How to track your financial goals for goal based investing in mutual funds


Introduction

A goal based investing approach with mutual funds makes it simple for anyone to create an investment plan to achieve their financial goals.

You just need to define the purpose of the investment (aka goal), a target amount for that goal and a time horizon in which you would like to achieve that goal.

For e.g. you need Rs. 5 crores (target amount) in 20 years (time horizon) for your Retirement goal (purpose of investment).

The first step towards achieving your goal is to make an investment plan. This includes:

1. Risk Profiling

Risk is the chance of losing your money permanently. Risk profiling helps you in understanding your capacity and tolerance to take risk.

You may be willing to take higher risk but your capacity to tolerate risk can be limited or vice versa.

Your actual risk profile must take into account both these factors and not just willingness. One good way to know your risk profile is by taking Goalwise’s Risk Profiler here.

2. Asset Allocation

It is the % allocation or distribution between different assets in a portfolio.

For e.g. you can have 60% of your money in equity mutual funds (high risk, high returns) and 40% in debt mutual funds (low risk, low returns) thus having an asset allocation of 60:40.

You must judiciously allocate your investments in different asset classes depending on your risk profile and time horizon you have to achieve a particular goal.

For e.g. a 60:40 ratio in equity and debt funds works well for a moderate risk profile for a 10 year goal. However, even with a moderate risk profile, if the goal is just one year away then allocation to equity funds should be close to zero.

3. Mutual Fund Selection Strategy

You must have a strategy of selecting top performing mutual funds out of the thousands available and getting rid of non-performers regularly.

A data driven strategy keeps out subjective biases in making decisions of selecting mutual funds. Further, your mutual fund selection strategy should be aligned with your risk profile e.g. if you have a low to moderate risk profile, you should not invest in small cap mutual funds.

For e.g. Goalwise selects best performing funds based on a data driven mutual fund selection strategy. You can read more about it here.

After making the investment plan, the second step towards achieving your goal is to implement it by starting an SIP (Systematic Investment Plan) or doing a lumpsum investment for your goal as per your investment plan.

And, the next but equally important step is to track your goal periodically.

What is goal tracking?

In investing, goal tracking means periodically checking whether you are on-track to achieving the desired target amount in the time horizon you had set for the goal.

Most importantly, it also involves taking corrective actions if the goal is off-track.

You can think of it as tracking your commute or trip on Google Maps.

google-maps-tracking

At any moment you are aware of your ETA via the best route available and in case you end up taking a wrong turn, there are suggestions to get back to the original or modified best route in order to reach your destination.

Why is goal tracking important?

Goal tracking is important because it tells you whether you will be able to achieve your goal in time or not.

If your goal is on-track then you can rest easy rather than constantly wondering and worrying.

If not then you can take some corrective actions to bring it back on track in a timely way.

Without tracking your goals, you may only realise at the end of your time horizon that you have fallen short of your desired target amount. And at that point you wont be able to do anything about it.

How to check whether your goals are on-track or not?

Whether a goal is on-track or off-track depends on what is your desired target amount and what is the projected value of the goal based on its current status and your planned investments (SIP or lumpsums) and some reasonable assumptions about the future returns of these investments.

For example, a reasonable assumption of returns to use (based on the historical averages) can be that equity funds will give 12% per annum and and debt funds will earn 7% per annum on average going forward. (These numbers are what we use at Goalwise in our goal planning).

Based on this you can assume the following projected returns as per your risk profile:

Risk Profile Projected Returns Assumption
Low 8%
Moderate 10%
High 12%

It is generally better to be conservative in your returns assumptions so that there is higher certainity of achieving your goal. Assuming 15-20% returns per year is unrealistic and may not happen in the future.

You can calculate the projected value yourself now by using the compound interest formula or use a goal calculator (like here and here) to get the projected values.

If the projected amount is higher than your target amount that means you are on track to achieve your goal else you are off track.

on-track-off-track

When and how often should you track your goals?

Goals should be tracked periodically say half-yearly or yearly to check whether a course correction is required. A shorter frequency may not be useful as sometimes goals may keep getting on/off track due to shot-term stock market fluctuations.

For e.g. a goal may go off track as the stock market goes down in a particular month. But, the next month, when the market recovers and goes up then the goal also comes back on track. This is how the stock markets behave and it would be un-necessary to take actions based on short-term fluctuations.

You can set January and July as two calendar months when you are going to take stock of all your goals and see whether they are on track or not.

In between it is better to resist looking at your portfolio. :)

On-Track action

When you find that you are on track to achieve your goal then you don’t have to do anything. You have been sincerely paying your SIP instalments or doing lumpsums to keep the projected amount higher than your target amount.

Btw, one thing, you can pat your back for being a disciplined investor. :)

Off-Track corrective actions

When you find that your portfolio is off-rack then you can take one or more of the following corrective actions to get it back on-track:

  1. Increase the SIP amount: This will increase the total planned investments to be done in the future, thereby increasing the projected amount to match up to the desired target amount.

  2. Do a one time lumpsum investment: This will increase the existing investment and thereby increasing the projected amount.

  3. Increase the time horizon: This will help the existing and future investments to have more time for growth thereby increasing the projected amount.

  4. Decrease the target amount: Finally, if you can’t do any of the above or if you had set up an unrealistic target to begin with, you can lower the amount to match the current projections thus putting your goal on-track for a more realistic outcome.

Periodcially checking up on your goals can help you keep your goals on-track by taking small corrective actions along the way rather than being disappointed at the end.

My experience with tracking goals on Goalwise

I have been using a goal based approach for my investments through Goalwise. It comes with an in-built goal planner and tracker which saves my time in calculating the projected amounts for my various goals. I get to know whether my goal is on/off track from the dashboard itself.

goalwise-dashboard-with-on-track-goal

Not just that, whenever any of my goals is off-track, I get helpful and specific suggestions on how I can get it back on track using the ‘Fix This’ feature.

It does all the necessary calculations automatically and I can see all the corrective actions that I can take with the exact numbers for each of them e.g. how much do I need to increase my SIP by or how many months do I need to extend my time horizon by.

The best part is that I can then implement any of these actions with just one click!

For e.g. recently one of my goals went off-track and when I clicked on Fix This then it suggested me to either increase my SIP by Rs. 2,500 or make a lumpsum investment of Rs. 1,46,000.

get-back-on-track

If these two options are currently not feasible then alternatively it also suggested me to either increase the time horizon by 3 years and 4 months or reduce the target amount to about Rs. 38.5 lakhs.

The goal tracking and Fix This features from Goalwise have helped me keep all my financial goals on track because of which now I don’t have to worry about my investments and have peace of mind.

Goal tracking is an essential part of goal-based investing. It ensures you get valuable information regarding the status of your goals periodically, which can help you take corrective actions if and when required. As the saying goes, a stitch in time saves nine!

Go ahead and set up a recurring reminder for tracking your financial goals.