One of the major problems that investors face is to decide how to invest and what should be the ideal process that they should follow to invest and how to approach while following a Goal-based approach.

Investment is not a one-time affair rather it is a process that has to be followed by a systematic approach. One of the keys to structuring the investment process is to understand the goal-based approach to investment.

In this article, we would try to understand what a goal-based approach is and how to define goals.

What is a Goal-based investment approach?

Let us understand this with an example – let us say you walk into a shopping mall and see 10 good kinds of stuff and end up buying all of them. The next week you again go to the same mall and end up buying 10 more cool stuff and keep on doing this for the next few months and end up having hundreds of such stuff.

But, did you really need these things? Does this impulsive buying help you in finding the right things?

The answer is a simple NO.

The same is the case with investments.

An investor keeps on buying products either whenever he feels like (usually when the markets are positive), sometimes impulsive buying or as and when he is advised to do so usually by their bankers, wealth managers or various other intermediaries.

They end up investing in NFO’s which are being heavily marketed or investing in funds which they are not sure whether they need it or meets their requirement or it fits in their portfolio or even buying capital protection funds or ULIP (Unit Linked Insurance Plan).

How do I decide upon my GOALS?

The simplest way to decide upon the goals is to be SMART about it but is it that easy? Of course not but an investor can structure the GOALS by following the SMART approach towards his goal. This framework of SMART goal can be understood as –

S – Specific

The goal has to be specific. “I want to go to a vacation” or “I want to buy a car” these are vague goals with specific quantum or timelines rather I want to go on a vacation to Europe for 10 days in 2022” or “I want to buy an SUV worth 10 Lakh in 2022” are more specific goals.

M – Measurable

The entire objective of the process of financial planning is to achieve the preset goals in monetary terms hence the goal has to quantified and measurable to be able to achieve them in monetary values.

E.g. “I want to go on a vacation to Europe for 10 days in 2022 which will cost me around 10 lakh” or “I want to buy an SUV worth 10 lakh in 2022”.

A – Attainable

The goal has to be in line with one’s earnings capacity so as to make it attainable.

For a person who is a conservative investor (as per his risk profile) if he sets up a goal with aggressive returns expectation especially with respect to the equity market which is volatile, there might be instances where he might actually not meet the goal as well, hence one needs to set the goals which are attainable.

R – Realistic

The goals have to be realistic.

If one’s income is 5 lakh per annum with a salary growth of 10% per annum (with no investible surplus) to be able to achieve a goal of holidays abroad in 2 years of time with a cost of 10 lakh or to buy a car worth 10 lakh in 2 years will be highly unrealistic, hence it’s very important to set the goals which are realistic.

Also, an investor has to be aware of the fact that inflation has a dragging effect as it eats out of the returns hence it should be also accounted for while designing the GOALS and quantifying them and hence to be realistic about the goals is very important for a prudent investor.

T – Time-bound

The goal has to be time-bound. Goals can’t be ambiguous it has to be quantified and time-bound. “I want to buy a house” is an ambiguous goal whereas “ I need to buy a house worth 50 lakh in 2025” is an example of a SMART goal as it is both time-bound and quantified.

Example of SMART Goal

Above is an example of S.M.A.R.T. goals set by one investor which clearly shows the prioritization of goals along with them being quantified and time-bound.

Goals can also be looked in a broader sense as Short Term (0 to 3 year), Medium Term (3 to 10 years) and Long Term (11 to Lifelong). Goal Based approach to investment can be followed as per the process flow chart mentioned below –

Goal Setting Process

The biggest benefit of this approach is that it inculcates a sense of discipline to the investors and since the goals are data-driven it gives confidence to investors. The investments are not randomly done rather it gives a freedom to have guilt-free spending and helps in avoiding biases and unwise actions.