Investors generally have many questions in their minds like how to invest, where to invest, asset allocation strategy, etc. Therefore, it is essential for them to have a financial plan ready before they start their investing journey. In an interview with Mint, Prateek Mehta, co-founder and chief business officer, Scripbox, said goal-based investing is a very good idea that can support your financial plan, as this provides you with a personalized structure to invest within a goal-based framework. Edited excerpts:
How does goal-based investing help investors?
For your long-term goals like retirement or a child’s education, asset allocation forms the bedrock of your financial planning. Goal-based investing is a method of investment in which your financial goals decide your asset allocation. The goal-based asset allocation is personal, as you map your investments to your own goals and not some pre-decided benchmark. It will, thus, take into account your time horizon, understanding of risk and expected returns.
A good expert will help you create a glide path on your goals and will accelerate investments and mitigate risk depending on how close or far you are from your goals on the time axis.
What are the avenues of investment available?
For first-time investors, it is essential to have a financial plan, and an approach based on this plan, to make investing a regular habit. Goal-based investing is a very good idea that can support your financial plan, as this provides you with a personalized structure to invest within.
For instance, the pandemic has taught us the importance of having an emergency fund. You could use liquid funds to create a corpus that would take care of your expenses for six months even if there was a medical emergency or job loss. For short-term goals (1-5 years), look at debt funds.
For young investors, the starting salaries tend to be limited and saving is difficult considering the many distractions provided by life. In such a scenario, debt funds are ideal to start with. Debt funds serve as a good avenue for starting investments to learn about the income, the related expenditure and the corresponding saving pattern. They provide liquidity and a stable return (around 6-7% per annum historically). If held for more than three years, this investment also becomes tax-efficient as indexation can be applied to the investment. This will be important as in three years the increase in salary also increases potential tax liability. This feature makes it a better alternative than fixed deposits.
How do we make investment decisions during such uncertain times?
It is important to not panic and not exit your investments as a reaction to market fluctuations. Even when the market is down, keep your investments intact and continue with your systematic investment plans (SIPs) and other systematic investments.
The pandemic we are dealing with is unique, but this isn’t our first rodeo. In the 20th century, we have witnessed multiple pandemics, world wars, the collapse of financial markets, military coups and social and political tensions.
The infamous global financial crisis of 2008-09 led by the bankruptcy of investment banking giant Lehman Brothers wiped out over $2 trillion of the global economy and left millions jobless. Let’s assume you were ‘happily’ invested when the global financial crisis hit and held on to your investments over the next 10 years. The Sensex was at about 17,650 in January 2008 and crashed down to 8,700 by October 2008. Fast forward 10 years later to September 2018, and the index more than quadrupled to about 38,000 points!
Planning well in advance by mapping financial plans to goals helps you remain on course despite market fluctuations. As long as you stay invested and adhere to a rational asset allocation approach, you can make back the money you lost during a downturn. It is important to be patient and keep reasonable expectations of wealth creation and accumulation.
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