Mutual Funds: A Brief Note on Goal-Based Systematic Investment Plan

In the past few years, systematic investment plans (SIPs) have gained traction for their disciplined and convenient approach to investing. 

However, initiating the SIP approach a step further and aligning it with specific financial goals could transform it from being just a good to great investment opportunity.

Typically, a SIP involves investing a fixed amount in mutual funds at regular intervals, whether monthly or quarterly. SIPs are known for their simplicity and ability to instill financial discipline among investors. It allows an investor to kickstart the journey of investing with minimal amounts, which could be as low as Rs 100. The aim is to benefit from the power of compounding over a period.

Though SIPs offer various benefits, aligning them with specific financial objectives ensures focused and steady gains in the long run. 

Generally, goal-based investing involves identifying and prioritising financial goals, such as funding a child’s education or retiring comfortably, and tailoring investment strategy accordingly to achieve these objectives.

There are various advantages of goal-based SIPs, which include:

Clarity of purpose: Clearly defined financial goals tend to introduce focus and alignment to various investment decisions.

Emotions management: Goal-based SIPs reduce the significant impact of emotional biases, which could be related to fear, greed, or impulsive reactions to market volatility, on an investor’s investment choices.

Avoid impulsive withdrawals: Goal-based SIPs act as a hedge against impulsive fund withdrawals, as an investor understands that tapping into SIP funds can hinder progress toward the investor’s intended financial objectives.

Helps avoid overspending: Goal-based SIPs aid in creating a budget that aligns with an investor’s financial aspirations. An investor can avoid overspending suitably by allocating predetermined amounts to each goal.

Ongoing monitoring: Tracking the progress regularly while achieving the financial goals ensures that an investor remains on the right path.

Here’s how to go about implementing a goal-based SIP:

Identify and prioritise financial goal: Kickstarter the journey by identifying the short-, medium-, and long-term financial goals. Prioritise such financial goals based on urgency and importance.

Quantify goals: After this, assign a specific financial value to each goal, considering factors such as inflation and the time horizon for achieving the specific goals.

Proper risk assessment: Evaluate the risk tolerance for each goal, considering the investment horizon and willingness to withstand market fluctuations.

Select investment options: Ideally, choose investment instruments that align with the risk profile and time horizon of each goal. Also, ensure diversification of investments to manage risk effectively. Consider solution-oriented products for goals such as funding your child’s education or retiring comfortably.

Set up SIPs: Implement SIPs for each goal by investing an appropriate amount regularly. Ensure the investments are in line with the financial requirements and risk profile of the respective goals.

It is important to note that SIPs aim to provide a platform for disciplined investing, which could be helpful in allowing individuals to grow their wealth steadily over a period. By aligning investments with specific financial objectives, investors could achieve a higher level of financial security and fulfillment, making their financial journey more purposeful and rewarding.