Below is the verbatim transcript of the interview
Q: Many people begin investing without having any real objective. How important is it to invest with financial goals in mind? Does it change in any way, your asset allocations or what kind of return anyone could make?
A: Investing without a goal is like shooting in the dark. Many people come to financial markets chasing the hot assets, chasing the returns but never look at what they really want from themselves. So, I think the first and the most important thing that goals help you in doing is that goals help you avoid bad investment decisions.
If you have put down your goals, the first thing that you do when you are looking at financial instruments or savings is that whenever somebody comes and tells you that - should you be investing in this product, will it help you achieving your goals. If not then this product is not for you. So, that is the most important thing that financial goals help you to figure out.
Apart from that, there are three other important reasons of how financial goals can help you in your investment decision making. First and by far the more important one of it is that it tells you the kind of risk appetite that you have. People very often have certain goals but the goals and the kind of savings that they do are not linked to the kind of risks that they are willing to take. That is where it helps you.
Secondly, it helps you to decide the kind of asset allocation that you should be going for. Let's say a particular individual can save Rs 10,000 a month, he is not willing to take risk with that investment and let's say that particular value grows at 8%. Now, at 8%, the value can grow to a certain amount during the investment horizon. Now, if investor's goal is higher than that then he has to obviously take higher amounts of risk. So, not only does it tell you what is the kind of risk appetite you have, it also tells you how your asset should be distributed.
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Finally, it helps you in the emotional aspect of investing. People are very emotional. We are always driven by either greed or fear. Let me relate a story from 2007. Many people in 2007 had more money in their corpus, in their savings than they needed for their retirement but because of the way market were, people were very bullish and they wanted to basically hold on.
If at the same time you had a corpus target, if you know you need Rs 2 crore for retirement and you saw that your assets were higher than Rs 2 crore, you would have then not risked anymore or you would have at least partially booked your profits. So, if this is how you think about your investments where you have a goal linked to your savings, it helps you to take a decision as to when is a good time to get out of your investments.
How should you go about this whole process of framing goals for your investments? Framing goals is basically asking four simple easy questions to yourself. The first question - is what is this goal that you are talking about? Is this a goal of going for a holiday six months down the line, is it a goal of buying a car three years down the line or is it a goal of retiring after 20 years? So, the goals could be of different types. It could be a short term goal, it could be a long term goal. So, first what you need to decide is that what is this goal that you are aiming.
Secondly, you need to figure out if you are going to use up or basically plan for this goal what is the kind of money that you are willing to spend on that goal. You need to figure that value as of today. So, if you were to plan for your kid's education and if you were to send him for an engineering education, that would cost you Rs 10 lakh today. If this goal is due 10 years from now then possibly you will need Rs 20 lakh. So, you need to start saving for that goal doing calculations on Rs 20 lakh and not on Rs 10 lakh. That is the second thing that you need to ask yourself.
The third thing that you need to ask yourself is that - how much are you currently saving towards this goal? This is very important because that gives you a real picture of where you should be and where you are. So, these are the three-four important things that you need to ask yourself to figure out whether you are progressing towards your goal or you are not progressing towards your goal. We are very certain that having goals, financial objectives towards your investments will definitely help you reap better investment decisions from your savings.
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