Importance of Goal-Based Investing in Mutual Funds
By Akhil Chugh
Date August 4, 2024
Invest money to have the right amount of funds at the time of “need.”
Here, the “need” is the financial goal.
From our childhood, we’ve learned that setting goals is essential for long-term success. It’s hard to reach a destination without a clear idea of where you’re headed. Once you identify what matters most to you, your goals will keep you motivated and determined to achieve them.
This principle applies to all areas of life, including your finances. This is where goal-based investing comes into play. By aligning your investments with your financial goals, you can create a clear path to your desired financial future.
Let’s explore the importance of this strategic approach to investing.
What is Goal-based investing?
Goal-based investing is a strategy where you set specific financial goals and tailor your investment choices to meet those objectives. Instead of just accumulating wealth aimlessly, this method involves identifying your financial targets—whether it’s buying a house, funding your children’s education, or planning for retirement—and then investing in mutual funds that align with these goals.
Why Goal-Based Investing is Essential?
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. Some of the benefits of goal-based investing are:
1. Clarity and Focus:
Having clear financial goals gives your investments a sense of purpose. Instead of investing randomly, you know exactly why you are investing and what you aim to achieve. This clarity helps in making informed decisions, choosing the right mutual funds, and maintaining focus over the long term.
2. Helps you choose the right investment product:
Knowing your requirements gives you the headway in determining the life cover needed, what allocation of funds needs to be made in mutual funds, and the amount you would need to invest to ensure financial freedom post-retirement. This will enable you to make the right investment decisions rather than following the herd mentality and investing in a random manner with no clear objective.
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. Watching your investments grow towards a specific goal can be incredibly motivating. It provides a sense of accomplishment and encourages you to stay committed to your financial plan. This motivation can be especially powerful during market downturns when it might be tempting to withdraw your investments prematurely. 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.
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Tax Efficiency:
Different financial goals may require different types of mutual funds, each with its own tax implications. By planning your investments according to your goals, you can also optimize your tax liability. For example, Equity-Linked Savings Schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act, which can be a smart choice for long-term wealth creation and tax planning.
Key Takeaways from Net Brokers:
- The goal-based investment approach is the right way and very important when it comes to investing in mutual funds. Goal-based investing helps you answer important questions like how much to invest, where to invest, and when to start investing. Moreover, it also gives you a purpose to stay invested.
- Goal-based investments not only help create a significant corpus but also help save money in a disciplined manner over a period of time.
- Linking investments to goals prevents investors from digressing. If you get some extra money from somewhere but don’t have goals or targets, it’s very easy to digress unless you are really disciplined. On the other hand, if goals are clear, chances are that you will want to use the surplus money to give an extra push to your goal-based savings in order to get closer to the goals.
- Goal-based investing helps take corrective actions. When all investments are linked to financial goals, you can track, and review their performance at intervals. Doing so not only allows you to identify underperforming avenues but also helps you correct any deviations that can take you away from the set goal.
- Focus on your financial goals, prioritize them, and then select investment options that best match your requirements.
Mutual fund categories provide a variety of goal-oriented baskets created by professionals to assist investors in selecting the best-curated investment mix for their objectives. Start setting your financial goals today and take the first step towards a secure and prosperous future.
Download our Net Brokers mutual fund app and get access to our goal-based calculators like the child education calculator, the retirement calculator to get started with your goal-based investing.
For more information, get in touch with us today!
Happy investing!