Importance of Goal-based Investing
By Akhil Chugh
Date July 9, 2023
From our childhood days, we have been taught that goal setting is fundamental to our long-term success. After all, it is difficult to get to the desired destination without clearly defining the destination. But once you realize what is important to you, the goals set by you will help you remain determined to achieve them.
Like all other aspects of life, this applies to our finances as well. And this is where the concept of investing based on your financial goals or goal-based investing comes in.
Let’s understand goal-based investing in detail.
What is Goal-based Investing?
Every individual has life goals that he needs to reach in the short term or long term. Calculating and investing regularly to be able to reach that financial goal is called goal-based investing. For example, if you plan a foreign holiday with your family in 2025, which is 2 years away, it can be called a short-term goal. If you wish to plan for higher education for your child who is 8 years now, you have 10 years, and it is considered a medium-term goal. If you are 25 years old and have just started working and want to retire at 55, you have 30 years to plan for that goal and it is classified as a long-term goal.
Goal-based investing through mutual funds is a strategic approach where you align your investment portfolio with specific financial goals. Rather than making random investments, goal-based investing focuses on selecting mutual funds that are tailored to achieve specific objectives.
Importance of Goal-based Investing:
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.
Goal-based investing offers several benefits that can enhance your financial planning and investment outcomes. Here are some key advantages of goal-based investing:
1. Clarity and Focus:
Goal-based investing provides clarity and focus by defining specific financial objectives. It helps you identify and prioritize your goals, whether they are short-term (e.g., buying a car) or long-term (e.g., retirement). This clarity allows you to align your investment strategy and decisions with each goal, ensuring a purpose-driven approach.
2 .Tailored Investment Strategy:
Goal-based investing allows you to customize your investment strategy according to each specific goal. Different goals have varying time horizons, risk tolerances, and required returns. By aligning your investments with each goal, you can select investment vehicles and asset allocations that are most suitable for achieving those objectives.
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 it. 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 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.
4. 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.
5. 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.
6. Enhanced Financial Discipline and Consistency:
Goal-based investing encourages disciplined investing habits. When you have specific targets to achieve, you are more likely to stay committed to your investment plan. Regularly contributing towards your goals, such as through systematic investment plans (SIPs), promotes consistency in saving and investing. This disciplined approach can help you build wealth over time and avoid common investment pitfalls.
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.
7. Monitoring and Accountability:
Goal-based investing provides a tangible way to measure your progress. You can regularly track and evaluate how close you are to achieving each goal. This assessment allows you to make necessary adjustments to your investment strategy, contribution amounts, or timelines if needed, ensuring that you stay on track towards your goals.
8. Psychological Benefits:
Goal-based investing offers psychological benefits that can enhance your financial well-being. It provides a sense of purpose and control over your financial future. It reduces stress and anxiety by breaking down long-term aspirations into manageable milestones. Celebrating achievements when you reach your goals also brings a sense of accomplishment and satisfaction.
Why Mutual Funds are Ideal to Achieve Financial Goals?
Mutual funds are an ideal investment vehicle for achieving financial goals due to their unique characteristics and advantages.
Firstly, mutual funds provide access to professional fund managers who have the expertise to analyze markets and select suitable investments. Their knowledge and experience can help optimize returns and manage risks effectively. Secondly, mutual funds offer diversification by investing in a broad range of securities across various asset classes. This diversification helps reduce the impact of any single investment’s performance and enhances the overall stability of the portfolio. Thirdly, mutual funds provide flexibility in terms of investment amount and frequency. Investors can start with small amounts and gradually increase their investments over time. Additionally, systematic investment plans (SIPs) allow for regular and disciplined investing, harnessing the power of compounding. Lastly, mutual funds cater to different financial goals and risk profiles, offering a variety of fund types such as equity funds, debt funds etc. Mutual funds also offer asset allocation funds that can mirror your life-stage and progressively reduce the exposure to volatile assets and move to more stable options as you grow old. These funds are a good option if you want to leave the rebalancing of your asset allocation to the fund manager. This enables investors to select funds that align with their specific objectives, time horizons, and risk tolerance.
Overall, mutual funds combine professional management, diversification, flexibility, and goal-oriented approach, making them an ideal choice for individuals to achieve their financial goals.
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 is helpful in taking corrective actions. When all investments are linked to financial goals, you can track, 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.
- Goal-based investing is a dynamic process that requires periodic evaluation and adjustments. As your life circumstances change, you may need to modify your goals, timelines, or investment strategies.
Mutual fund categories provide a variety of goal-oriented baskets created by experts to assist investors in selecting the best-curated investment mix for their objectives. Download our Net Brokers app and get access to our goal-based calculators like child education calculator, retirement calculator to get started with your goal-based investing.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
