Goal-Based SIP
Goal-based SIP is an investment strategy which aims at shifting from imprecise wealth accumulation to defined goals or milestones. This approach assigns every rupee with an objective, measurable goal rather than only growing your money. The goal can be any of your financial milestones.
What is Goal-Based SIP?
Goal-based SIP is a strategy that aims to not only increase wealth over a period of time, but also assign that wealth a particular goal which is measurable and quantifiable in nature.
In this regard, you:
- Define measurable goals aligned with your investment horizon.
- Allocate capital to the best investment plans according to your defined goals, risk tolerance and investment period.
- Track your portfolio on a regular basis and readjust it as required.
Components of Goal-Based SIP
The components of Goal-based SIP include:
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Goal Identification and Quantification:
- Define your goal: Define the goal for which you are investing, it can be your child’s education, retirement or a house.
- Quantify the goal: Define the amount of capital you wish to invest in that goal. This means that you need to assign a precise monetary amount to the goal you wish to achieve by the end of the horizon.
- Time horizon: Define the amount of time for which you will be investing in a particular goal.
The following table lists some goals you can invest in:
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Goal Categorisation
- Short-term goal (0-3 years): focus on capital preservation. Examples include an emergency fund or a vacation.
- Medium- term goal (3-10 years): Focus on balancing risk. Examples include car purchase or school fees.
- Long-term goal (10+ years): Growth-oriented with a tolerance of volatility. Examples include retirement or higher education.
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Adjusting to Inflation
Inflation is an economic phenomenon characterised by the decreasing purchasing power of a currency paired with a simultaneous increase in the cost of goods and services. Inflation can significantly reduce the real value of your corpus by the time it matures, and thus, it is imperative to adjust to inflation by accounting for the future cost of the goal you are investing in.
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Asset Allocation and Selection
Asset allocation is a crucial component of goal-based SIP. You can use the following strategies to allocate your assets in the market.
- Diversification: It is recommended to diversify your portfolio by investing in different asset classes across markets. The horizon of your goal should be kept in mind as you do so. Asset diversification becomes crucial to mitigate the risk of single market volatility.
- Scheme selection: Select such schemes which directly contribute to building the corpus for your future goal. Different schemes offer different gains across different time horizons with different risks and tax benefits. For example, debt funds are generally preferred for short-term goals while equity funds are used for long-term goals. An SIP calculator can help you calculate your returns on the scheme of your choice.
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Systematic Execution
- Automation and disciplined investing: Setting up an automated payment system where a fixed amount is debited at pre-defined intervals not only makes investing convenient but also creates a disciplined investing habit.
- Multiple SIPs: Maintaining different SIPs for different goals helps you systematically track every goal separately and readjust your portfolio in accordance with your goal without affecting any of your other goals.
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Enhancement and Tracking
- Step-up SIP: Step-up SIP is used to automatically increase your principal amount by a fixed amount periodically. Step-up SIP helps you by starting small while constantly increasing your investment as your income increases over the years. This not only helps you grow your corpus over time systematically but also has the capacity to beat inflation by constantly increasing the principal amount adjusted to inflation, often gaining higher returns. You can use a Step-up SIP calculator to calculate returns on your investments.
- Periodic review and readjustment: Tracking the performance of your portfolio periodically and readjusting according to market fluctuations, inflation and your goals can help you build a corpus of your liking.
- Transitioning: Switching from high-risk to low-risk instruments as your goal approaches in order to safeguard your accumulated corpus.
Choosing the Right Asset for Your Goal
The following table summarises your goals and the asset you should choose for each. You can follow the table and choose the best investment plan.
| Goal Category |
Time Horizon |
Example Goals |
Recommended Asset |
| Short-term |
0-3 years |
Emergency Fund, dream vacation, gadget purchasing, down payment for vehicle/wedding/function |
Liquid funds, short-term debt funds, or bank fixed deposits. |
| Mid-term |
3-10 years |
Buying a car, down payment for a house, school fees or starting a business. |
Hybrid/balanced funds or large-cap/index funds |
| Long-term |
10+ years |
Retirement, higher education or foreign education. |
PPF, NPS, Equity funds, SGB, small and mid-cap funds. |
Common Mistakes to Avoid
- Investing without a definite purpose: Set precise goals with a defined investment amount, along with a time frame for investment. This will ensure that every rupee invested is accounted for and brings you clear, quantifiable returns.
- Attempting to time the market: An SIP generally removes the need to time the market through rupee cost averaging. Trying to time the market can increase the psychological burden on an individual.
- Ignoring inflation: Inflation has the power to reduce the purchasing power of your corpus by the time it matures. This means that the goods and services you were able to buy using a certain amount of money will cost you much more in the future. Thus using strategies like Step-up SIP can help you readjust to inflation.
- Choosing unsuitable investment products: Ensure that the investment vehicles of your choice align with your future goals, time horizon and your risk profile.
- Neglecting to step up SIP: A stagnant SIP will not be able to compete with your rising income or the increasing cost of living due to inflation. It is recommended to keep increasing your investment amounts periodically with time in order to beat inflation in the long run.
- Poor account management: Ensure your account always has a sufficient balance before the investment amount is debited from it. Missing three consecutive instalments often leads to the cancellation of an SIP. Additionally, if you fail to review and readjust your portfolio as per your goals, your investments might be wasted on instruments that no longer match your future goals.
Conclusion
Goal-based SIP is a clear pathway to a corpus of your dreams. However, it is necessary to ensure that your financial goals are quantifiable and clear. Vague goals lead to vague results. Ensure you research thoroughly before investing, and consult a professional to ensure your investment portfolio aligns with your financial goals.
FAQs
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Can a SIP calculator help me plan for financial goals?
Yes, when entering the investment amount, the tenure of investment and the assumed rate of return, a
SIP calculator can significantly help you in understanding your projected corpus.
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What should I do once I've reached my goal?
Once you've reached your desired goal and spent your corpus on the same, you can redirect the remaining corpus to other goals you are currently investing in.
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How do I calculate the target corpus for any goal?
To calculate your target corpus for a particular goal, firstly, estimate the value of the goal today, and then adjust it as per inflation, assuming a constant average rate of inflation over your years of investment. This will provide you with the estimated cost of that goal in the future.
