A roadmap for achieving financial goals in time

Successful goal-based investing demands a disciplined approach, appropriate asset allocation, and timely adjustments to navigate market fluctuations and ensure your financial security at each stage of your journey. Remember, it's not just about accumulating wealth, but also preserving and efficiently distributing it to achieve your desired outcomes

We usually invest towards achieving a goal, for instance, college education needs, retirement, etc. And we tend to invest across multiple avenues like bank deposits, insurance, equities and mutual funds (MFs). As the goal nears, we tend to reduce the volatility in the value thus in case of approaching through equities or if there’s an equity exposure of the investment, we tend to move towards a relatively lesser volatile avenue or a debt/ deposit instruments. This is done so as to ensure the need is achieved or guaranteed irrespective of the market conditions.

However, one must understand that investing for a goal involves three stages i.e. of accumulation, preservation and distribution. Accumulation is the first phase where an appropriate investment avenue is chosen for the purpose. This is in consideration of the risk appetite, timelines and other related factors. These factors then provide the exact proportion of allocation to the assets.

Numerous strategies are available in public domain to achieve this objective ie, accumulation of wealth. A more disciplined and principled approach of staggered investments to equity has proven well for the investors in the long run. Of course, accumulation phase doesn’t only mean the contribution of funds towards the goals but also involves in periodic review of the investments. And as the market conditions vary, the allocations could also vary accordingly.

This rebalancing of the portfolio becomes pertinent as the goal timelines are approached. This is also one of the major exercises in the preservation phase. The idea is to contain any risks that prevent the erosion of the gains made so far. Accordingly, the asset allocation is in the existing strategy is continued or altered. This is particularly true as the goal timelines are neared, the asset allocation is altered and so the choice of fund. Should the same fund continued in its proportion or whether the profits be moved out to a safer investment, etc. The preservation phase addresses this conundrum and on consideration of these factors, investment decisions are made.

The distribution phase is where the accumulated corpus is consumed. For goals like children’s education or marriage needs, the requirement is usually lumpsum/ one-time or spread over a short to very short period. The solution is classic as mentioned earlier, the desired amounts are moved to much less volatile or liquid investments and are withdrawn at the required time.

But, when the investments are made for the purpose of retirement, the cashflow requirements are spread over a medium to long-term, so transferring all of the corpus into a liquid or less volatile investment avenue doesn’t help and at times could turn out to be detrimental to the erosion of the corpus quicker than desired or losing of its value due to inflation.

Systematic Withdrawal Plan (SWP) is a very good solution to address this issue. This is inverse to the SIP (Systematic Investment Plan) where a fixed amount is contributed for investment while in SWP, a fixed amount is withdrawn to provide for the consumption requirements. SWP could be applied on the accrued corpus with a defined interval that suits the requirement and the same is reached directly into the bank account of the investor.

Earlier a much simpler option of dividend payouts is considered for this kind of regular requirement, though the amount of dividend is varied with the market conditions. Now, with the introduction of taxation of dividend income, it no longer remains an attractive option.

This is particularly helpful for retail and small investors. The gains from equity and equity-oriented instruments are considered as capital gains and for gains made from units held for more than one year are translated to long-term capital gains (LTCG). The threshold for each financial year currently stands at Rs1 lakh for gains made through LTCG. Thus, SWP forms for a superior option than a dividend payout for not just the tax consideration (up to the limit) but also the certainty of the sums (investor could choose unlike a dividend). A similar option is also introduced recently even in the NPS (National Pension Scheme) at the time of maturity.

(The author is a co-founder of “Wealocity”, a wealth management firm and

could be reached at [email protected])