Financial Planning

Aligning Investing with Life Goals

For most people in India, savings come naturally and even millennials understood the benefits of savings in the last year. But investments still seem to be an alien concept.

People do not consider investments for the sake of making investments, but for all different reasons:

To save tax – mostly insurance policies.
Because it is mandatorily deducted from the salary (EPF).
Because one of your relatives had to complete her LIC policy goal.
Because papa said, “deposit extra cash in FD to earn more interest.”
Because you bought gold (or nowadays Bitcoin) in hope that prices will surge.

Investments are different from savings, and they are certainly different from just depositing money or buying gold or property. An investment is always made with a clear plan insight and a clear mandate to meet a specific goal.

A few things that are clear from the above are:

Parents and friends play ‘investment advisors.’
People do not define specific goals and moreover do not know how much they will cost.
No one understands the implications of not having a goal-based financial plan.
Equity is a late choice, if at all.

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Implications of unaligned investment Goals.

An assorted set of ‘investments’ without any alignment with your life goals, is like a car with all its wheels pulling it in different directions. You will never reach anywhere and most likely crash.

As one grows older, gets married, and have kids, responsibilities stare you in the face. They realize that not having an investment strategy and depending only on savings would not make it.

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You come to the realization that inflation eats away at most of your earnings from FDs and LICs, and gold & property may not appreciate enough and are not liquid in times of need. Add to it the burden of EMIs gobbling upmost part of the salary and you are left with nothing to invest for children’s education or retirement.

With a goal-based financial plan you can align your goals and investments and when the time comes, simply liquidate them.

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Understanding Investment Goals.

Investment goals must be clear with a defined objective in mind. You must always have a plan B in place because anything can go wrong. COVID-19 has taught us at least this much.

We suggest SMART investment goals:

Specific: You cannot be vague – I will go on a world tour. To be specific I will need Rs.10-lakhs in 2025 to go on a world tour.
Measurable: Not only the target amount but also the goal for which you are investing should be calculable – Say Medical education today costs Rs. 10-lakhs/year, by 2030 it would cost around Rs. 21-lakhs/year at 10% annual inflation.
Achievable: You must be able to invest a sufficient amount for a long enough period to achieve your target. Starting at 50 years of age with a corpus of 1-crore, you cannot expect to touch the retirement fund target of 4-crores by investing only 20,000/month at 10% CAGR.
Realistic: The assumption for ROI and monthly investments must be realistic – no one can sustain a high ROI of say 20%/annum for the long term.
Time-bound: Each target must have a time horizon – whether it is 3 months or 30 years.

Before making any investment, you must have adequate information about its risks, timeframe, and expected returns.

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The Path to Aligning Investment goals.

Step 0: Current Portfolio

It is unlikely that you do not already have ‘investments.’ The journey begins by taking stock of the present. List all your current investments on a sheet or Excel, with the following attributes:

Type of investment – FD, Property, Gold, Equity MFs, Stocks, Debentures, etc. Remember insurance policies are NOT investments and neither is the house you live in.
Tenure – original and remaining in case of MFs and deposits.
Liquidity – how easily can you liquidate your asset.
The current rate of return – from the date of investment till now. You can use online investment calculators. This will be the real eye-opener.

Step 1: Financial goal setting

Clearly spell out each financial goal, with their timeframe and how important it is – can you defer or cancel it if things do not go your way? Play devil’s advocate and think of the worst things that could derail your planning.

Goals can be:

very short-term like buying a high-end mobile in 6 months;
a short-term goal like buying a car or foreign vacation in 1 to 3 years;
medium-term goals like child’s higher education in 5 to 7 years; and
long-term goals like buying a house in 10 years or retiring in 20 years.

Goal setting requires estimating the current cost of the goal, expected inflation over the years, and the estimated cost of the goal at the end of that timeframe. Use a realistic inflation rate, not the official CPI, as many items like healthcare and education witness a higher rate of inflation for sustained periods.

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Step 2: Hedging before investing

We all came face to face with such risks for the time during the pandemic. So, protect yourself and your family against potential risks, like:

Job and income loss,
long and severe illness, and
death of the main breadwinner.

You can do this by:

creating an emergency fund equivalent to your 6 to 12 months’ expenses,
buying sufficient health insurance cover, and
term insurance for earners in the family.

Step 3: Asset classification

Classify assets into categories based on their nature (equity, gold, debt, property, etc.), liquidity (liquid, illiquid), and earning potential (fixed but steady, volatile but high).

Allocate safe, liquid, and steady assets towards your emergency funds and short-term goals. Choose a hybrid of equity and debt to meet your medium-term goals, and mostly equity to meet long-term goals. Use gold in limited amounts as a hedge against high inflation.

Step 4: Invest and review

Once you have the time horizon of goals, your risk profile, and an estimated value for regular investments, you can start your goal-based investments.

FDs and Debt mutual funds for any goal within the next 2 to 5 years.
Hybrid funds for goals beyond between 5 and 10 years, with a gradual shift towards debt as your goal, comes nearer.
Aggressive equity funds for any long-term goals beyond 10 years.
Investments with long gestation periods like EPF and PPF can also be used for long-term goals.

Periodic review and prioritization are necessary as life changes and so would your goals. You can also check if you are on track and take timely corrective steps.

What next?

Aligning your goal with a financial plan ensures that you never run short of funds whenever you need them. The whole process can be overwhelming for simpletons and a trusted financial advisor may help you in all aspects of financial planning, goal setting, and asset allocation for them.