Goal-based Investing Through Mutual Funds

Goal-based investing is an approach to investing that is linked to your financial goals. It maps your savings and investments to a fixed goal and is aimed at bringing discipline to your investing method. Let’s understand some of its benefits:

1. Helps to identify the required investment amount to achieve your financial goals:

When you do goal-based investing, you will list down the goal you want to achieve, by when you want to achieve it, and the money you will need for it. And while you do it, you will consider the current cost of achieving that goal and calculate the future cost based on the expected inflation.

For instance, let’s assume you want to plan higher education for your child 10 years away. Currently, it costs Rs. 50 lakhs. When you plan for it, you will calculate how much it will cost in the future after factoring in the inflation. So, assuming an average inflation rate of 8% in education, it will cost nearly Rs. 1.1 crore in 10 years. Now you know how much money you will need for this goal. So you can download the Net Brokers app and use the Child Education calculator to calculate the required SIP amount that needs to be invested in mutual funds to accumulate the required corpus assuming a certain annual rate of return.

2. Helps you choose the right investment product:

When you know the amount you will need for a goal and know the time you have to accumulate that corpus you can effectively build your investment strategy. You can pick from asset classes like equity, debt, gold, etc., as per your investment horizon and financial goals.

For instance, if you have short-term goals like international travel, kid’s school fees, etc., your focus will be on investing the money in safe assets and getting some growth on them. And hence you will go for Debt Funds or even Fixed Deposits.

On the other hand, for your medium-term goals (3-5 years away) like buying a car, you can have a mix of Equity and Debt. That’s because you have a slightly longer investment horizon, and if there is some interim volatility or a fall, you can live with it. So, Hybrid Funds become the right product for you.

And on the other hand, are long-term goals for which you can pick pure equity funds and focus only on growing your money.

3. Helps to attain portfolio diversification:

The primary objective of investing is to earn higher returns. When you match each rupee of your investment to a financial goal, you are able to earn better returns. In most likelihood, you will include different investment products to meet various objectives. This allows you to diversify your portfolio thereby reducing your risks while being beneficial in wealth creation over the long term.

4. Helps to avoid debt trap:

If you do not clearly define your goals and do not invest in them, the chances are that you will not have enough money when the time comes. In such a situation, you might be forced to take a loan. The loan will help you achieve the goal at that point. However, you can end up in a debt trap.

Therefore, it is essential to stay clear of taking loans as much as possible. Take the goal-based investing approach and you will never need to take a loan in desperation.

5. Inculcates fiscal discipline in investors:

Investing without goals is a less disciplined way of investing. Many investors who do not have a goal in mind eventually stop investing due to some distraction or random reason.

But if you have specific goals to achieve, you are more likely to stay the course. Because you know that you will never reach your goal if you stop your investments. This clarity on the cost of not investing can be a significant driver to continue investing.

So, you are more likely to deal with adverse market movements in a better way if you follow goal-based investing. This is a massive advantage because keeping your emotions at bay is as important as picking the right investment products in investing.