Understanding Goal-Based Investing
By Akhil Chugh
Date January 23, 2022
Invest money to have the right amount of funds at the time of “need.”
Here, the “need” is the financial goal.
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?
Before you start a new investment, ask yourself an important question: What exactly are you saving and investing for?
This is a serious moment of introspection! In order to invest for the future, you are cutting back on spending your wealth now. There must be some future purpose for this sacrifice – a future goal whose present value and importance outweigh the pleasure of today’s spending.
Goal-based investing is not just “another fancy way” of saving money. It focuses on investment from a more goal-oriented outlook. Goal-based investing is more like a philosophy that can help in identifying, quantifying, and designing an action plan for achieving various financial goals. The idea is to achieve a goal instead of chasing returns from financial investments. A financial goal could be buying a house, foreign tour, higher education, marriage expenses, setting up a retirement corpus, etc.
Goal-based investing is all about identifying your financial goals, setting a timeline for each one of them, and investing for them regularly to be able to reach them. Mapping out all your needs gives you a clearer picture and the time for which you need to stay invested to achieve each goal. Even the type of risk you should take will be defined by your goals. The importance of goal-based investing is that it not only gives you a good investment strategy, but also a direction to achieving your dreams and in the process making your future stress-free.
How Goal-Based Investing Works?
To achieve your goals, you must climb the ladder step by step. Here is a comprehensive step by step process to get you started with goal-based investing to achieve your goals:
1. Identification of financial goals:
“Goals” are a personal budgeting mechanism that has been around for hundreds of years! Remember your grandmother’s old system of separating money into tin cans – one for clothes, the other for groceries and the other for buying gifts? That’s the exact same rationale behind goal-based investing. By separating your savings into buckets for clearly defined future objectives, you’ll stay disciplined and will be reaping multiple benefits in the long run.
Investors should start by identifying their financial goals and the time available to reach that goal. When you allocate your assets based on your financial goals, you have a clear, well-defined, and realistic plan to achieve success.
Financial goals are often categorized as follows:
Short-term financial goals – These are goals you want to achieve within a year. For example, going on a trip abroad
Medium-term financial goals – These are goals with a time between one and five years. For example, buying a car
Long-term financial goals – These are goals you wish to achieve beyond five years. For example, child education and retirement.
2. Calculate your appetite to save and invest:
Once you identified and quantified your goals and figured out the investment horizon, it is time to ascertain how much you can save for investment from your monthly income. You must account for an emergency fund with at least 6 times of monthly income in liquid funds that is able to meet your expenses in case of any unexpected development.
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.
3. Assess your risk appetite:
Every investment has risks of its own. It is essential to know what your risk appetite is before investing. An ideal investment portfolio should be aligned to your financial goals based on your risk appetite and time horizon.
4. Pick an ideal investment instrument:
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, risk appetite 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.
Consult a financial expert at Net Brokers to know about the amount of required investment and the right asset class to reach your desired goals!
5. Review & rebalance your portfolio:
Your goals might keep changing over time depending on the situation you are in. Therefore, it is important to keep reviewing your portfolio and track where you stand financially. This will not only help you plan ahead for the future but will also facilitate in improving your portfolio’s financial performance.
Why To Opt for 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. Some of the benefits of goal-based investing are:
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.
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. 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.
Why Mutual Funds are Ideal to Achieve Financial Goals?
Investors can invest in mutual funds to create a diversified investment portfolio to meet their long-term, medium-term and short-term financial goals. However, it is necessary to ensure that there is sufficient diversification or spread of investments across the chosen mutual fund schemes. It is important to take into account the risks and avoid under or over-allocation in a particular asset class.
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.
All in all, you have a variety of mutual funds to choose from, each with a different investment objective. Further, you can leverage mutual fund investments via SIPs to instil financial discipline and meet your financial aspirations in a structured and timely manner.
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.
- Perseverance, consistency, and patience are indispensable and the most important aspects of goal-based investing.
- Focus on your financial goals, prioritise them, and then select investment options that best match your requirements.
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 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! Download our mutual fund app & start investing for your long-term financial goals.
Happy investing!