As a concept, how important is goal based investing? And because we have so many goals in our life, how do we actually compartmentalise the kind of goals that one can actually decide for themselves?
I think you have yourself given a lot of detailing on the importance of goal but let me give you a very quick summary of at the core. Goal based investing is nothing but it is a personalised investment strategy that aligns your financial goals with your investment portfolio. It involves identifying your financial aspiration; such as buying a house, funding a children education or saving for retirement or financial freedom or developing a plan that is tailored to achieve these goals. So what happens normally whenever I take a lot of sessions and I ask people that how many of you want to become rich, everybody raises their hand. But when I ask how many of you have planned your goals, I think only 5-10% of them tell that they have planned their goals and accordingly they are following the investment strategy so the problem is the discipline.
And I think that is where big problem is there, people do not understand that why it is very critical to have a goal based plan. It is very important to make a framework wherein you define your goals in three parts; safety bucket, stability bucket, as well as aspirational bucket.
So safety bucket is nothing but a bucket where you want to make sure tomorrow come what may, I do not want to be poorer than what I am.
It is the basic plan. And if the foundation of the building is strong, you can build a skyscraper there. Soit is very important to have a safety corpus. Apart from that, coming to stability, your children future, your financial freedom, any other goals, medium term goal comes under the stability goal.
And apart from that, the aspirational is something wherein you want to do something and again it is not related with money, it could be getting more power, getting more freedom all these come under aspiration and for that it requires a completely different mind-set.
So the investment need to be completely different for each of these categories. Like for safety corpus, I will put in something like a fixed deposit, liquid funds and debt funds where I want safety as very important. I do not want value of my investment to come down. But for a stability corpus, yes I have a good time frame available and I am ready to take risk for that period. And aspiration is something where I am ready to make more concentrated investment and ready to make very outsized return but it comes with high risk also.
So now, based on the kind of goals that you have, based on your goal selection you definitely need to pick up or select the right kind of asset class and investment instrument. How does one actually get on to that level? We have lined up our goals. We know that we want to achieve a particular financial goal within so many years but what should be the criteria for selecting the right kind of investment instrument or according to you, you just need to have like a model financial portfolio and based on that portfolio, you just assign the kind of accumulation years that need to be allotted to the portfolio and your goals will automatically be achieved?
The first job is building specific buckets; the safety bucket, stability bucket and the aspirational bucket. And in each of these buckets, you need to identify each goal with a very definite amount and a time period when you want to achieve it. Next comes the process of identifying what is your right risk profile. And again, risk profile is a subject I can take a one day session for it. Risk profile is identifying what is your psychology towards risk, how much your ability to take risk. So we need to get deeper there and understand what is the right asset allocation mix which takes care of your risk profiling. After the risk profiling has been set in, we need to make sure the portfolio need to be made which is suitable to your risk profiling.
So the suitability part is extremely important since we have done a very clear cut defining of safety, stability and aspirational goal. It starts defining what should be, let us say on a larger level what should be your asset allocation. Once the asset allocation has been defined, then you start zeroing at the security level. What security you want to buy, which investment product you want to take, which instrument you want to take; all these comes after that. So I feel this process is a very structured process and you need a very-very strong handholding to get there. According to me, it is not a do it yourself kind of model. It requires a prescription based model where somebody can really help you achieve this goal in a very time bound manner.
How important it is for one to analyze the kind of risk appetite they have even after analyzing the kind of goals you want to achieve and you have got a financial portfolio in place will you not go ahead if you do not have the right kind of risk management in place in your portfolio?
Yes, risk management is extremely important but risk management will come once you have a very clear cut idea that what is the purpose of this portfolio. What happens is once the purpose part is not very clear at times you will end up at when the market goes down you start panicking and that is where you can take a very irrational decision. So risk management is not about selling the portfolio it is about ensuring whatever prudential limits which have been identified from an asset allocation framework you always stay under that and there is a proper rebalancing of the portfolio which we keep doing whenever we see that breach of that prudential norms is happening there for us.
How do you align and how do you identify your short term goals and when do you start planning for it because if it is again advanced planning that it might just fall into the category of your long term goal?
I started with that. I think short term goals or the safety bucket is the foundation stone and when your foundation is strong you can build a very large wealth creation oriented portfolio. So the first and most important part and as we have seen in times like 2020 where we have seen people having job losses business losses is and we have seen a stress of another level. I think that is the best example we have seen in over last one decade and in that environment I have seen families which have created a very strong safety bucket or a strong contingency portfolio.
They were able to tide this environment in a much balanced way compared to somebody who are not planned for it. Like six months you are out of job or out of business at that point of time how will you take care of your home? So it is very important to identify that very clearly and start working towards it because that is one very important short-term goal one can have. Let us say a goal after one year you have to make payment for your daughter’s education or a child future I think that could be again a short-term goal. Any goal which is less than one to one and a half year according to me will come under the short-term goals. Let us say you have to make a payment for your house property in next one year that also comes under short-term goal. So you need to make sure you have adequate amount of portfolio available which is not in a very high risk category. It needs to be low to medium risk category in order to take care of the short-term goals.
