Instead of starting a random SIP in a mutual fund, based on past returns or the flavor of what’s in at the moment, financial planners now suggest investors tag their SIPs and investments to their long-term financial goals.
Understanding investment goals
Every investors could have some life goals that they need to reach in the short term or long term. Calculating and investing to reach that financial goals is the basis of what is known as goal-based investing.
For example, if you want to plan a foreign holiday with your family in 2020, it is a short-term goal. If you wish to plan for higher education for your child who is aged three years now, you have 15 years, and it is considered a long-term goal. If your age is 30 years and you retire when you are 60, you have 30 years, which is a long-term goal.
How to plan to meet the goals
The first step is identifying the goal for which you wish to invest and the time you have to reach it. Once done, find the cost of the goal today. Add a reasonable amount of inflation to that, which will tell you the cost of the goal in the year you wish to accomplish that. Decide the asset class with your financial advisor that suits you, work backwards and calculate the amount you could save via SIP or lumpsum or a combination of both to reach the goal.
How can you use mutual funds to meet the goals?
With the help of a financial planner, identify funds based on your risk profile which can help you reach your goal. For example, if you plan for a foreign holiday 18 months from now, which will cost you ₹5 lakh, you could use debt funds to reach that goal. Since it is a near-term goal and the time is less than three years, typically investment advisors would suggest you to go for a combination of debt and arbitrage funds, which could yield you between 6% and 8%. Decide whether you wish to opt for a lump sum investment or want to stagger it. Keep the tax implications in mind, as debt investments redeemed in less than 3 years are liable for short-term capital-gains tax.
Similarly, for your child’s higher education, which is more than 10 years away, you could invest in equity funds. If your child is aged 3 years and needs money when he turns 18 for higher education, do an SIP of ₹5,000 every month for 15 years. At a 12% return you could accumulate ₹23.79 lakh.
The bottom line
An investment that is not driven by a goal is not a sound investment strategy. If you’re investment advisor is not asking you what your goals for investing are, the smart thing to do is immediately find one that does.