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 Goal | Amount Required | By When |
| Down payment for New House | 20 Lakhs | May 2021 |
| Retirement Corpus | 1 Crore | Dec 2049 |
| Singapore Family Vacation | 5 Lakhs | Jun 2020 |
| Down payment for New Car | 3 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 Goal | Amount Required | By When | Months | Monthly Investment Required for Goal |
| Down payment for New House | 20 Lakhs | May 2021 | 24 | 83333 |
| Retirement Corpus | 1 Crore | Dec 2049 | 368 | 27174 |
| Singapore Family Vacation | 5 Lakhs | Jun 2020 | 14 | 35714 |
| Down payment for New Car | 3 Lakhs | Jan 2020 | 8 | 37500 |
| … | … | … | … | … |
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.
