Goal-based investing is what it says: a type of investment approach that aims to help you attain your goals. When you invest with a goal-based strategy, you do so with a real-life objective that you want to achieve with the money.
Adopting this strategy can give you a good chance of meeting your goals. So whether you are looking to save for a college education, or enough to put down a down payment for a home or build a retirement nest egg, following a goal-based investing strategy could be your best bet.
View a goal-based investing strategy as akin to a glorified piggy bank, albeit with a difference. But unlike the money that stays stagnant in the piggy bank, a goal-based investment strategy puts your money to work in various investments. With the process, every financial goal you wish to achieve is funded and invested independently through the goal-based approach with a unique time horizon, asset allocation, and risk profile.
What are the benefits of goal-based investing?
One of the main benefits of a goal-based investing strategy is that it provides you with an anchor. Since the goals provide you with a suitable timeframe, risk and return parameters, you can choose the right asset allocation mix to address it.
- It connects investment solutions with your goals.
- It empowers you to meet specific financial and life goals — short, medium or long-term.
- It can help you attain better outcomes for your financial independence
- It can provide you peace of mind as you track your plan and progress towards meeting your objectives.
How to approach goal-based investing?
Goal-based investing is an intuitive approach that focuses on meeting tangible objectives. Several investment platforms offer goal-based investment strategies through their goal-based basket of securities. Choosing this approach can help anchor your investment efforts and take the stress of your decisions.
Here are some tips on approaching it
- Articulate your goals by dividing them into three-time frames: short-term, mid-term and long-term.
- Create a budget and stick to it. Make sure that you know the breakup of your income, expenses and savings to set aside a fixed amount for each goal.
- Set down a timeline to achieve it. Once you have listed your goals and know the amount you can set aside to reach them, look into suitable financial instruments to help you achieve them within the specified timeframe.
- Know how much the goal would cost today
- Given current inflation trends, find out how much your goal would inflate by the time it's due.
- Based on your goal's tenure, know the kind of returns you wish to achieve.
Goal-based investing through mutual funds
Mutual funds are a lucrative way to achieve goal based investments.
In a nutshell, here's how you can achieve financial goals through mutual funds:
- Set priorities for every goal.
- Invest in the right basket of mutual funds that address them.
- Stay disciplined to the financial plan — SIP — to achieve the goal
When tagging your goals with mutual fund investments, pick out funds based on your risk profile.
For instance, let's say you wish to travel abroad 18 months from now. According to your calculations, it could set you back by ₹5 lakhs. To meet this short-term goal [time less than three years], you could invest in a blend of debt funds and arbitrage funds. You can then determine if you want to invest a lump sum or choose the SIP route. However, you may want to consider tax implications when planning your debt investments as any amount redeemed less than three years could be liable for short-term capital gains tax
On the other hand, let's say you wish to fund your child's higher education. Assuming your child is still a toddler, this specific goal could be mapped as long-term, considering it would take more a decade to achieve it. In this case, you could choose to invest in equity funds that can help you get a sizeable return in the long run.short-term capital gains tax.