What is the need for goal-based investing?
We all have desires and goals that we want to pursue and fulfil over the course of our lives. Buying a house, buying a car, gifting our parents or loved ones things for their big days, a comfortable life after retirement, funding your or your children’s education/college, are examples of some of the common goals people look to achieve. Investing for these goals is a powerful way to ensure that you can fulfil them as and when the time comes for the same. This is called goal-based investing where the time horizon of your investment for that particular goal is pre-decided.
Why current goal-based investing options don’t work?
The majority of the current goal-based investment options work backwards and give a monthly/quarterly investment amount that the user needs to invest, in order to achieve the final terminal value. This approach doesn’t take into consideration the actual investment capacity or fluctuating investable cash in the hands of the investors. According to us, a pragmatic goal-based investing option should work as follows:
- Lets an investor invest any amount (more or less) depending on investable cash in hand at different points in time.
- Optimizes the terminal value on a particular year — wealth maximization in early years & wealth protection in later years.
- The target year is picked by the investor and it signifies when the investor wants to realise a particular goal.
Such a product will try to optimize the final value at the target date, irrespective of the quantum or frequency of the investments done by the user. Thus, the product tries to achieve the best possible outcome, based on the investment capacity of the investor.
Understanding target-year investing
As we discussed in the beginning, different investors have different goals that they want to work towards. However, the timeline in which they want to achieve their respective goals is often the same. What we mean by that is, maybe you aim to buy a house in 10 years, whereas someone would want to pay for their child’s college education at the end of the same 10-year period. Maybe a third person who is, say, 50 years old, would want to retire in 10 years. Given that the timeline of these goals is the same, even though the goals are very different — a good investment option for all 3 investors would be a portfolio that aims to optimize the value of the investment at the end of the 10 year period, for each of the use-case — irrespective of the amount invested towards the fulfilment of the goal in each use-case.
What do we mean by that? Basically, for a 10-year time period, the ideal investment, irrespective of the objective, should have a mix of asset classes that focuses on generating wealth in the first few years and then shifting to more conservative options towards the end. This significantly reduces the risk near the target year set by the investor and provides a smooth investment journey.
Introducing Horizon smallcases by Windmill Capital
As we have said before, at Windmill Capital, our aim is to be a one-stop-shop for all retail investor needs. And working in that direction, we are thrilled to introduce target year smallcases. These smallcases help you allocate money towards specific goals that you may want to achieve at a predefined year — which may be a few years from now. The predefined year is called the target year. And we’re calling these smallcases “Horizon”.
How does this work?
Target-Year smallcases are baskets of various asset classes (like stocks, gold, bonds, etc) weighted in a manner so as to help an investor optimize terminal value towards a particular goal or horizon. These are dynamic smallcases that are rebalanced every year so that it keeps adjusting with the remaining time period in the target horizon. Needless to say, investments in such smallcases should be made with long term cash — which should ideally be intended to be withdrawn only at the target year, which is the year when you would use the money for the intended purpose.
One of the basic philosophies of target-year smallcases is that in the early years of the investor’s journey, a greater portion of the investment goes into equity and gold compared to fixed income. This allocation becomes balanced during mid-years and eventually, equity & gold allocation decreases proportionally year after year as the investor approaches their target year — meaning a larger sum of money starts getting allocated to fixed income and cash instruments as the investor moves near to the target year.
Key characteristics of Horizon smallcases:
- Same investment objective for common timelines: Irrespective of their goal, different investors can invest in the same smallcase if their target year is the same.
- Flexibility of investments: While investing for a specific goal, you can park your funds into these smallcases as and when they are available to you. Invest in them whenever you can, but keep in mind — the more time you give your investments to grow, the higher will be the terminal value
- Wealth maximization in initial years: Higher proportion of investments are directed towards equity and gold in the initial years for wealth maximization.
- Wealth protection near target year: As the target year comes closer, more and more money is allocated to less risky asset classes like fixed income (or bonds) and cash. This ensures that even a market crash near the target year (like the one that happened in March 2020) doesn’t impact the wealth that was generated over the years.
What are these smallcases made of?
The smallcases invest in different asset classes with the help of ETFs — which are low cost in nature and efficiently help in investing in the underlying asset class. ETFs, like mutual fund units, are baskets of securities that trade on the stock exchanges — just like stocks of companies. Every ETF tracks an underlying, which could be Nifty, price of gold etc. For example, a Nifty Index consists of 50 stocks. So if one wants to invest in the Nifty index, one can just buy the Nifty ETF, instead of buying all the 50 stocks in the same proportion as the Index. If the Nifty generates a return of 5%, the Nifty ETF will also generate approximately the same return. Similarly, investing in a gold ETF will allow investors to earn the returns on investing in physical gold.
For now, after assessing the liquidity of the various ETFs, the following is the list of ETFs that will be used for Horizon smallcases:
How many different Horizon smallcases do we have?
We have 6 different Horizon smallcases, with each smallcase named after a year — which is in and around the target year of when an investor would like to realize a particular goal. The smallcase is dynamic and is built using ETFs that are weighted intelligently between equity, gold, cash and bonds.
To understand the strategy and analyze the historical backtests and performance of this smallcase, please read the next post. We have backtested these smallcases for 15+ years and have been running these smallcases in closed beta since 1st Jan’21. We are satisfied with the way these smallcases have played out and are super excited to open them for our investors.
That’s a wrap. Take care, and happy investing! 🙂
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Disclaimer: The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy/sell or the solicitation of an offer to buy/sell any security or financial products. Users must make their own investment decisions based on their specific investment objective and financial position and use such independent advisors as they believe necessary. Refer to our disclosures page, here.