Set Measurable and Time Bound Goals before Investing

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Set measurable and time bound goals before Investing



The first step in the financial planning process is to create a list of goals that you would like to accomplish. Goals are difficult to define due to the subjective nature of determining what we want out of life and really figuring out what fulfils our personal needs. Setting goals is a mix of both, art and science. For every non-financial goal to be achieved, judge whether any financial need would be a precondition for achieving such an objective. Some such goals could be financial freedom, retirement, kids' education & marriage, house, etc.

Here, one needs to ensure that the goals are measurable in monetary terms and time bound, that is you should list the specific dates by which you would like to accomplish each and every one of your financial goals.

Once you set the financial goals, consider the instruments to invest in for achieving these goals. In India, mutual funds are the best option to channelize your savings towards the achievement of your financial goals because of these advantages: Professional management, diversification, convenient administration, higher potential for return, low cost & affordability , concessional nil tax liability, high liquidity, absolute transparency and well-regulated & a wide choice of schemes to invest in. Also, mutual fund schemes of a particular category can be used for multiple goals, depending on your risk profile and the investment's time horizon.

Determine your risk profile

Next is to check your risk pro file. Here, you would be better off taking the help of a professional, like a practising financial planner. This is essential to establish an investment strategy that you will be comfortable with, because equity investments may decline in value even though this may be temporary. Are you prepared to accept the possibility of a negative return at any time in exchange for potentially higher long-term returns?

Your risk-profiling may classify you in any of the broad categories in the first table Getting the right asset mix (the indicative equity debt allocation mentioned against each profile will enable you to set a target asset allocation of the portfolio and would ensure that you don't take unnecessary risks in your investments).

Categorize your goals

Next, you should categorize your goals into short-, medium and long-terms. This would help you select an appropriate investment for each goal. Short-term goals are those which you wish to achieve within the next three years, the investment for such goals should be in pure debt instruments. Medium-term goals are those which are three to seven years away and investments for such goals could be a mix of debt and equity. Long term goals are generally over seven years away and can be majorly in equities.

Next, spread the investments in schemes from the categories shown in the second table Go for diversification, based on the time horizon of your goals. This would also enable you to calculate the estimated returns of investments for each goal, enabling you to determine the amounts to be invested (whether lump sum, periodic or both) to achieve that goal. You also need to ensure that the asset allocation limits set for the portfolio are not breached while spreading the investments.

Know your tax bracket

Finally, it's important to check which tax bracket you are in before choosing between dividend and growth option in an investment. Equity balanced funds should be held for over a year, which makes the returns tax-free. So in these funds, select the growth option. Arbitrage funds, if held for less than one year, should be in dividend option. If you hold these for more than a year, select the growth option.

In case of liquid ultra short-term or accrual debt funds, the options will depend in which tax bracket you are. If you are in the 0% to 20% tax bracket, select growth option irrespective of the tenure of holding. However, if you are in the 30% tax bracket, go for dividend option in case your investment horizon is less than three years. And if the time span is for more than three years, select the growth option.

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