The Hindu Business Line : <I>Why set goals? </I>

Queues, especially long ones, are good places to get a cue on what the world at large is thinking. So my curiosity was kindled when I heard one co-standee at a queue ask his friend: "What are your financial goals?". Pat came the reply, "I want to own a house in a few years time, provide for my child's higher education and have a relaxed life after retirement". The first chap nodded in approval that his goals synchronised with his friend's.

But what both have in common are dreams not goals. A financial goal is achievable when it is specific and in monetary terms. "I need Rs 20,000 per month for my home loan instalment starting 2008" or "by the time my child is 17, I need Rs 5 lakh to provide for her under-graduation studies" perhaps sounds closer to what you wish to achieve. Investing without a goal is like a journey without a destination.

But why should goals be specific? You may decide to invest and make a lot of money and use that to meet the various demands made of you at various points in time. Unfortunately, it is highly unlikely that such an unplanned investment will serve your multiple goals simultaneously. Besides, the need to plan and invest is dictated by two major factors — inflation and changing lifestyle.

Identifying financial goals helps you build a portfolio to achieve each. Each goal may need a different portfolio simply because each has to be achieved at different points in time, with varying risk-reward requirements.

Let's take an example. At 30, if you want to provide for your child's education 15 years down the line, your risk tolerance can be reasonable but not too high, as you have to necessarily meet the goal after a set period. Your portfolio would, therefore, require a balance of slightly risky and capital-protected instruments. In contrast, if you want to build a retirement fund for the time you turn 60, you have a long-term horizon (30 years) and that can tolerate relatively high risk and generate reasonable returns so as to beat inflationary pressures.

Clearly, the amount of money, the time of liquidation, and the investment options would be different these two goals. It may be close to impossible to track and manage a single portfolio that meets multiple goals as and when they arise unless you set the goals and plan investments accordingly.

The need to set goals and plan for the future is also largely driven by inflation. Let us suppose a graduation course now requires Rs 2.5 lakh. Your first reaction may be that you can comfortably provide for it with the funds you have. But what you may have missed out is the compounding effect of inflation. A five per cent inflation rate every year would blow up the same college fee to a staggering Rs 5.2 lakh, 15 years down the line! Unless you monetise your goal and build a portfolio accordingly, you will be caught unawares.

And what of requirements made by changing lifestyles?. That fancy car you always wanted to own or the dream holiday at Sydney requires setting time and quantifying targets. Why, simply because large purchases or expenditure seldom fit into your routine monthly budget.

Once you set financial goals and know how much to put by, you just have to treat the saving as another bill that you would pay every month. So you can dream and have it too... just set your goals.

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