If you’ve been reading up on mutual funds lately, chances are you’ve seen people talking about ‘goals’ and ‘goal-based investing.’
So, what is goal-based investing? Put simply, it is the act of allocating a part of your investments for a specific life-goal, such as retirement, a house, your child’s higher education, etc. You can do this by creating and investing in portfolios (groups/baskets) of mutual funds that are tailored to your goal.
1. It gives you a clear finishing line
When you start investing for a goal, you give yourself a clear deadline and financial target to achieve. From buying a house, to retiring from your job – you are sure to have at least a rough time-line and target amount for each of these goals.
This means two things: First, when you start investing for either of these goals, you already have a deadline in mind – so you know exactly how long you have to build wealth for these goals. Second, if you know the price of the house or exactly how much you need to save to retire in comfort (if you need help figuring this out, our calculators can help), then you also know how much money you need to build.
Both these inputs are vital to creating a good investment plan and portfolio for your goals.
2. It helps in selecting funds best suited for your needs
Knowing how long you have has one other key use: It helps you select the most appropriate mutual funds for your needs. There are thousands of mutual funds in the market distributed across several fund categories, and each category has its own pros and cons.
So, your fund selection will vary depending on your investment time-frame and how much risk you can take. For short-term goals, like buying a new vehicle in three years, you’d be better off with debt mutual funds – a kind of mutual fund that tends to offer higher returns compared to bank FDs, but lower returns (and higher safety) compared to equity mutual funds; while for longer-term goals like retirement, equity mutual funds may be a better choice.They carry a slightly higher risk than debt funds, but also tend to offer higher returns, especially in the long term.
3. It helps you check if you’re on the right track
When you invest without a goal, you may often trick yourself into feeling like you’re saving enough even when that might not be the case. This means when the time comes to put this invested money to use, you may end up with a lot lesser than you need.
However, identifying your different goals, the target amount you need to achieve them, and putting together individual plans for each of these goals, ensures that you are investing as much as you need, and are well on your track to meet those goals.
But how do you know if you’re investing enough?
All you need to do is calculate the final value of your investments using your current (or planned) investment amount, and the estimated returns for your portfolio, to see if you’ll reach your target. Alternatively, you can make use of our monthly investment need calculator to determine how much you need to invest to reach your target amount and change your investment amount accordingly.
Having a goal also helps in keeping your portfolio healthy. Knowing your target date and amount makes it easier for your advisor to review your investments. Armed with this information, your advisor will get much better insight into the performance of all your funds and will be able to give better advice.
So, to sum up: Goal-based investing isn’t a new fad that’s sweeping the industry; it’s an important concept that can go a long way to helping you build enough wealth for all your needs. So get a head-start on your goal-planning today!
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