Goal based planning – how it can go wrong

I have never done any goal based planning in financial terms myself, even though I agree with the general principles. My belief has been that you need to be clear about your life goals and invest in the 3 portfolios of debt, MF and stocks as much and as well as you can. In my interaction with my blog readers I often come across examples where some goal based planning has been done in a very sub-optimal manner.

Let me share a scenario with you that I encountered in the last week only:-

  • Ajay is 44 years old and his son Raja is 10 years. Ajay wants to have 40 lacs at current prices for his son’s graduation and PG education.
  • As Raja will go to college in 8 years, the financial planner wanted to put the entire amount in debt, so that the money will be available risk free.
  • As Ajay wanted 40 lacs in current prices this meant putting 50 lacs in debt funds. As you can imagine most of his current assets were now locked in debt funds.
  • The other goal Ajay has is retirement in about 12 years which can be met through his PF, Superannuation, LIC policies and SIP of 30000 every month.

Now you are probably thinking why am I not in agreement with the financial planner here. The reason is a lack of understanding of the goal itself. Let us now take a look at things in a more detailed manner, like what the financial planner should have done.

  • Assuming that Graduation and Post graduation require equal money, Ajay needs 20 lacs in 8 years and another 20 lacs in 12 years.
  • Even in Graduation it will be 5 lacs each year and not 20 lacs in the first year.
  • Therefore keeping 40 lacs in debt when you have 12 years is really not making sense.
  • Ajay should simply put 10 lacs in debt funds and put the rest in equity MF over a period of time. If he wants to be more conservative he can look at Debt funds for graduation and Equity MF for post graduation.
  • This will free up some of his current resources. He will need to do a SIP of about 20000 as opposed to putting 20 lacs in debt funds.

Goal based investing cannot just be a mathematical exercise of applying the formulae and calculators. It needs some knowledge about real life scenario and application of that knowledge in meeting your investment goals.

I hope you would have taken care of these things while planning your goals.

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2 thoughts on “Goal based planning – how it can go wrong

  1. Sir,
    With due apologies, I think the problem is not with Goal based planning, but with the implementation of the strategy. From your article, I can observe that you also agree with the Goals, but the problem which you have rightly highlighted is more in the implementation and thought process behind it.

    Like

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