How to set investment goals and how to set financial goals - Motilal Oswal
How to set investment goals and how to set financial goals - Motilal Oswal

How to set investment goals and how to set financial goals

Financial goals are that which can be reduced to financial terms. For example, “I want to be happy” or “I want to lead a comfortable retired life” is a statement of intent. It is a goal. When they are translated into a certain monetary value and are extrapolated well into the future; that is when they become financial goals. Financial goals are those that you have to work towards. That means you must work hard and also make your money work hard for you. How do you achieve these financial goals? It is done by preparing subsidiary investment goals.

Investment goals are therefore subservient to your long term financial goals. Let us look at some financial goals examples and also how to achieve these financial goals. Let us also then look at how to set specific investment goals within these parameters.


What financial goals and investment goals are all about?

Financial planning is about creating a game plan for meeting your financial goals. What exactly do we understand by defining financial goals? If you want to really achieve your dreams you need to translate them into goals. These goals must subsequently be broken up into smaller milestones. Defining a goal is about setting up these milestones and translating your goals into financial numbers.

Financial goals are the first step. Then you need to set investment goals that are subservient to these principal goals. They will show the path. Let us look at 4 rules on how to go about the process of financial goal and investment goals.

Goals are ends and you then must look at means to that end. Goals may pertain to the short term like a margin for your home loan or the long term like retirement or child’s education. The first step is to identify the time frame for the goal.

Goals are meaningful only if they can be broken up into milestones because that is the only way you monitor goals. When you plan retirement after 30 years, it is pointless if you cannot monitor progress at least once in 3 years. That is why goal setting has to be granular and then broken up into monetary milestones.

No goal really is meaningful if you don’t tag appropriate investments to these goals. The emphasis here is on appropriate investments. You can just save and invest at random. You have a clear cut goal like retirement, future annuities, child’s education, child’s marriage, international holidays etc. Unless you match your investment plan to a pre-defined goal, you are unlikely to be able to either define or reach your goals.

Goals are not just about returns but also about risks. Your focus should on opti8mization; which means you either get the maximum returns for a given level of risk or reduce the risk for a given level of return. When you are planning for the long term or even for the medium term, you need to consider liquidity and the tax efficiency of you investment plan. After all, it is what you get after taxes that really matters.

You financial goal and investment goals have a confluence

Now understand the process flow from setting your financial goals to preparing your investment goals to monitoring the same. Here is how you go about it.

Step 1: Setting your financial goals clearly..
Setting and defining your financial goals forms the first step to financial planning. You need to be as granular and specific as possible. Goal setting is not just about investing. You need to provide insurance cover so that your goal can be achieved even in your absence. Look at what a foreign MBA used to cost 15 years ago and what it costs today. Assume a sharp increase in price over the next 15 years. Always underestimate the growth in income and the yield on your investments. Make it a point to overestimate the growth of your expenses in future. AT the end of the day you may be left with a cushion but that is a good problem to have.

Step 2: Are you loans and risk coverage taken care of?
Two important building blocks in financial goal setting are insurance and managing debt. A common reason people falter in their gaols is too much of debt. Let your life be adequately insured through a term plan and medical emergencies be appropriately covered through a medical policy. You can even opt for family floaters. At the end of day, you are covered from the Damocles Sword of debt hanging over you as well as the risk of uncertain events.

Step 3: Set your investment goals in a more granular manner
Once your goal setting and risk coverage is completed, you get down to the brass tacks of your investment goals. First thing to remember is that you must use the phased SIP approach. That not only syncs with your income but also gives you the benefit of rupee cost averaging. Secondly, tag specific SIPs to specific goals for clarity. No random investing please. Thirdly, let short term goals be in debt, medium term goals in balanced assets and long term goals in equity. That is the best way to match. Finally, monitor your investment mix every year and on major triggers. Rebalance your portfolio at least once in 3 years.

The success of your financial plan will depend on how effectively you define and monitor your goals. Get down to the detailing and the fine print. If you take care of the micros the macros will take care of themselves. Don’t worry about how markets will evolve or which government will come to power or how will interest rates move. You don’t have control over any of these factors. You have a control on your financial goals and your investment goals. You must just focus on that!
 

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