Insights

3 reasons why goal-based investing is good for you

June 7, 2017 .
Akash Kapur

A man (investor) standing on a cliff, and staring at his goal - a mountain peak (his goal)

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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3 thoughts on “3 reasons why goal-based investing is good for you

  1. I have a question regarding calculation of Mutual Fund NAV change:
    Suppose fund A day change NAV rate is 0.25% which has an expense ratio
    is 2% and fund B has a day change NAV is also 0.25% with an expense
    ratio 2.5% then which fund is good to invest? I.e; I want to know that
    is these both fund will grow at a same rate i.e. 0.25% for the day in
    spite both of those fund has different expense ratio?

    1. NAV is final price after all deductions. So if the NAV change is 0.25% it means both funds are performing alike after expenses. The fund with the higher expense must have delivered higher pre-expense in your example, to get same returns as the fund with lower expense.

      thanks, Vidya

  2. This is a relatively new approach to wealth management, that emphasizes investing with the objective of attaining specific life goals. Using goals helps you to match your time horizon to your asset allocation, which means you take on the optimum amount of risk.

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