Posted in Financial Gyan

Easy Steps to Create a Goal Based Investing Portfolio

After having learned about “Goals Based Investing” and its benefits, today we are going to learn the simple steps to create a goals based portfolio. There are no pre-requisites to this exercise. All you need is willingness to explore this investment philosophy and evaluate the benefits vs your current approach and then decide for yourself.
Obviously, you will have a few questions around this concept and we will address them as we proceed. If you still have queries, please feel free to post it in the comments, I will try to address them. The first possible question that may come to your mind may be “What about my existing investments? Do I have to start afresh?” You do not have to start afresh. Once you are clear about your financial goals, you should be able to align the existing investments to some of your goals. So let’s get started by first taking a look at the many benefits of this approach –

  • Goal based investing is an investment framework which helps you align your existing as well as new investments to your financial or life goals.
  • It helps you diversify your investments as it helps you understand the right type of investment for each goal.
  • It ensures that you are aligning your investments as per your priority
  • It helps you avoid impulsive financial decisions so that you do not have to regret later

Let’s get started.

Step 1 : List Your Financial Goals

Create a list of all your financial / life goals such as buying a house, kids education, dream vacation etc etc. Against each financial goal mention the approximate amount you think you will need and the time period in which you want to accomplish them.

In the first pass don’t be bothered of being too accurate with the years or the amount required, ballpark numbers will do to get started. However it is important to capture all the goals.

For instance you may need INR 20 lakhs as down payment for buying your own home in the next two years. Or you may need 1 Crore for your retirement after 30 years. Or you may need 5 lakhs for your vacation abroad or or 3 lakhs for the downpayment of your new car next year. 

Financial GoalAmount RequiredBy When
Down payment for New House 20 Lakhs May 2021
Retirement Corpus1 Crore Dec 2049
Singapore Family Vacation5 Lakhs Jun 2020
Down payment for New Car3 Lakhs Jan 2020

Step 2 : Prioritize Your Goals

Once you have created the list, take a close and thoughtful look at it. Decide which financial goals are the most important. And which ones are more important than the others. Start numbering them in the order of priority. It is natural to have conflicting goals and you may have to make some uncomfortable choices. 

For example goals like your kids education or saving for your own retirement are non-negotiable. While there may be others which are essential for financial security like having an emergency fund equivalent to at least 6-9 months of your current monthly income. And then there are those discretionary ones like buying a new car or vacation abroad which you can prioritise depending on your flow of income.

Step 3 : Decide on the Investible Surplus

Now you know WHAT your financial goals are. Let’s look at HOW to achieve them.
Based on your current income and expense, think about an amount that you are willing to put aside each month towards these goals. This is the amount you have surplus after meeting your daily/weekly/monthly expenses. Do include the amount you are currently investing in SIPs or RDs. Let’s write it down as we are going to be using this in our next steps. In the first pass write down a number that you are comfortable with. In subsequent reviews you can revise this number depending on the availability of funds.

Step 4 : Map the Investible Surplus to the Goals

Let’s assume you have committed to invest INR 50k every month.  This amount needs to be divided among the various goals depending on their priority and time horizon. So first you have to calculate the monthly investment required to achieve each goal.

Financial GoalAmount
By WhenMonthsMonthly Investment
Required for Goal
Down payment for New House 20 Lakhs May 20212483333
Retirement Corpus1 Crore Dec 204936827174
Singapore Family Vacation5 Lakhs Jun 20201435714
Down payment for New Car3 Lakhs Jan 2020837500

Once you do this exercise it is quite possible that the investible surplus you have decided may not be enough to fund all your goals adequately. This means you will have to review your goals once again. By review I mean, you may have to either revise the amount required or the timeline of the goal or increase the monthly investment. Based on your priorities you may have to go through a few iterations to arrive at an acceptable balance.

Step 5 : Understand Your Risk Appetite

At this stage you are equipped with the knowledge of which goals are you chasing and how much you are willing to invest towards each of them. Now we need to decide WHERE are we going to invest this amount. For this we first need to evaluate your risk appetite for the short, medium and long term.

Simply put, risk appetite means how much money are you willing to lose on an investment. It can vary for different individuals based on their current financial situation, age and confidence level. Also there is no good or bad or one size fits all approach. Each person’s situation is unique. Look at the table below and calibrate your own risk appetite.

Sometimes your risk appetite may vary according to the time period. You may be willing to take higher risk in the short term and invest in stocks/equity directly where you feel more confident of being able to absorb the downside (if any). However you may want to stick to safer investment options for your long term goals or vice versa. 

Step 6 : Decide the Investment Type for Each Goal

There are a plethora of Investment Options available now-a-days but to keep this discussion meaningful I will restrict the discussion to the few tried and tested ones viz. Mutual Funds, ELSS, Stocks, NPS, PPF, NSC etc. One you understand your risk appetite and depending on the amount you have for investment you could try investing into Bitcoin, F & O, Commodities, Real Estate, Art and what not.

To start with, take a look at your existing investments and map them to some of your goals. For example if you have recently started a PPF account, you could map it to partially fund a goal which has a time horizon of 15 or more years. Similarly, you could map the corpus of your PF and the amount invested in NPS to your retirement goal and so on.

Now look at the goals that need to be funded. Depending on the time horizon, risk appetite and amount required you could invest in MF, Equity, ELSS or a Debt/Liquid fund. After deciding on the type of investment, note down the monthly amount you are committing to invest towards that goal. If you are investing in Mutual Funds, then SIP is the best way to fund your goals on a month-on-month basis without having to go thru the hassle of manual intervention.

Obviously, managing your wealth is not a one time activity. To ensure that your money continues to earn and grow, you will have to periodically review your portfolio and tweak it if required to meet the changing needs, disposable income and other factors. You may have to do a couple of iterations of your Goal Based Portfolio to make sure that you have reviewed it thoroughly and are ready to implement it. Feel free to share your comments and/or questions and I will try to answer them.

Posted in Life Gyan

How to Find “What I Really Want?”

If you haven’t read the first part of this post “What Do We Want From Life?” I would recommend you go through it first before reading this post any further. 

Finding what you want from life is a very personal journey which will require a lot of honesty and a little bit of courage to accept yourself the way you really are and the  involvement of your heart and mind – all at the same time. Once you pose the question (What do I want from my life?) to yourself with the serious intent of finding the answer, your mind (both conscious and sub-conscious) will get engaged. 

Our mind is a big storehouse of all our desires, emotions, things that our parents, friends, family members, teachers etc may have told us over the years. All these hidden emotions below the surface keep playing with our mind when we want to take any decision. And you will notice that at time we experience a lot of chatter in the mind pulling us into different directions. That is because of lack of clarity of what we want.

At the outset, the mind will start giving you many options of what you want from life. These options may be based on what others may have told you or expect from you. So how to find out if the options that your mind is throwing at you are the real answers? There may be different ways to ascertain that but the one that works for most is writing down the answer and then writing down the “Why?” – the reasons why you want it? Just keep writing all the big and small reasons that come to your mind till you have emptied all your thoughts about this answer. 

Repeat this process with the other answers that come to your mind. 
This may not happen in one sitting. The time taken will vary from one person to another depending on your desire, the fire in your belly to really uncover the answer. But the key is to remain persistent and determined to take it to conclusion. And I assure you it will be worth the effort. And remember the journey is as important as the destination as that is where the transformation is actually happening.

Review the answers you have written and the reasons – some of them will start resonating with you while you will be able to discard the others. It is ok to filter out more than one answer to “what you want from life” as you may want to express yourself, your talents in multiple fields. For example, on one hand you may want to be successful in your career and on the other hand you may want to do something meaningful for the under-privileged. On one side you may strive to be the best parent and at the same time you may want to give wings to your own creative pursuits. I have come across many talented people who are achievers in more than one field in life. 

Eventually by this process of looking at the various desires and options and reviewing them by being true to your own self, you will arrive at the answers in a few iterations. 

Posted in Life Gyan

What Do We Want From Life?

Here is something really worth pondering over. The honest answer to this one question can change the direction of your life, can create a new meaning and may even give you an entirely new perspective towards life, goals, happiness and finding satisfaction. Ask yourself,

“What do I want from my life?”

While some may say Success, Wealth, Fame, Love, Happiness – answering this for oneself requires a little more thought and a peek at one’s innermost desires. The key think to remember is that you need not share the answer with anyone else – is to for your own sake that you must answer this question.

It is certainly not an easy one to answer and at the first attempt you may be tempted to say “I don’t know”. While that is perfectly normal, don’t stop there. Be persistent. Find the answer or create one for yourself.

The question remains relevant no matter at what stage in life you are at. You may be a student, working professional, artist, entrepreneur or housewife – think about what you want from life. A lot of times not knowing what we want, is the source of unhappiness and restlessness, as we perpetually keep looking for a better job, more wealth, bigger house etc. That is what is called the rat race. 

Once you are able to arrive at the answer to this question, you will no longer be in the blind rat race. You will go after your goals, your passion with a sense of purpose and a new kind of enthusiasm. It will give a new clarity to your thoughts and actions. You will feel transformed. A version 2.0 of yourself. A lot of your old dilemmas and debates that occupied your mind so far will automatically disappear. Your interactions with people will become better. All of this because of the clarity of thought you now have.  So go ahead and spend some time in solitude. 

Do yourself a favour – find the answer to what you really want from life. After all it is just one life that you have. Make it count.

If you are interested in knowing a practical approach to “How to Find What I Really Want?” click here.

Posted in Financial Gyan

Goals Based Investing

“Goal Based Investing” though a relatively new concept in the world of investing, is catching the fancy of many investors due to its various benefits. (And we are going to learn about them soon.) Once you learn more about this concept it seems more like common sense. (But common sense is quite uncommon) – so let’s learn a little bit more about this investing concept.

As the name says, in Goal based investing, you invest in specific goals such as your kids education, a vacation in Europe or saving for the dream house rather than generic investment and focusing on generating the highest possible return or beating the market. To start with you are required to list out your financial goals that you want to achieve. And then design an investment strategy that enables you to accomplish these goals in the best possible manner.

Most traditional investment frameworks start with assessing your risk taking ability  – Conservative, Moderate or Aggressive.  Then they use various indexes to show whether you will be able to beat the market but it does not specify whether you will be able to reach your financial goals.

Advantages of Goal based investing – 

  • Greater commitment of the investor as he is saving towards his own goals and he is able to track his progress 
  • Reduces chances of impulsive decision making due to sudden market fluctuations or availability of spare funds
  • Investor can relate to the entire process as it directly relates to a set of tangible goals 
  • Encourages a disciplined way of investing – whenever the person has some spare funds he is more likely to channel it to his current goals rather than get carried away by the sales pitch of some financial advisor
  • Helps have peace of mind w.r.t investing as he watches his investments grow

Also I have seen most investors struggle with the question of “When to book profits on investments?” In the absence of defined goals, it becomes very difficult to stay invested during market volatility or get carried away due to greed during a bull run. However when you are following a goal based investing approach, the process takes care of this dilemma. You book profit when a goal is attained. Period.