Investment Planning for Goals
Updated: Oct 19, 2022
Aligning your financial objectives with your available investing resources is the process of investment planning. It is the primary element of financial planning, ensuring that your savings are put to use and that you increase your income through investments. In order to guide you on the types of investment vehicles you can use to multiply your financial assets and achieve these goals and objectives, it is important to first determine your financial goals and objectives. In order to maximize the return on your assets, having a plan for your investments provides you a sense of direction and purpose. Planning your investments also enables you to select the optimal investment approach to achieve your financial objectives.
Setting up your goals
Creating goals to achieve them is personal and may vary from people to people depending on their needs. For a working student, it might be pay back student loan. For a salaried person, it may be to buy a house, car, marriage or wealth generation. The amount and duration of the goal is again dependent on you. Your savings may have been previously invested in a variety of market-linked financial instruments, including fixed deposits, public provident funds, mutual funds, stocks or shares, and real estate. However, if they are not connected to any particular objective, your investment will be more random, and you won't be able to predict when you'll see a return. Investing with a goal in mind can enable you to lessen this uncertainty.
How to Start an Investment Planning Based on Goals
A method of investing that is based on your financial objectives is called goal-based investing. It links your savings and investments to a specific objective and aims to instill discipline into your investing approach.
Analyse the required funds and timeframe: Your ambition to accumulate funds for objectives like setting up an emergency fund, purchasing a car, booking a vacation, planning for your retirement, or saving for your child's education could be accomplished within the next few years or over the course of 15-20 years. We cannot approach these ambitions like they are out-of-pocket expenses that may be indulged in without having a clear plan in place since they require a different degree of investment.
Consider present costs: For instance, if you want to buy a car in the next five years and the present price is INR 10 lakhs, taking the rate of inflation into account at 6%, you will need INR 13.38 lakhs to do so. Similarly, if the current cost of schooling is INR 20 lakh with education inflation of 10% and you want to save for your child's education over a 15-year period, you would need INR 83 lakhs.
Calculate future costs: You should make an educated guess as to whether a certain item will cost more or less in the future and then adjust your financial estimates accordingly. If someone wants a smart phone, for instance, the cost of the phone will increase in the future. At the same time, if you wish to buy something like gold, its price will inevitably go up. By observing the recent and historical market movements, this can be predicted.
There is no perfect time to begin investing: Ideally, you should start investing when you start making plans for a goal. The likelihood of accomplishing your goals with less money invested increases the sooner you start your investing journey. For instance, if you begin investing at the age of 35 rather than at the age of 45 while saving for a long-term goal like retirement, you will have more time to build your funds. Additionally, when you start sooner, your monthly outlay to reach your objective is lower.
How to Approach Goal-Based Investing
The following stage is to collect the necessary finances after the objectives, deadline, and required sum are known. Therefore, saving up for them is the best course of action.
Saving on its own is insufficient: Simply saving for the goal is insufficient. You won't achieve your objective if the interest rate on your savings account is lower than the rate of inflation. Therefore, you would need to make the appropriate financial decisions that will increase your return on investment.
No overarching plan exists: A general investment strategy would not be effective because you can have different time limits for various goals. You could have short-term (within two to three years) goals, medium-term (between three to eight years), and long-term goals (achievable over 10 years). Your investment plan cannot be based on a single financial product. To properly accomplish all of your goals, you might need to mix and match various investment products, depending on your risk tolerance.
Cost evaluation is essential: You must calculate your investable surplus before beginning your investment by taking into account your monthly income and costs. You might discover after completing this exercise that not all objectives are feasible given your investible surplus. Therefore, you could either delay or abandon the objective or strive to grow your surplus for investment.
Where to Invest to reach your goals?
1. Direct Equity
Direct equity refers to purchases made on the stock market. You require a demat and trading account in order to directly trade in the stock market. Investors can purchase shares or stock in the company directly from the stock market using this account. In other terms, equity refers to the funds invested in the company's shares. Legally speaking, the investor purchases a portion of the company in exchange for the right to vote.
Investors who are ready to take risks and, more importantly, have the appropriate knowledge, should consider direct equity investments. Direct stock investments demand sufficient knowledge and expertise. Investors with a limited risk tolerance should avoid market-linked assets. Therefore, equities mutual funds are a better option for investors who are short on time or experience.
Investors must commit to direct equity investments over the long term. Investors must be aware that because stock markets are erratic, equity investments may see large short-term movements. Given that historically, markets tend to rise over the long term, it is advised to maintain an investment through difficult circumstances.
2. Mutual Funds
A mutual fund is simply a shared fund into which investors invest their money. The total is then invested in accordance with the fund's investment goal. The funds could be used to purchase gold, real estate, bonds, money market instruments, equities, and other similar assets. These funds are run by investment professionals who aim to increase or increase investor capital through investments that are in line with the stated investment objective. Following are the categories of mutual funds are:
Equity Mutual Funds - Funds that only invest in stocks and other equity-related securities are known as equity funds.
Debt Mutual Funds - Debt funds are funds that only invest in fixed income securities.
Hybrid Mutual Funds - To achieve balance, hybrid funds split investments between equity and debt.
3. Fixed-Income Securities
Fixed-income securities, as their name suggests, provide guaranteed returns on investment. Financial instruments with guaranteed returns are very common among conservative investors. Some of the most well-liked Indian securities that provide fixed returns on investment are listed below.
Bank Deposits – Savings bank account, FD/RD
Post office schemes such as PPF, Senior Citizen savings scheme, Post office monthly income scheme and SSY for girl children
Pradhan Mantri Vaya Vandana Yojana
4. Alternative Investment Fund
The phrase "alternative investment fund" describes a group of pooled investment funds that invest in managed futures, hedge funds, venture capital, private equity, and other sorts of investments. AIFs are a sort of investment that are different from conventional investment options like stocks, bonds, and other debt securities.
Alternative Commitment Funds are typically used by high-net-worth individuals and organizations since, unlike Mutual Funds, they require a sizable initial contribution.
Indian people love gold. Demand for gold comes from many different places, including as an investment, a reserve asset, jewellery, and a part of technology. Due to its high liquidity, lack of credit risk, lack of availability, and lack of obligation, it has historically maintained its value throughout time. There are several ways to invest in gold. Here are the top five strategies to invest in gold in India:
Buy physical gold
Gold ETFs or Gold Exchange Traded Funds
Gold Mutual funds
Sovereign gold bonds
Investing for short-term goals
Short-term goals are those that must be attained within the next two to three years.
You need an investing strategy that guarantees the security of the capital. You should not be falling for returns here as the objective is to play safe.
You might use liquid/short term debt mutual funds to invest in bonds or other securities that generate interest. As much as they do provide premium over FDs, they do come with certain type of risks i.e., credit risk, liquidity risks, interest rate risks etc.
If you would prefer a risk-free solution, a recurring deposit/fixed deposit can be a possibility.
Considering the volatility, it could be dangerous to invest in equities for such little periods.
Investing for medium-term goals
Goals which are to be achieved during a period of three to eight years.
One can go ahead with Medium Term Debt funds or Hybrid Funds which are combination of debt and equity in appropriate proportion.
Adding some debt mutual funds might help balance the risk associated with investing in equity funds, which can be dangerous.
To reach a medium-term objective, an aggressive investor could go for Equity-Oriented mutual Fund where proportion of equity is more. Risk averse investor can invest into Balanced Advantage Fund or Debt-Oriented Fund to earn decent returns while avoiding much equity exposure.
Investing for long-term goals
Long-term objectives are those that are more than eight to ten years distant. As there is some time for you to achieve the goal, you could afford to take risks here.
Creating a retirement fund, putting money down for your children's education, or beginning a business are examples of common long-term objectives.
You could attempt investing in direct equities or equity mutual funds to obtain the necessary sum to reach your objective. Equity investments are seen as suited for long-term goals despite their risk as beat inflation and provide hefty returns.
The historical data shows that equity can be as safe investment as fixed income securities in the long run provided you stay invested in market ups and downs.
You could employ robo advising apps, apply a do-it-yourself strategy with thorough research, or even contact a licensed financial planner for assistance with fund selection and investing decisions.