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How can you align your existing investments to goals? Start with this 7 step plan.

Having a disparate set of investments without direction, is like a car where the wheels are pointed in different directions and each one moves at a different speed. Here’s what you can do, if you find yourself in such a situation.

While most mutual fund investors should invest with specific goals in mind, the reality of Indian investors is somewhat different.

A reality check

Most of us started saving first and then thought about investments. Anecdotal evidence suggests that many, if not all, young urban professionals started investing to save tax rather than for any specific goal. 

The fact is that in our mid 20s we rarely have any long-term plans for life. We are rather focused on the realities of the present where our income, in most cases, is just enough to survive. 

It is only when we have spent at least half a decade working that our income starts rising enough to actually leave something to save. Most of us move this saving to tax savings instruments. There is EPF contribution as well, which many see as a default. 

Those who saved beyond this, often ended up choosing Bank FDs. Or if their incomes are high enough, property and gold.

Equity – a late choice

Equity enters into the picture late for many of us. Most new investors are entering the equity market via the mutual funds route. Considering how easy it is to invest in mutual funds these days and our traditional focus on buying an investment product (after all that’s what is marketed) we end up with a disparate set of mutual funds. 

These get a share of our savings but aren’t meant for anything specific. Rather than an “asset class” selection based on goals and then investing in mutual funds within those asset classes, most of us just have 10 or more different schemes based on what caught our fancy or what was sold to us. 

Implications

As we grow older and responsibilities become apparent, we realise that our savings might need better direction. We have started noticing the effects of inflation and wonder how much will things cost in the future. The loans we have paid off, and are paying off, hint at the importance of having a significant corpus. 

Align your savings and investments – the path

In such a case, having a disparate set of investments without direction is like a car where the wheels are pointed in different directions and each one moves at a different speed. Here’s what you can do, if you find yourself in such a situation.

1. The first step

Collate all your investments in one place by simply writing them down or better yet use a spreadsheet application.

2. Decide what you realistically want to achieve with your savings - 5 years from today, 10 years from today, and 20 years from today. 

This is an easy way to classify your goals as long term or short term, with 5 years being the short-term mark. Anything beyond 10 years is long term. Have a goal amount linked to all of these and take into account inflation.

3. Now let’s start classifying 

First ensure an emergency fund worth four months of expenses. No, it’s not your savings account balance. If you have multiple fixed deposits, then allocate some of them for this purpose. 

This is all you need your fixed income investments for – emergency fund and short-term needs. If you still have more money in them (apart from EPF and other options which come with restrictions on withdrawals), then it might be a good idea to move them into options that are more suited for long term investing.

4. The short term

If what you want to achieve is due within the next five years, then depending on your existing savings and how much you will actually need, allocate your FDs and debt mutual funds to this.

This is all you need your fixed income investments for – emergency fund and short-term needs. If you still have more money in them (apart from EPF and other options which come with restrictions on withdrawals), then it might be a good idea to move them into options that are more suited for long term investing.

5. The long term

If you have a stock portfolio then allocate this to your long-term goals and talk to an investment adviser to check whether your portfolio is good, bad, or ugly from a long-term perspective. Too many small caps and not enough large caps might be a warning sign.

In case you have an equity mutual funds portfolio, link these to your long-term goal amounts.

7. Take stock 

Note all this down in your spreadsheet or notebook. You should know the following by now:

a) Your short-term goals and the total amount you will need for them, as well as how much you have already saved in the relevant investments.

b) Your long-term goals and the total amount you might need potentially, and how much have you have already saved up in the relevant investments.

In both cases, prioritise what is non-negotiable – emergency fund, retirement, and child’s education.

What next?

Now that you know where you stand with respect to your investments. The next step is to understand where your future investments need to go. 

For your long-term goals, once you have an estimate of how much you will need, start investing either via SIP or as a lump sum, whichever you find more convenient. Continue SIPs if you are already invested in the right equity mutual funds.

It might so happen that your current income is not enough for the goals and the SIPs needed. Don’t worry. As your income rises, raise your SIP amounts to move towards your goals. 

Now the short-term goals which you hadn’t planned for. If you have the monthly savings, allocate them to SIPs in good liquid funds or ultra-short duration funds. 

Do all this and you should be on your way to making your investments goal based. If all this sounds too daunting, take the help of an investment adviser or a financial planner. The sooner you go through this exercise the earlier you will move in the direction of your goals.

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