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Goal Based Investing – What is it & Examples

  • Akshatha Sajumon
  • 12 Jan
  • 5 minutes

The first question that a majority of investors have in mind is, ‘How much money will I get?’. This is true for most of us, however, as investors, we should ask, ‘How will the investment help in achieving the financial goals I have?’. If we ask this, we are working towards goal-based investing. Goal-based investing focuses on investing our hard-earned money through a structured financial plan.

We will discuss goal-based investing and how this concept can help generate wealth for investors in the long run.

What is Goal-Based Investing?

The reality of the Indian investment market is that most investors invest:

  • For tax-saving
  • Due to peer pressure
  • An advisor or agent within the family coaxes one to invest

Goal-based investing is a novel concept in India since most investors allocate their funds to bank FDs, mutual funds, equity stocks, real estate investment, etc. They hardly realize that saving money does not help in achieving any concrete financial goals.

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.

Why should we consider Goal-Based Investing?

Here are some of the key benefits that can be availed through goal-based investing:

  • Disciplined investment: Goal-based investing encourages disciplined investment through monthly SIPs, periodic portfolio rebalances, etc. 
  • Limit debt usage: As you plan for your financial goals in advance, you can limit your debt usage which you would have used for annual vacations, purchasing a vehicle, home investment, etc.
  • Tax planning: Holistic tax planning is one of the outcomes of goal-based investments. As you plan for 80C deductions in advance, you can avoid making random and hasty investments just for the purpose of saving tax.
  • Planning & saving: With goal-based investing, you can keep a close watch on every small and big expense which helps in increasing your savings as you continue to reduce non discretionary spending.
  • Financial Safety: Through goal-based investing, you can plan in advance and attain financial security for your future.

Examples of Goal-Based Investments 

Goal Investment Description
Emergency funds Fixed Deposit, Liquid Funds The emergency fund requirement can be calculated using total monthly expenses X 6 months.
Home Investment Mutual Fund SIP, 

SIP – Blue chip Stocks

Aim for accumulation of amount equalling 20-30% of the value of home.
Education Mutual Fund SIP, 

SIP – Blue chip Stocks

If this is for children’s education needs, ideally savings should be from the time the child is young + investments made in SIPs.
Retirement SIP – Blue chip Stocks Aim for systematic savings while you are employed and generating returns for a secure future.
Car Purchase Fixed Deposit, 

Recurring deposit

Through planned investments, you will have sufficient savings to purchase a car and don’t have to rely on loans.

Things to Consider Before Starting Goal-Based Investing

To get your goal-based investing right, you must consider some rules and follow them as far as possible. Here, we have provided some of the top rules to keep in mind:

  • Be clear with your goals—Identifying your goals and the corresponding time horizon is essential to begin with. You must be sure about your goals and should not keep switching goals to get the most out of goal-based investing. 
  • Accuracy is key—Having approximate estimates, or unclear numbers can cause digression from your goals. For instance, if you are considering foreign education for your child, try to talk to peers about their experiences, specific capital requirements, etc. As per the time horizon chosen, always incorporate the rate of inflation while calculating an investment goal.
  • Have a clear figure for investing – Always be clear about your capability to save and invest depending on your income, monthly expenses, existing loans, other commitments, etc. 
  • Check the rate of return of investments—While calculating the rate of return on a mutual fund, always check for the weighted average of returns. The rate of return of most investments is based on the estimated compounded annualized growth rate (CAGR).
  • Select equity exposure–You can consider investment exposure in both equity and debt instruments to achieve your investment goal. For longer-term goals, equity exposure bodes well. Calculate your equity exposure as per your investment horizon.
  • Check your risk appetite—Your risk-taking ability can have a heavy influence on the selection of investment instruments and portfolio structuring. While investing in ULIPs, for instance, you can invest more in equity funds if you have a high-risk appetite and a long-term horizon. For short-term goals, you can focus more on debt-oriented funds.
  • Periodic review—Try to review your investment portfolio frequently to ensure that it is on track to achieve the set goals. At any time, you can switch funds and also use top-up investment options for higher returns, in case your portfolio performance has been good.

Conclusion

To succeed in goal-based investing, you must have the right mindset, patience, and consistency throughout your investment journey. Convert strategy into a discipline as far as investments are concerned. When in doubt, always ask yourself, “What am I saving or investing for”. 

 

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Akshatha Sajumon

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