Goal Based Investing

Goal-based investing is a method of investing based on your financial objectives. It aims to bring discipline to your investing approach by mapping your savings and investments to a fixed goal.

What is Goal-Based Investing

Goal-based investing is a method of investing based on your financial objectives. It aims to bring discipline to your investing approach by mapping your savings and investments to a fixed goal. People usually start putting away their savings into fixed deposits, recurring deposits, stock market, mutual funds, and so on without any particular plan or goal in their mind. This leads to random investments without any specific time horizon and an uncertain expected rate of return. Goal-based investing helps us to prevent these uncertainties up to a limit.

Why is Goal-Based Investing necessary?

Goal-based investing brings attention to how important it is to start investing early. It helps get a clear idea of how one’s investments meet specific goals, bringing discipline to the investment process. Goal-based investing also allows you to get a better overall view and performance of your portfolio at regular intervals. Goal-based investing can also help attain life goals like saving for college tuition fees, retirement plans, etc.

How to begin with Goal-Based Investing?

  • Estimate the time frame: Start by setting a goal, it can be buying a new car or house, retirement plan, college tuition fees payment, vacation planning, and then estimate the time horizon required to reach the goal. The time horizon will vary for different purposes. For example, you may need 15-20years of goal-based investment for buying a new house, whereas, for vacation planning, 1-2years of investing might suffice.
  • Take inflation into account: Reserve Bank of India (RBI) is the central bank of India and sets the inflation rate. RBI, in India, always maintains inflation to be around 4-6%. This indicates that the cost of the product is 4-6% more than the previous year, and this is a vital metric that needs to be considered before setting an investment goal. For example, if you want to buy a car for INR 10 lakhs next year and the inflation is at 4%, then the cost of the car will be INR 10.4 lakhs next year.
  • Estimation of the future cost: We must also consider the appreciation or depreciation. For example, if you want to buy a new phone, the phone’s price will reduce in the future. At the same time, if you’re going to buy a new house next year, due to appreciation, the cost of the house may go up by then (Given the market goes up).

So, where should you invest?

There are various options where you can invest your money. This depends on your risk appetite and the time horizon of your investment. It is always good to know about all the investments opportunities to be well aware of all the options. Taxation is another major factor that you need to consider while investing. Investment opportunities can be divided into subcategories of time horizons. They are

  • Short-term goals:  If you have to meet your goals in 1-3 years, we can categorize them into short-term goals. As the time horizon is shallow, it doesn’t allow the investment to grow much, and the risk is also much higher in the short term. Considering all this, debt mutual funds are the best option for short-term goals. Debt mutual funds invest in bonds; hence it’s less risky. Short-term gains in debt mutual funds are taxed according to your tax slab, and long-term gains are taxed at 20% with indentation benefits.
  • Medium-term goals: Medium-term goals can be achieved in 3-5 years. Here the scope of investment opportunities increases as the time horizon has increased. A mix of equity and mutual funds or index funds is an excellent combination in medium-term goals. The mixture usually should be 70% equity and 30% in mutual funds or index funds. Equity is taxed at 15% for short-term gains and 10% for long-term gains (STCG & LTCG taxation).
  • Long-term goals: Long-term goals are the goals that can be achieved in 5-15 years. Here we have an extended time horizon, and due to this, we can increase our risk appetite. Equity mutual funds or direct equity are the two best ways to achieve long-term goals.

Final Verdict

Goal-based investing has the potential to help you gain more clarity over your planning and execution, to be more disciplined about saving and investing, and to help you accomplish more with smaller investments. Goal-based investing also light upon the importance of portfolio review at regular intervals and on the importance of setting goals according to your needs.