What Is Goal-Based Investing And Why Is It Important?
It is natural that you may have certain desires and dreams. One way to achieve these is through systematic investments. However, giving the investments a goal to achieve makes you better understand the value of your investment.
Goal-based investing is a process that makes your investments after setting up goals on what you want to achieve in the future. 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.
What Are The Benefits Of Goal-Based Investing?
Here are five reasons why goal-based investing is important:
1. It gives a purpose to your investments
2. Choose the right investment products
3. Develop investment discipline
4. Attain portfolio diversification
5. Achieve financial independence
Let’s look at the above points in more detail:
It Gives A Purpose To Your Investments
When you have surplus funds, you may ask how to invest, how much to invest, and how long to invest. Goal-based investing answers these questions because you know the exact amount that is needed and it when is needed to meet your objectives allowing you to determine how much you need to invest. Goal-based investing is beneficial in wealth creation to ensure you meet your financial objectives.
Helps You To Choose The Right Investment Products
Once you have answered the ‘how’ above, you will be able to choose the right investment products. You know your exact requirements, which allows you to determine the life cover needed, whether investing in mutual funds is beneficial, and the amount you need to invest to ensure financial freedom post-retirement. You make right investment decisions without adopting the herd mentality.
Creates An Investment Discipline In You
When you know your long-term objectives such as children’s education or your retirement corpus, you may opt to start a Systematic Investment Plan (SIP) in a mutual fund. An SIP helps you develop investment discipline by ensuring a certain amount is invested at regular intervals to yield higher returns.
Helps You 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.
Let’s Achieve Financial Independence
Because you match your investments with specific time-bound financial goals, you are able to achieve financial independence. You are assured that all your objectives would be easily met without any financial difficulties or stress.
Maximizing The Benefits Of Goal-Based Investing
Before you set your financial goals, it is advisable to analyze your current financial situation. You must determine what you want your money to achieve in the future. Financial goals are classified into three categories as follows:
Short-Term Financial Goals:
These will occur within a year and includes goals such as taking an international holiday or buying a new laptop
Medium-Term Financial Goals:
These often have a time period of between one and five years and include buying a car or your child’s education
Long-Term Financial Goals:
Goals that are beyond five years are considered long-term and may include children’s higher studies or retirement
Goal-Based Investing Procedure
Once you determine your current financial situation and various goals, you must chalk out a clear plan on how to achieve these within the determined period. You need to understand the following:
- Amount needed to meet your goal
- Investment amount either as a lump sum or monthly plan
- Identify the right investment product based on investment horizon and risk-return balance
Investing in the right financial product is difficult and requires in-depth knowledge and analytical skills. If you want to build wealth, you need to hold your investments for a longer period. This is because, over the long-term, you achieve the power of compounding. With compounding, your income is reinvested in the same financial instrument to earn additional returns, which builds a sizeable corpus over the long-term. Investing in SIP is an easy way to benefit from the power of compounding.
Most experts recommend investing in mutual funds to achieve your medium and long-term goals. However, several asset management companies (AMCs) offer multiple types of mutual fund schemes. Evaluating and analyzing these is a time-consuming and daunting task.
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