How is Goalwise better than FundsIndia or ICICI Direct - Part 2


In Part 1, I wrote about how Goalwise being a We'll-Do-It-For-You platform is better than Do-It-Yourself platforms like FundsIndia or ICICI Direct.

With Goalwise, getting the maximum out of your money does not require you to spend a lot of time or be an investing expert.

Goalwise also saves you from harmful behavioral biases by automating a lot of implementation details - the boring, tricky but important stuff like Mutual Fund selection, risk-profile based asset allocation, rebalancing etc.

In this post, I will show you how Goalwise leverages all these features to bring you something truly useful - Goal-based Investing.

Goal-based Investing

Simply put, it means investing according to your (financial) goals. A goal comprises a purpose (say Retirement), a time horizon to achieve it (say 35 years from today) and an estimate of a target amount (say 5 Crores).

One typically has multiple goals of varying time horizons and targets. For example, a married man of age 35 could have the following financial goals:

  • Retirement - after 35 years - 5 crores
  • Child's education - after 12 years - 1 crore
  • Vacation - every year - 1 lakh

It is easy to see why all financial advisors and planners swear by goal-planning and goal-based investing as the best way to achieve financial security. Once you have set your goals and planned for them, it gives you the clarity and peace of mind that ad-hoc saving and investing cannot provide.

Okay, but what is the big deal? Can't I just save as much as I can and invest for the highest returns and achieve all my goals without explicitly planning for them?

Well, as they say - failing to plan is planning to fail.

Even if you save as much as you can and are investing in things that give you the highest returns, there is stuff that can still go wrong. And in a big way.

Imagine this - you are that 35 year old guy whose goals we spoke about earlier. You have been investing mainly in stocks (Mutual Funds or directly), since you are still young and have a high risk taking capacity. The markets are doing well and your investments are growing.

You are now 45. Your daughter is about to finish her 10th and wants to go abroad for her college degree after two years. No problem, you think, because this is one of the things you had in mind while investing, even though no explicit planning was done. Your portfolio has done well and is big enough to take care of the expense coming up 2 years later.

Suddenly and unexpectedly, the stock markets start going down and in just a few months they have come down 30-40%. Maybe some idiot flew a plane into a sky-scraper again, or maybe the economy slowed down. Stuff like this happens, and stock markets go down a lot almost every 5-7 years.

Since you kept investing without explicitly planning for your goals, you were as exposed to the stock markets as you had been in the past and your investment account too lost 40%. Maybe even more.

Now you can no longer fund your daughter's education without selling almost all of your investments. What about your retirement? Not only will you be forced to sell your investments when the stocks are sharply down (typically a great time to buy), but also start from scratch for your retirement. Not a happy position to be in, right? What did you do wrong? Almost nothing. Except failing to plan goal-wise.

How would goal-based investing have been different?

To start with, you would have had one separate portfolio for each goal - i.e. a different portfolio for your retirement, one for your daughter's education, and another one for your vacation.

Then, each portfolio would have had a different target amount and different time horizon associated with it.

How much time is left for your goal decides how much risk (and hence, stock market exposure) you should be taking with it - if 12 years are left then you can have a high allocation to equity (stocks) Mutual Funds, but if only 2 years are left then most of your money for that goal should be in safe and stable instruments like debt Mutual Funds (which give Fixed Deposit like returns).

So when you were 35, you would have started off with a high equity allocation for your daughter's education goal (thus earning higher returns). As the time to send her to college came nearer, your portfolio would start moving from risky stocks to stable debt.

Now, even if the stock markets declined sharply just 2 years before the money was needed, your losses would be small, if any. So you can sleep peacefully knowing it will all be there when you need it.

What about your retirement portfolio? Well, since there are still probably 15-20 years left for you to retire, it would have higher equity allocation and hence would take a larger hit due to the stock market decline - but that is okay because you do not need this money right now and you can wait it out.

Once you start approaching your retirement, even this portfolio should start moving from stocks to debt Mutual Funds because now you have fewer years to wait out any adverse market event.

This is the beauty of goal-based investing - it balances higher returns with your individual needs, ensuring that the money is in safe assets when you need it. Once you have planned for your goals adequately, you can sleep peacefully and spend guilt-free. It is highly customizable and can be setup as per your unique needs.

But as you can see, it does take a lot of work - from you or your financial planner (if you have one). Just to recap, one would need to do the following to properly implement goal-based investing:

  • For each goal keep track of the time left
  • Adjust the stocks and debt part of investments accordingly - generally move money from stocks to debt as you approach the goal
  • Select the best stock and debt mutual funds to invest in
  • Remove money from the old funds and invest them in the new funds
  • Asset allocation might also change over time due to market movements -
    • if the markets have run up move some money from stocks to debt (sell high)
    • if the markets have gone down then move some money from debt to stocks (buy low)
  • Do all this for each goal, every year and that too in a tax efficient manner

Phew!

Surely, a financial planner who does all this for you meticulously does earn her keep. But most people don't have one. Even when they do, it is usually them running after their financial planners to review things, and not the other way around.

What about platforms like FundsIndia and ICICI Direct? As we have seen, despite their fleet of so called 'relationship managers', they are primarily built and work as a Do-It-Yourself platform. Hence, even when they do offer 'goals', it is merely a label for a portfolio and nothing more. The most they will do is give you a starting portfolio and after that you are on your own. So, all said and done, it is mostly a marketing gimmick and not actual goal-based investing.

This is why we created Goalwise. It does everything that I listed out above. Not just one or two of those things, but everything. After all, there is no point in creating something just marginally better, right? So we went the whole way and created a platform where you just need to set a target amount and time horizon, and everything else will be taken care of by the platform automatically. And that too for free!

As I said, the future is here. Have you signed up for it yet?