Goals Based Investment Approach vs Market Situations

We all know that driving a car without knowing the destination will land you nowhere. Similarly, investing without clearly defining your goals/objectives will not give you the desired results.

A Goals Based Investment Approach is process of allocating money to achieve a predefined objective. It could be saving for a vacation, buying your car, building your dream house or accumulating a corpus for retirement. Clearly knowing what you want helps to identify and focus on factors that can affect the goals.

Goals Based Approach for Child’s Graduation

For instance, if your goal is to accumulate for your child’s graduation, a goal based approach will force you to answer the below questions;

How many years do you have?

You will be able to tolerate high fluctuations and invest in higher return generating assets like equities if you know that you have more than 5 to 7 years for your goals.

Importance of risk profiling

A goals based investment approach will help you understand the importance of risk profiling and will assess three important parameters; your capacity to take risk, willingness to take risk and need to take risk. A holistic understanding of these parameters will help you arrive at the right asset allocation for your investments.

Destination of Study

Where would you like you child to study? If there are no good colleges in your city, you will have to budget for hostel and living expenses.

Impact of Inflation on Education

Education inflation in India has been quite high compared to the general inflation. You will be able to consider the right inflation number for this goal and ensure that you don’t fall short.

Goals Based Investment Approach v/s Market Situations Linked

The current market volatility has put considerable emotional strain on investors. When the market tanked by 35% in March 2020, a lot of investors panicked and liquidated their investments. They are now regretting seeing a close to 50% upside from the March lows. Most investors fail to understand that timing the markets are very difficult and a futile exercise. We have seen that markets rebound eventually and make up for the temporary losses. In fact, it is the nature of the market to be volatile and timely market corrections are considered as a healthy event. Read here to understand what happens if you invest during a stock market correction.

A Goals Based Investment Approach helps you overcome these temporary events and take advantage of market corrections. When you know that the market always recover and your goals are still far away, you would be tempted to invest more at favorable prices and valuations instead of panicking and selling out. Systematic investments done during these times help you increase the returns on your portfolio over the long run and will definitely reduce anxiety.

Goals Based Investment Approach will clearly define the intervals and trigger for re-balancing and need to take action on your portfolio. With your financial planner defining your risk profile and ideal asset allocation, you know exactly what percentage of investments should be held in equity, debt, real estate etc. It is common for this to vary as time passes. A good plan defines the deviation at which you will need to take action and re-balance your portfolio.

Equities are a great tool to build wealth in the long term. They have certainly helped individuals achieve their goals. While they are predictable in the long run (more than 7 years), they are extremely volatile in the short run. This is precisely why it is important to change your allocations as you approach near your goal due date. A goals based investment approach will illustrate how you can reduce exposure to equities and ensure adequate liquidity when you goal is due.

Steps In Goals Based Investment Approach

  1. Identify your goals.
  2. Prioritize your goals and know when they are due.
  3. Understand your risk profile or reach out to a financial planner if you are not clear.
  4. Formulate the right asset allocation matrix based on your risk profile.
  5. Study and choose the right investment instruments in each asset class. For instance, in equities you will the below options;
    • Direct equity via stocks/share on the stock market – You need the right skill sets to identify the right stocks and track them, increase or reduce the allocation to each stock based on performance and future potential.
    • Mutual Funds – You have the option to invest in different types – Large Cap, Multi-cap, Mid Cap, Small Cap and many others. The advantage of a mutual fund is professional management. You get a fund manager and his team to track the different stocks and invest on your behalf.
  6. Set monitoring frequency and triggers for re-balancing your portfolio. This is just like regular de-weeding of your garden. Without this, you will lose track of your investments and your portfolio will start to under perform.

Connect with a SEBI Registered Fee Only Financial Planner to help you with your goals. Book a Free Consultation Call today.


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