This is where a goal-based investment plan makes right sense.
The concept of goal-based investment focuses on having a planned and disciplined approach in saving money for the important goals of life. By having an investment plan defined around your goals, you could allocate your finances to the right asset class, so that they are readily available to meet the big expenses of life. There is very high possibility of reaching your goal if the investments are properly linked and you stay committed .As most of the experts say “Being a Committed Investor is more important than being an Interested Investor”
But the biggest challenge for the investor is to understand and decide on the Investment goals and most of them are unable to do it. The importance of doing it well and the pitfalls of doing it badly are illustrated below
My personal Experience:
Example 1: In 2008, when I was undergoing training for LUTCF Certification, I happened to meet one trainer from an Insurance company. He was 53 years old. He used to tell everyone that he had planned for all his goals and he is going to retire at 55 itself. Inspite of having good understanding of various Investments, he was unable to figure out whether he was on right track or not. He had more investment done in equity Mutual funds (Infra Fund, small and mid cap fund) . In 2009 he was hospitalized and was not in a position to work for next 6 months. His financial life took a Big U- Turn .After seeing his experience I could realise the importance of Asset Allocation and Importance of Goal Based Investing. He simply failed to keep provisions for medical emergencies & Regular Monthly Household Expenses for 6 months. When he was actually in need of money, he could not liquidate his investments because his portfolio was down by 60%. Inspite of him being in Finance Industry, he failed to link his investments for any goal. Infact his case was the simplest case; many investors have much complex goals . Lesson what I learned from the above incident was, Investing without understanding the need or goal is of no use.
Example 2 : Goal based approach should not be restricted towards investment itself . It can be practiced or can be followed in our day to day activity. The process which I am going to tell you would have been already in practice in your family. The solution is Bags/Covers/Purse.
My grandmother used to save money and she used to keep all her savings in different covers based on the requirement, Small cover for Yearly school funding and big cover for marriage funding. My mother currently keeps monthly expenses in different purses. She has a purse from which household expenses are taken , one purse for milk and maintenance , one for vegetable maintenance and one for saving , which in turn she parks in liquid fund and withdraws in case of any contingency (i.e. Unexpected Expenses) . While financially sophisticated readers will call this system as primitive and sub optimal, it has got lot going for it. It is a simple system, easy to implement and easy to understand and above all, it worked. Most importantly it adopted one of the golden rules of personal investment management – separate folios for separate goals.
I would end up by saying, A true advisor would always help his/her client in setting SMART (Specific, measurable. attainable, realistic and time bound) goals. Though there is No guarantee whether the goals will be achieved with the amount you save , because lot of factors needs to be considered and certain factors are not in any once control like inflation, school fees etc . But one thing which is guaranteed is the clarity and a clear cut road map for your goal. As the saying goes, “What gets measured gets achieved”, will actually work if we all follow it delicately.
Article by Nishith
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