This post is targeted towards investors facing too many choices in funds, stocks, and insurance policies, making it difficult to get started.

📚 Table of Contents

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• Introduction
• Step 1: Thinking differently regarding investments: set goals first
• Step 2: Risk and returns go hand in hand: risk profiling and asset allocation
• Step 3: How much to invest per goal
• Step 4: Where to invest and how much
• Step 5: Reviews and health checks
• Step 0: Building defences around your financial life

Introduction

A dilemma faced by investors comes from having too many choices. As of today in India, we have:

• 10,000+ mutual funds
• 5,000+ stocks
• 50+ insurance companies
• 100+ banks, NBFCs, and others offering banking, cards, and loans

Having too many choices is indeed a problem that is overwhelming for both new and seasoned investors. Both traditional and social media provide a steady flow of noise in the name of information that makes things worse. Investors, as a result, start focusing on the following generic questions:

• Which is the best stock or fund to invest in?
• Which is a good insurance policy?
• Should they invest now or later, depending on what the market is doing?
• Where can they get investing tips?

These questions add to the confusion and do not move the investor away from the analysis-paralysis situation. Therefore, this post will cut through the clutter and reframe the problem statement with some actionable steps.

Step 1: Thinking differently regarding investments: set goals first

We will reframe this problem by shifting from a solutions mindset (“best mutual fund”) to a requirements-driven one. Therefore, the first question we will ask is, “Why are you investing?”. This is the basic tenet of goal-based investing as we have covered in this post.

Setting a goal gives you purpose, direction, and momentum that lays the foundation of the investing process. Goals can be:

• Go for a foreign vacation in 5 years
• Buy a house in 8 years
• Save for children’s college education in 12 years
• Save for retirement starting in 20 years

Goals need a date, a target corpus amount, and a priority. You can set goals in many ways:

• Sit and think about what you plan for the future: write them down
• Discuss with family members since they are important stakeholders in your journey
• Major life events like marriage (or not), children (if any), career changes, early retirement (FIRE) etc. will require revision of these goals

This post is a classic example of where many investors are regarding investing: they have some money in the bank and are trying to get started.

Given the importance of children’s education-related goals, we have covered that in more detail here.

Step 2: Risk and returns go hand in hand: risk profiling and asset allocation

This step gets slightly technical, but it is an essential one that cannot be skipped.

A portfolio created for a goal has one purpose: to meet the goal. Therefore, we need to balance risky assets that generally appreciate fast (like equity) and slow-growing assets that provide stability (like debt). The tool that is used to determine this mix of investments is risk profiling.

Once risk profiling is done, along with the horizon and priority of the goal, the next step is the goal-wise asset allocation. The basic premise of asset allocation is a balance of the investor’s goal priority (needs vs. wants) and the time horizon of the goal like this:

A few general thumb rules are:

• The further the goal, more can be in equity and less in debt, and vice versa if the goal is closer
• The higher the importance of the goal, the less should be invested in risky assets like equity

You will get more details here:

• Risk profiling tool
• Asset allocation for a goal

Step 3: How much to invest per goal

This step deals with the monthly investment that you need to make for every goal. There are calculators available that can help you based on the target amount, goal horizon, and priority. You can use:

• The online Goal-based Investing calculator for each goal
• This comprehensive Goal-based Investing Excel planner for all goals together

There are a few common questions that we have discussed earlier:

• Should you invest in SIP or lumpsum?
• Should you sell your funds since the market is overheated?
• How to invest a lump sum amount when the stock market is at an all-time high?

Step 4: Where to invest and how much

This is the step where we finally describe where to invest. If you have followed the process so far in this post, you should realise that while this step is important, it is not as important as new investors think it to be. In fact, a combination of a provident fund (that most salaried investors already have) and just two mutual funds is sufficient for all goals. This conclusion will surprise many investors, but it is a key step to cut through the clutter:

• Choose a fund for equity: here
• Choose a fund for debt: here

There are a few common questions and issues that we have discussed earlier:

• Should you invest in the same funds for different goals?
• Common mistakes in investing in mutual funds
• Can you retire by keeping money only in FD or pension?
• What percentage of my salary should go towards retirement?

Step 5: Reviews and health checks

Following all the steps above will get you started in goal-based investing but that does not mean you are done. Since stock markets do not move up straight like an FD, you need to review and rebalance every year by performing the same steps so far: check the list of goals, review goal target corpus, corpus accumulated and find out new SIP amounts. The process is described in more detail in this post.

There are a series of health checks that you can do depending on your life stage:

• I am 45 years old and have not invested before. How do I start now?
• How much you should have saved at 30, 40, 50, and retirement
• How to prepare today in case you are forced to retire in the next five years?

Step 0: Building defences around your financial life

We have come to this step last, but this is the first step that needs to be implemented. Completing these four prerequisites will ensure that you are on firm footing and that any emergency will not derail your financial plans.

At all times, ensure that you have the following in place

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

These four measures will ensure that investments made for long-term goals can continue and compounding is not interrupted.