Goal-Based Investing – How to evaluate and implement financial goals?

Goal-Based Investing – How to evaluate and implement financial goalsGoal-Based Investing – How to evaluate and implement financial goals?

Goal-based investing is an investment approach that considers one’s end financial goal, hence helping the investor make investments that complement the end goal. By linking the investments to a goal, the aim of this approach is to systemize savings over a specific duration to yield expected results. In this article we would detail about Goal Based Investment approach which can help to achieve end goal in systematic manner.

Also Read: 10 Solid tips to achieve financial freedom faster

What is Goal Based Investing approach?

As an investor, you may be inclined to invest your savings in various options, like fixed deposits, mutual funds, public provident funds, stocks, and real estate. However, the investments, if not linked to a goal, may tend to become random and rather erratic.

With goal-based investments, you can mitigate this unpredictability by disciplining your investments to facilitate the actualization of a fixed end goal. For example, Rs. 50,000 into a certain SIP on the 1st of each month for 5 years to be able to buy a dream car. In this example, we have a fixed end goal (a car) and a disciplined system of investment (Rs. 50,000 on the 1st of each month for 5 years) which makes this approach a goal-based mutual fund investment.

How to evaluate Goal-based Investing Plan?

1) Evaluate the time and money needed

For instance, if your financial corpus for goals while investing is to buy home, plan retirement, or plan for kids’ foreign education, then the need could range anywhere between 10-20 years away.

Here, an investor cannot treat these as out-of-the-pocket that can be indulged as they require a different amount of investment, and with no plan, they could be difficult to achieve.

2) Consider the present cost

For example, if as an investor you plan to invest in a car in the next three years with the current price of INR 6 lakh, then try to consider the rate of inflation at 6% when you start to invest. This means you will now need to save around INR 7.15 lakhs to purchase your dream car after three years.

3) Estimate the future cost

One must try and speculate the cost of a thing in advance, that is, to speculate if there would be an increase or decrease in the coming time to plan your goal accordingly.

4) The correct time to invest is now

There is no ideal period for you to initiate your investing plan. As for an ideal situation, when an investor plans their goal, that moment is the best time to initiate your investment.

Few Pointers before implementing Goal-based investment plan

As soon as an investor is prepared with their:

  • Goals
  • Time-frame
  • Amount needed

The next step is to initiate the funds through savings. But, before that, here are a few pointers that you must keep in mind:

1) Savings alone are not enough

In most cases, as it might seem to be, savings aren’t enough. This means, if the rate of interest on the savings account is rather low than inflation, then it could get a little difficult to meet the goal. Therefore, it is important for you to invest in the right investment products to help earn a good return.

2) There is no blanket strategy that exists

The blanket strategy may not work as there could be different goals set at different time frames. For this, the best strategy is to set yourself with short-term (2-3 years), medium-term (3-8 years), and long-term goals (over 10 years).

3) Evaluate the expenses

Before you step into the investments, you must consider your monthly income and the expenses to help understand and figure an investible surplus. By doing so, you will be able to see through the goals that are not achievable with the investible surplus and visa-versa.

How to implement Goal-based Investing Plan?

1) Short-term Goals

These are the goals that are to be met in the next 2-3 years. Since there isn’t much time, an investor must look for an investment plan that provides safety to the invested capital.

  • As per the expected returns, start by setting a fixed amount
  • Debt mutual funds may allow an investor with reasonable returns in the short term
  • If you prefer a risk-free option, a recurring deposit could be an option as investing in equities could be risky

2) Medium-term Goals

These are goals that are needed to be achieved over 3-8 years and provide an investor with a larger scope of choosing the investment avenues.

  • You could choose to invest in an 80:20 debt and equity mutual fund mix or stick to the equity index, based on your risk appetite.
  • On the other hand, an aggressive investor could also choose to invest in an equal mix of both to achieve their medium-term goal

3) Long-term Goals

These are flexible goals that are aimed to be achieved over a span of 8-10 years. Having said that and owing to the flexible time, an investor could afford to take risks.

  • You could try to invest in equity mutual funds or direct equities to achieve the required amount. Although equity investments are risky, they are best suited for long-term goals
  • Do-it-yourself is another approach that you can opt for, provided you did good research through Robo advisory apps or by approaching certified financial planners who help you choose funds and investments

Conclusion: Goal-based investing is an approach that has the potential of benefiting an investor to help them achieve clarity through planning, execution, and discipline with saving and investing in even smaller goals.

While choosing your investment strategy, it is extremely important for you to take some time off and review the investment portfolio to help take necessary action to rebalance as required.

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Suresh KP

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