Failing to plan is planning to fail!
When we set out for a vacation, we plan everything from start to end. If we don’t plan, we will not know when to start, which mode of transport to take, where to stay, which places to travel, etc. In short, it will be a totally chaotic trip. Similarly, when we invest, we need to plan. Goal-based investing helps us do that.
What is goal-based investing?
It is an investment strategy that helps us plan our financial goals from inception till they are achieved. It involves:
a) Identifying our financial goals
b) Quantifying them in terms of present cost, how many years do we have to achieve, what will be the future cost considering inflation, etc.
c) Making a financial plan in terms risk profiling, asset allocation, how much to invest, where to invest, for how long, what is the expected rate of return, etc.
d) Implementing the plan and regularly reviewing till the financial goal is achieved.
Types of financial goals
Based on the time left to achieve the financial goals, they can be classified into three broad categories:
1) Short-term goals
Any financial goal that has to be achieved within three years can be categorised as a short-term goal. An investor may consider investing in debt mutual funds or other fixed income securities for short-term financial goals. Some of the examples of short-term financial goals include:
a) Building and maintaining an emergency fund
b) Buying term life insurance for all family bread earners
c) Buying an adequate amount of health insurance for all family members
d) Repayment of credit card outstanding, personal loan, or any other short-term loan
e) Buying a two-wheeler
f) Accumulating money for a short domestic vacation
g) Purchasing a consumer durable or an electronic gadget
2) Medium-term goals
Any financial goal that has to be achieved within 3-7 years can be categorised as a medium-term goal. An investor may consider investing in hybrid mutual funds for medium-term financial goals. Some of the examples of medium-term financial goals include:
a) Accumulating money for house purchase down payment
b) Accumulating money for home renovation
c) Purchase of a car
d) Accumulating money for an international vacation
e) Repayment of an education loan
f) Building a fund for starting own business or start-up
3) Long-term goals
Any financial goal that will take more than 7 years to be achieved can be categorised as a long-term goal. An investor may consider investing in equity mutual funds for long-term financial goals. Some of the examples of long-term financial goals include:
a) Building a fund for a child’s higher education and/or marriage
b) Building a fund for own and spouse’s retirement
c) Repayment of home loan
d) Buying a second house or vacation home
Learn more about advantages of long-term investing on Motilal Oswal Mutual Fund Blog.
History of goal-based investing
Goal-based investing has been practised in western nations like US and Europe since quite a few years. In India, goal-based investing is a relatively newer concept. Fintechs such as Glide Invest, NiyoMoney Goalwise, Elever, Investica are focused on goal-based investing. They are taking this concept to the masses so that individuals can plan their financial goals in a systematic manner and achieve them.
Advantages of goal-based investing
Some of the advantages of goal-based investing include:
a) Systematic planning: Goal-based investing helps an individual to take a systematic or organised approach towards financial goals. It helps planning right from goal inception till achievement.
b) Asset allocation: Goal-based investing helps an individual do their risk-profiling. Accordingly, an individual can do the asset allocation and choose the appropriate financial products for investment.
c) Freeing up financial resources: Goal-based planning helps an individual make a cashflow statement and identify financial resources that can be directed for investing towards financial goals. If the individual doesn’t have sufficient financial resources, they can adopt budgeting to free up financial resources for investing towards financial goals.
d) SIP inculcates disciplined investing: Once you know the regular amount to be invested towards your financial goals, you can start a systematic investment plan (SIP). SIP helps to invest regularly towards financial goals in a disciplined manner. The probability of achieving financial goals with SIPs is high.
Goal-based investing is the key to financial freedom
As discussed earlier, goal-based planning helps you identify all your financial goals and take a systematic approach towards achieving them. Along with regular investments through SIP, you can do regular review. During the review you can do portfolio rebalancing, addition or deletion of financial products, as required. You can follow this process till all your financial goals are achieved.
Goal-based investing is a part of comprehensive financial planning of your mutual fund which ultimately leads to financial freedom. While comprehensive financial planning is a lifelong journey, financial goals are destinations within the journey which can be achieved through goal-based investing. As discussed at the start of the article, if you want to enjoy a vacation, you have to plan it from start to end. Similarly, if you want to enjoy your lifelong financial planning journey, you should do goal-based Investing.
Disclaimer: The article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
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