Started your SIP’s, what next – Go for Goal Based Investing
Slowly but surely Indian retail investors are transitioning from being a good saver to a good investor. Record inflows into mutual funds via Systematic Investment Plans (SIP) by retail investors month on month is a testimony of this. During events such as brexit, demonetization – retail investors poured in more money via SIP and didn’t redeem their investments and neither stopped their SIP’s. Investors now are a lot more patient with their investments then they were a couple of years back and are now willing to invest in equities every month via Systematic Investment Plans (SIP) to create wealth. They are willing to stay put for the long term to enjoy the power of compounding and fulfill all their long term goals. Change is here to see.
Having said that, for a retail investor started investing via SIP’s is just the starting point. There are still lot of unanswered questions with which they grapple with time to time:
(a) how long is really the long-term for my investments?
(b) am i investing enough or should I invest more?
(c) what will be the future corpus I will require keeping inflation into account?
(d) what percentage of the corpus will be used for retirement, medical expenses post expenses, child education, marriage?
(e) what if markets are down and I need to redeem accumulated corpus (which funds to redeem)?
(f) what will be the education and health care cost few years down the line. Have I saved enough?
(g) what about medium-term goals such as a foreign trip, buying a car, house. How to plan for that? How do I plan for medium-term goals? What kind of investments should I go for?
If you tend to have such questions cropped up in your mind time to time, its time to go for ‘Goal-Based Investing’. What does that mean? Instead of investing randomly in different investment products, you link each of your investments to a particular goal and track them on a yearly basis.
How to go about goal-based planning?
(A) Get Yourself Organized – Document, Update Your Current Investments – There are times when we make our investments in such a random fashion that even we don’t remember the details of investments we made, what purpose it will serve – is it a ULIP or a pure investment product, what is maturity date, what is current value of holdings, how is the product performing in comparison its peers etc.
Now is the time to get organized…
The first step would be to take latest statements of all your investments/insurance policies – insurance or investment policies, PPF, PF, mutual funds, fixed deposits, ULIP’s, tax saving investments etc. Maintain a proper physical folder of all your investments and get organized. Documentation can contain a summary of all your investments and a statement copy of each of it. Term plans or other ULIPs should contain original policy documents. Read all the policy documents which you might have skipped in the past. In case of any of your investments – communication address, email address, mobile number, bank details, nominee names are not updated – make a list and get them updated immediately. Avail online access to all your investments so that you can check the relevant details online anytime. In case you are not subscribed to monthly/quarterly statements, get yourself subscribed and also SMS alerts.
(B) Discuss financial goals with your family and list them in order of priority – Once you have your current investments in order, its time to chalk out your financial goals. There are instances when we talk about every other upcoming movie hitting the theaters, new car launch recently which caught your attention, last night’s cricket match which India won with our family but not our financial goals in immediate, medium and long-term goals.It is always prudent to have a healthy discussion about all future financial goals with your family (especially spouse), review them thoroughly and come up with a priority list. For instance, a child’s higher education or retirement goals will hold a higher priority than goals such as buying a second house, buying an expensive car or going on a foreign vacation. Write down all the details with a pen/pencil. This is significant as post this activity, you can have a clear roadmap as to what to map your investments against. What is the purpose for which you are saving and investing? It is significant to involve your family in the discussion so that everyone understands the overall financial priorities and are in sync with what needs to be done to achieve all goals. Review your goals every year for any modifications if any. Goals should not ideally change every year in a big way. It’s just a formal review that everything’s in place and you can account for any modifications/additions if any to your goals.
Let’s take an example:
For instance, if your current age is 35 and you would like to retire at 60. Assuming your monthly expenditure is 70,000 per month and expected inflation rate is assumed to be 6%, the future value of your current monthly expense will be Rs. 3,12,548 per month. Assuming to avail annuity of 3,12,548 per month post-retirement with a life expectancy of 90 years and a post-retirement return of 6%, 5,21,30,385 should be a minimum retirement corpus required based on above assumptions. SIP investment of 9,086 will be required to achieve the goal. One may also like to consider building a higher retirement corpus to take care of emergency expenses.
Do such an exercise for each and every goal of yours.
|S.No||Goal||No. Of Years Left
||Inflation Assumed||Future Expenditure
|1.||Retirement||25||70,000 per month||6%||3,12,548 per month.||Corpus required will be 5,21,30,285. Assuming 18% return, monthly SIP investment required is 9,086.
Funds dedicated to goal: XYZ Fund (5000 per month SIP) ABC Fund (4000 per month SIP)
(C) Review your existing investments, filter out underperformers – Once you have sorted out your goals, its time for your current underperforming, redundant investments strictly to be on the way out. Time to review each investment and insurance product you intentionally or unintentionally brought in the past and try to map purpose it will serve in your overall investment portfolio in future. In case some of the investments have not yielded desired returns – stop and redeem your investments. For all insurance policies, review the insurance cover and returns provided against premium paid over the years – its current value against amount invested. For all the investments, review the returns they have generated over the years. Compare it to its peers to analyze performance. In nutshell, sit and evaluate. At the end of the activity, you should have a complete list of your current investments (including insurance products) which are on the way out and which ones you will persist with. Do map your existing investments which you are going to retain to the goals you have chalked out in (B). Make sure you share investment details with your spouse, particularly term insurance policies. In case you can’t make out what to keep and what to filter out, do seek professional advice in such a case.
(D) Map your current investments (sorted in point (C) against your goals sorted in point (B) and start fresh investments – As mentioned in concluding comments of point (B), now you have goals and you have your current investments. So it is easy to map them to each other. Make sure you have adequate term insurance cover, medical cover, an emergency fund in place to begin with. If some of your investments don’t map against any of your goals, then again evaluate if you really require it. There’s no harm in giving it a second thought. Identify the potential gaps. Every single penny of your salary saved should work towards achieving your goals.
Such an activity will give you an insight as to where your future investments should head towards and where are the potential gaps. Clarity of mind is of paramount importance. For instance, if you are utilizing PPF, PF for retirement goal, you can’t use them for any other goal. This will avoid duplication. Choose investment options like PPF, FD’s, mutual funds etc. depending on your corpus target, a rate of return expectation, number of years. For instance, if your return expectation is 18%, FD’s won’t give you that even in the long term, So such an activity will make sure you choose right products for right goals. For some of the goals, you will be amazed as to how big a corpus you will require post taking inflation into account. This will make sure you invest right and invest aggressively. Don’t be disheartened if you can’t start investing for all your goals at present. Your prioritization of goals will play a key role here. Your investible surplus will increase as your salary increases.
Post point (C), you will be on your way to achieve financial independence. All your targets will be clearly visible to you and which investments you have for which goal will be absolutely clear. For most investors, randomly investing without clear goal visible will not do any good. Like for any other task, proper planning of goals and pursuing corresponding investments regularly by following discipline in investing for years together will be beneficial to investors.
I hope above article will be useful to our readers to take next step towards financial independence. Consistency in investing across different market cycles is the beauty of SIP and you as an investor must take advantage of it. So get going now.
Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.