You may ride the waves for a while, but eventually, you’ll find yourself lost. If your investments are guided solely by returns, it often leads to risky decisions and missed goals.
Instead, goal-based investing offers a more effective and smarter approach by aligning your investments with personal financial goals, making your journey clearer and more secure.
Let me explain this with an example, you have Rs 50,000 to invest, and you see the stock market booming. Tempted by the recent performance of equities, you put all your money into stocks, hoping for high returns.
What if the market is volatile and you need the money to buy a home appliance or pay your child’s school fees in a year? The volatility in the stock market could derail you from your financial goals!Now, consider a smarter approach: instead of simply chasing returns, you start by defining your goal — buy a home appliance, or pay your child’s school fees in a year. Here, it’s not about getting the biggest return — it’s about ensuring that money is available when your goal arrives.This shifts your focus from, “How much can I make?” to “What do I need to achieve?” With this approach, you have more clarity and can choose low-risk investments like liquid mutual funds, or fixed deposits, etc!
The Power of Goal-Based Investing:
● A Clear Starting Point
Goal-based investing is like setting a destination on a map — once you know where you’re going, your route becomes clear. Whether you’re saving for a house, planning for your child’s education, or preparing for retirement, defining your goal gives you a starting point and a direction.
● Discipline and Consistency
Let’s face it — investing is as much about psychology as it is about numbers. There’s a massive difference between, “I’ll start investing now” and saying, “I’ll invest 10% of my income every month for my child’s education.”
The latter makes you consistent, turning investing from a vague idea into a structured plan. The more precisely you describe your goals and intent, the easier it becomes to follow through. And the more you are able to follow through, the more you will be able to invest a greater percentage of your savings, once you see the results of your consistency.
● Navigating Volatility
When investing according to specific goals, such as building a child education fund or a retirement corpus, you’re less likely to panic. A long-term focus helps you stay calm and avoid impulsive decisions driven by short-term fluctuations.
Categorising your goals
To start goal-based investing, it’s important to categorise your financial goals into 3 broad time frames. Each category will have a different investment strategy:
● Ultra Short-Term Goals (within a year)
These are goals that you want to achieve within a year such as planning a vacation, buying a gadget, planning for school fees, or saving for an emergency fund. Here, liquidity and safety is paramount because the money should be readily available when you need it. You can explore options like liquid and ultra-short-term debt mutual funds, high-yield savings bank accounts, recurring deposits, etc!
● Short-term Goals (1 – 3 years)
This category could include goals such as saving for a car, a wedding, or repair/renovation of your house. Since the time frame is slightly longer, you can afford to take on a bit more risk, compared to ultra-short-term goals.
You can explore options like Debt mutual funds with a small percentage of equity mutual funds, fixed deposits, etc!
● Long-term Goals (3+ years)
Long-term goals are typically larger goals like buying a house, investing for retirement, and a child’s education fund. Since these are long-term, you can plan to invest with a higher risk than short-term goals for potentially higher returns.
You can allocate a higher chunk towards equity-based investment options and the remaining into debt and gold for diversification of your portfolio.
Goal-based investing isn’t just about putting your money to work—it’s about ensuring that your money works for you. Whether you’re saving for a vacation next year, a home in five years, or retirement in 20 years, goal-based investing gives you the tools to make smarter money decisions.
Next time you think about investing, remember: it’s not just about chasing the highest returns. Let your goals guide the way you invest.
With a clear plan, disciplined approach, and the right risk management, you’ll not only achieve your financial goals, but you’ll do so with greater confidence and peace of mind.
(The author is Founder of LXME)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Source link
