With Nifty benchmark indices NIFTY 50 in correction mode for almost a month now, we are witnessing gains in our equity based portfolios getting eroded substantially, more so in mid and small cap. Nifty benchmark index has fallen almost 9% from its recent high and Mid & Small cap index has lost 28% and 44% respectively from their all time high made in Jan 2018.
Although it does create apprehensions and some sort of panic in the mind towards future outlook of our investments, it should not worry us especially if we are into Goal Based Investments. So what is this concept of Goal Based Investments?
When we begin our journey towards savings and investments, there has to be some future purpose of these investments, some events like Children’s Education, their Marriages, Retirement Planning etc which we want to finance in future by sacrificing our today’s spending. Let’s call these as future goals which we want to achieve through our investments over the available time horizon. Investment without a goal is like boarding a train without knowing the destination.
Hence Goal Based Investments allow us to invest towards achieving the desired goals in the available time horizon by choosing the correct asset allocation(equity, debt, mix of both, gold) with optimum risk through a Systematic Investment Plan.
A few of the behavioral and financial reasons for choosing goal based investments are :
1. Optimum Savings. Once the goals are decided well in advance, we know how much money needs to be saved regularly, nothing more nothing less.
2. Start Saving Early to get More. Sooner we start saving towards a goal, lesser savings would be required due to power of compounding. e.g If a child’s education requires 50 lac after 20 years, we need to save only Rs 5,500 pm if we start today as against an amount of Rs 10,600 pm if we start after 5 years and Rs 22,500 pm if we start after 10 years (Assuming 12% return P.A.).
3. Tangible Outcome. We are more likely to save and invest towards achieving a definite goal rather than saving without a purpose.
4. Avoids Debt and Better Management of Assets and liabilities. By mapping tomorrow’s liabilities with assets of today, we avoid getting into debt trap. It also helps us in better budgeting thereby meaning how much we can afford to spend today as against how much we want to spend.
5. Optimum Returns. Goal based investment gives us the opportunity to match our time horizon with asset allocation by taking optimum risk. If there is a mismatch in allocation, we may save too much or too little, missing out on returns with conservative allocation or missing out on goals with too much of risk.
Goal based investments provide us with an opportunity to work towards achieving our future goals rather than chasing returns and give us peace of mind during such turbulent and volatile market conditions.