal based investments to the rescue
In both the scenarios above, a solution that can work wonders is a goal based investment
plan. In simple words, as an investor, you determine one or multiple financial goals
that you want to achieve through your investments. While an investment objective starts
with defining the corpus of funds required, time horizon, risk preference and regular /
lump sum returns requirement, goals are more target oriented. Once these goals are
defined, you can look for investment options that match your goals and eventually narrow
down to the portfolio that you can begin investing in. Some common investment goals are:
- Tax benefit
- Easy liquidity
- Stable Income
- Wealth creation
- Retirement Planning
Each of these goals intrinsically defines the type of investment option that will help you
achieve it. Goal-based investment gives a sense of direction to your financial plan.
Investment goal – Tax Benefit
Many investors look for investment options that offer tax benefits. This can be in the form
of tax deductions or tax exemptions. Investing for tax benefits can be made in equity or
debt. These options offer different growth prospects and have varying risk elements
attached to them apart from offering tax deductions and/or exemptions. Ensure that you
align your choice of products with your overall portfolio structure.
For example, if you are a risk averse investor and want to invest with the purpose of tax
benefits, then you can opt for a Public Provident Fund (PPF), Employees’ Provident
Fund (EPF), National Pension System (NPS) or certain fixed deposits which are tax
efficient and offer decent returns. On the other hand, if you are willing to take
certain risks, then you can opt for Equity
Linked Savings Scheme (ELSS).
Easy Liquidity
Cash is known as the most liquid asset since you can buy almost everything using cash. In
investments, liquidity is the ability to be able to convert an asset or an investment
into cash quickly. This is a delicate area and needs to be treaded carefully.
Once an investment is made, if you are able to liquidate it easily, then chances are that you
might end up breaking all your investments prematurely and not achieving your financial
goals. On the other hand, in times of emergency, you should be able to sell your assets
and get the funds too.
As an investor, it is ideal to have a certain part of your investments in assets that can be
sold off quickly if the need arises. Also, you must dedicate a certain portion to
non-liquid investments which will help you build a corpus.
Stable income
Some investors look for a regular source of income from the investments made by them. This
income can be in the form of interest earned or dividends received. As an investor,
there can be a variety of reasons to opt for a stable income as an investment goal.
Regardless of the reasons behind it, if you are looking for a stable income from your assets,
then you must look at the investment options carefully to understand the underlying
risks associated with them. Any investment in the market comes with risk and it should
not be ignored as a small dent to your capital can affect your monthly income
exponentially. You can look at mutual funds designed for regular payouts or dividend
paying stocks or fixed deposits among the other options available.
Wealth creation
Wealth creation is arguably one of the most common investment goals in the world. People have
realized that creating a corpus needs investment with a plan, focus and determination.
This includes aligning your risk preference, time horizon, age, type of employment and a
host of other features.
You might have a wealth creation goal for a host of reasons like children’s education,
buying or renovating your home, etc. One of the most important aspects of wealth
creation is to be clear about the final amount that you wish to target. It creates focus
and makes the goal tangible.
Employing the services of a financial advisor is usually preferred by investors looking to
create wealth as the strategy needs to be flexible and in sync with the market trends.
Retirement planning
One of the core reasons why investment found a place in people’s lives was the desire
to have financial independence after retiring from the workforce. With ever-increasing
costs of living, shrinking family units and children opting for opportunities around the
world, people try to plan for their retirement so that they are self-sufficient and
don’t have to depend on anyone when they are old. Many people also desire to
retire early and travel the world or live a life they envisaged with their loved ones
without having to run the 9-5 hamster wheel.
Planning for retirement should ideally start early so that the magical compounding of
interest can work wonders on your savings. Albert Einstein once called compound interest
the eighth wonder of the world. Simply put, the longer you allow your money to stay
invested – the better returns it fetches since interest earns interest too.
Finally…
Here are some pointers to help you get started in your goal based investment journey:
- Ascertain the goal, its time-frame and your risk preference.
- Incorporate a practical inflation rate. The higher the better.
- Based on your risk preference, decide on the equity exposure.
- Seek assistance from a financial advisor. If you do not have the time or inclination
for it, then it may be prudent to start a Systematic Investment Plan (SIP).
- For wealth creation, get accurate target amount. Estimates can leave you short when
the need arises.
- The amount of money you can invest should be determined after considering expenses,
loans and any other fixed outgoings.
Remember, think well and determine concrete and tangible goals for investment. This ensures
that you know exactly where you are headed. Once your goals are set, then create a
strategy to approach them and start investing.
