Goal-based investing for short and medium-term financial goals

Financial goals along the financial planning journey

Comprehensive financial planning is a lifelong journey. The journey consists of many financial goals that we need to achieve on the way. Based on the time left to achieve goals, each goal may be classified as short, medium, or long-term goals. This article will discuss how to do goal-based investing for short and medium-term financial goals.

Categorisation of financial goals

Every individual has various goals. The first step is to classify them as either financial goals or other goals. In this article, we will focus only on financial goals. Based on how much time you have to accomplish a financial goal, it may be categorised as a short, medium, or long-term financial goal.

1. Short-term financial goal
   
   Any financial goal that needs to be achieved within three years may be classified as a short-term financial goal. Some examples of short-term financial goals include:
   • Building and maintaining an emergency fund
   • Buying term life insurance for all family bread earners
   • Buying an adequate amount of health insurance for all family members
   • Repayment of credit card loan, personal loan, or any other short-term loan
   • Buying a two-wheeler or small car
   • Accumulating money for an annual domestic vacation
   • Accumulating money for the down payment of a house purchase (where the amount to be accumulated is less than Rs. 10 lakhs)
   • Purchasing a consumer durable or electronic gadget etc.
     
2. Medium-term financial goal
   
   Any financial goal that needs to be achieved within 3-7 years may be classified as a medium-term financial goal. Some examples of medium-term goals include:
   • Repayment of an education loan
   • House renovation
   • Accumulating money for the down payment of a house purchase (where the amount to be accumulated is more than Rs. 10 lakhs)
   • Buying a bigger car or a luxury car
   • Accumulating money for starting own business or venture or start-up
   • Accumulating money for an international vacation or world tour with family
     
3. Long-term financial goal
   
   Any financial goal that will take more than seven years to be achieved may be classified as a long-term financial goal. Some examples of long-term financial goals include:
   • Accumulating money for a child’s higher education
   • Accumulating money for a child’s marriage
   • Build a retirement fund for self and spouse
   • Buying a second home or a holiday home

Please note that the timelines for short (0-3 years), medium (3-7 years), and long (more than 7 years) goals are thumb rules followed by most financial experts. You may change these timelines as per your need. Also, what is a short-term goal for someone may be a medium-term goal for you, and what is a long-term goal for someone may be a medium-term goal for you.

Goal-based planning: How to accomplish a short-term financial goal

The timeline for accomplishing a short-term financial goal is usually three years. Based on this timeline, fixed income products such as debt mutual funds are ideal for investing towards short-term financial goals. Within debt mutual funds also, depending on the specific goal, you can choose a particular type of debt mutual fund. Some examples include:

1. Building an emergency fund with liquid fund
   
   Everybody should have an emergency fund with 3-6 months' income. A liquid mutual fund is ideal for building and maintaining an emergency fund. Some AMCs offer an instant redemption facility for liquid mutual fund schemes. Using this facility, a unitholder can redeem their units (up to a specified amount), and the money gets credited to the savings account instantly through IMPS. Also, debt mutual funds are tax-efficient compared to recurring deposits or bank savings accounts for building and maintaining an emergency fund.
   
2. Building house down payment fund with money market fund
   
   A bank requires you to make a down payment (usually up to 20% of the property value) for a home loan. You can accumulate the down payment by starting a systematic investment plan (SIP) in a debt mutual fund like a money market mutual fund. The fund invests the money in money market instruments such as treasury bills, Government securities, etc., with a residual maturity of up to one year. The risk in money market mutual fund schemes is low.
   
3. Building annual vacation fund with a corporate bond or credit risk fund
   
   Many people prefer to take annual domestic vacations. You can build a fund for this financial goal by starting a SIP in a corporate bond fund or a credit risk fund. A corporate bond fund invests a minimum of 80% of its total assets in the highest-rated debt instruments. 
   
   A credit risk fund invests a minimum of 65% of its total assets in debt instruments rated below the highest-rated instruments. The risk profile of a credit risk fund is relatively higher than that of a corporate bond fund.

Performance of credit risk funds

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/credit-risk-fund.html)

Note: The above data is as of 12^th November 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.

Goal-based planning: How to accomplish a medium-term financial goal

The timeline for accomplishing a medium-term financial goal is usually between three to seven years. Based on this timeline, equity mutual fund products such as an index mutual fund scheme or balanced advantage fund may be used for investing towards medium-term financial goals. Some examples include:

1. Accumulating money for starting own business venture
   
   Manish wants to start a healthy-food company. He has been working on this project side-by-side along with his job. He wishes to get into this project on a full-time basis in 5 years and needs to invest Rs. 15 Lakhs for the same. Manish can start a SIP in an index fund with an underlying index such as the Nifty 50 or the Nifty 100 Index. The index funds have given good returns in the past and are a good investment vehicle for achieving medium-term financial goals.

1. Buying a luxury car
   
   Karan wishes to buy a luxury car worth Rs. 12 lakhs in 4-5 years. He can start a SIP in a balanced advantage fund. These funds invest in a mix of equity and debt instruments. The rebalancing is done based on parameters such as price to earnings (P/E) ratio, price to book (P/B) ratio, or other specified parameters. Balanced advantage funds are recommended for an investor who wants a mix of equity for growth and debt for the stability of the investment portfolio.

Performance of balanced advantage funds

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/dynamic-asset-allocation-or-balanced-advantage.html)

Note: The above data is as of 12^th November 2021. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.

Mutual funds are ideal for achieving financial goals

You can start a SIP in mutual funds, whether you have short, medium, or long-term financial goals. You can partner with the Glide Invest App to understand your risk profile and get recommendations for the appropriate investment products. You will get advice on how to plan and systematically invest towards your financial goals. 

With Glide Invest, you will get guidance for:

1. A personalised risk profile assessment
2. Identifying your financial goals
3. Appropriate asset allocation
4. Making a financial plan for each goal
5. Automating the financial plan
6. Review and analysis of your financial plan 
7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.