Goal-Based Investing – How does it work?

Goal-based investing is powerful and simple. List out your goals, list out the timeframe, the amount of money you already have, and the balance amount you need. Then, investing your savings every month just becomes a matter of reviewing progress and funding your goals accordingly. It keeps it simple. It keeps it real.

We could give you an answer to that question in 5 bullet points. But that’s not us. Give a man a fish, and he will eat for a day. Teach a man how to fish and you feed him for a lifetime. This newsletter will teach you how to fish, metaphorically 🙂

Word of caution: There are an infinite number of approaches you can take to arrive at an answer to that question. But all (good) roads, lead to Rome. Here is one, metaphorically 🙂 (Two metaphors in a row, I am on a roll!)

Goal-Based Investing

Let’s work through an example to make it a bit more real.

It is the 1st of the month. Salary Divas! Arnav Ramaswami, our protagonist has decided to take Rs.10,000 from his salary and invest it. But where?

He approached us and we asked him, ‘So Arnav, what are some of your short-term and long-term goals in life? The nation wants to know!’

And that is when he showed us this chart.

This is perhaps what most people’s funding chart looks like – The short-term goals are adequately funded while the long-term goals are not. This is normal. If your short-term goals are not fully funded, your Rs.10,000 should go towards funding them into a risk-free/short-term money market fund. But if you are like Arnav whose short-term goals are all well-funded, then read further.

Goal-Based Investing - Allocating Funds

We look at the chart together and Arnav tells us, ‘I am still short by 4% (About Rs.18,000) for my sister’s wedding which is a year away. If I set aside Rs.1,500 each month, then it will be fully funded by the time of the wedding.’

And so Rs.1,500 of Rs.10,000 goes into a 1-year FD. That leaves us with Rs.8,500 to invest.

Read about the best fixed deposits and risk free investments

Looking at the chart again, Arnav says, ‘I am still short by about Rs.2,00,000 for the down payment of my future house. If I invest Rs.5,000 each month in a corporate bond fund and it returns 8% per annum, then I will have all of the money I need when it is due in 3 years.’

And so Rs.5,000 of Rs.8,500 goes into a corporate bond fund. That leaves us with Rs.3,500 to invest.

His son’s college fees savings is underfunded quite significantly. But Arnav is not too worried since his little boy is still 15 years away from college. He does the math and tells us, ‘Rs.2,900 invested each month in an equity mutual fund which returns 12% per annum over the next 15 years will fully close the gap in funding.’

And so, he decides to invest Rs.2,900 into an equity mutual fund. That leaves us with Rs.600.

And that 600 bucks goes straight into his retirement pot with his pension scheme. That amount invested each month is not going to get him anywhere near the amount of corpus he wants to have when he retires. But he expects that as time progresses, he will get a few promotions and some salary hikes which will help him contribute more to the retirement pot. It is still 30 years away!

Takeaway

List out your goals, list out the timeframe, the amount of money you already have, and the balance amount you need. Then, investing your savings every month just becomes a matter of reviewing progress and funding your goals accordingly. It keeps it simple. It keeps it real. But this is just one way to do it. Asset allocation based investing is another way to do it and we will discuss it next week.

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