5 Steps to a Goal Based Investment Plan

Life is filled with desires and ambitions. A holiday abroad, a swanky new car, or a plush home, whatever it may be, we earn money to fulfill such goals. However, very often, when it comes to saving for our goals, most of us randomly make investments, without a proper plan. We buy financial products, without giving much thought if it is actually going to help us at the time when goals are to be met. A Goal Based Investment Plan comes into picture here.

The concept of goal based investment stresses on having a planned and disciplined approach to 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. Sounds complicated? Not in reality though. From identifying your needs to choosing the right asset class, here are 5 simple steps to help you go about this approach.

Step 1: Defining your goals

Before you embark on your journey of investing, define the goals that are specific to you and set a timeline as to when you want them fulfilled.

  • Immediate Goals
    • Clear credit card dues
    • Buying life insurance
    • Short holiday with family
  • Short to Medium Term Goals (3- 7 years later)
    • Buying a house
    • Buying a car
    • Holiday Abroad
  • Long Term Goals(7 to 10 years later)
    • Saving for retirement
    • Children’s higher education
    • Daughter’s marriage

While some needs require immediate attention, others are for later years. Sort them out into immediate goals, short to medium term and long term goals

Step 2: Ascertain the current cost of your goals

Ascertain what you would have to shell out today if you want to fulfill your goal. For example, what would it cost to get your daughter married today, or if you were to send her abroad for higher education this year? Remember to be realistic and arrive at the cost on the basis of your lifestyle, income and spending behavior.


Step 3: Determine the future cost of your goals

The cost of your goal today may not be the same tomorrow. Soaring inflation rates and rising cost of living make things more expensive year by year. So how do you calculate the future cost of your goals? We could do this with a bit of mathematics. The concept uses the basic compounding function applied in most financial calculations. Let us take an example to make it simpler.

Mr. Sharma wants to save for a lavish wedding for his daughter 15 years down the line. At current costs, it would cost him Rs. 20 Lakhs.  Using a simple mathematical equation we compound Mr. Sharma’s current value of goal, at current inflationary rate to arrive at the future value of his goal. Let us assume an inflationary rate of 9%.

  • Future Value = Current Value x [{1 + ( Rate / 100 ) } ^ No of Years ]
    • =20, 00,000 x [{1 + (9/100)}^ 15]
    • =72,84,964.92

Thus, it would cost Mr. Sharma more than Rs. 72 Lakhs for the wedding 15 years hence. Similarly using this compounding function, you could calculate the cost of achieving your other goals at their respective target dates.

Step 4: Determine how much to invest

The next step involves determining how much money you would need to invest today, at a particular rate of interest to achieve the future value of your goals. Let us take Mr. Sharma’s case again.

Mr. Sharma decides to invest in equities which he hopes will fetch him minimum 15%p.a. returns.  To calculate the amount he would be required to invest currently to reach his target value, we could use a similar compounding function.

  • Lump sum investment required now=Future value of goal/[{1+(Rate/100)}^ No of years to goal]
    • =7284964.92/[{1+(15/100)}^15]
    • =8,95,282

At 15% rate of interest annually, Mr. Sharma should invest Rs. 895282 to be able to meet his goal. What one must remember here is that the rate of interest is largely dependent on where the investment is made.

Step 5: Choosing the right asset class

Once you know the amount you would actually require to meet your goals, the next step involves choosing the right asset class. Primarily, the asset class you choose depends on the years required to meet your goal. Here are some quick suggestions on which asset class will be ideal for a particular time frame.  

  • Immediate goals (within 1-2 years)

For short term goals within a year or so, it is wise to avoid equity as it is difficult to time the market, especially in times of volatility. For money which need to be parked for up to 2 years consider fixed deposits and recurring deposits as they are a safe bet.

  • Short Term(2-5 years)

For buying a car or house, you would require to build a small corpus for the down payment. Depending on your risk appetite, you could choose from the myriad of mutual funds available. Debt oriented funds are a good option for investors with low risk appetite. Systematic Investment Plans, serve as a convenient tool to build a corpus and reduce risks considerably with their averaging principle.

  • For 7 years or more

For long term investment horizon, experts often recommend equity as it has the potential to generate higher returns than many traditional investment options. Try equity of reputed companies in small quantities before you get comfortable with active trading. Unit linked plans for children and money back policies for expenses of marriage are a good bet. Ensure you have adequate life insurance cover to offer your family protection in case of any unforeseen events.

The main objective of having a plan is to guide you through the various financial decisions of life. Apart from saving, investing and fulfilling dreams, you should ensure you have adequate cover for your life and health, and also plan accordingly for your taxes. A sound financial plan is one that covers all these aspect. 


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