What is Goal Based Investment Planning?

OPEN EXCEL SHEET ATTACHED AT THE END OF THE ARTICLE

Goal Based investment planning helps identify long term financial goals and works best when started early to create the desired surplus for future. It is not a very developed practice in India but is gaining increasing traction with more and more investors.

Instead of investing randomly, goal based planning gives a perspective to investor and aims to track investments based on long term goals. If investors have clear short or long term goals, they can have better asset allocation depending on their time horizon and risk profile.

Goal-Based Asset Allocation in Mutual Funds

Read More – Best Mutual Fund Allocation

LONGER TERM GOALS MEDIUM TERM GOALS SHORT TERM GOALS
Vacation Home, comfortable retirement, Children’s education and marriage A vacation abroad, A big car Need for spare and surplus cash
Equity Mutual Fund­s and Hybrid Funds Fixed Income Funds Liquid Funds

In goal based planning, it is important to understand how much you can save or invest for that goal. You could either use a systematic investment plan (SIP) to save for it or go for a lump-sum investment or even a combination of both.  Read More – How to Start a Systematic Investment Plan (SIP) in Mutual Funds and Power of Compounding.

Consider Goal Based Planning for a 4 year old child with following cash requirement:

  • In 14 Years: Rs. 2 Cr. (for graduate studies)
  • In 17 Years: Rs. 1 Cr. (for postgraduate studies)
  • In 20 Years: Rs. 2 Cr. (for marriage)
Allocations
Monthly Investment (Ongoing SIPs)
Large Cap Equity SIP – Rs. 25,000
Small & Mid Cap Equity SIP –  Rs. 25,000
Multi cap Equity SIP –  Rs. 25,000

 You can break up the monthly investment amounts between large, small and mid-cap equity funds which are market driven and over a period of time (typically 5+ years) they return higher than broad stock indices. To keep things conservative, in all my assumptions, I have assumed a growth rate of 14%.

In the attached excel, I will highlight growth of SIP amounts, if the same (i.e. Rs.75k monthly SIP) was continued for the next 20 years.

Amount in Equities at the end of 14 Years: Rs. 1.26 Cr

Projected Portfolio at the End of 14 Years = Rs. 1.87 Cr (After taking pay out of Rs. 2 Crores)

_____________

Amount in Equities at the end of 17 Years: Rs. 1.53 Cr

Projected Portfolio at the End of 17 Years = Rs. 2.08 Cr (After taking another pay out of Rs. 1 Crores)

_____________

Amount in Equities at the end of 20 Years: Rs. 1.80Cr

Projected Portfolio at the End of 20 Years = Rs. 1.40 Cr (After taking another pay out of Rs. 2 Crores)

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Goal-Based-Planning

  • USE THE ATTACHED EXCEL: If you change the amount of monthly SIP you pay (in Column B5 of the attached Excel), you will see the amount you will have left after meeting your goals will change (in the green boxed above your GOALS).