What makes goal based investing a good idea?

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Travelling can be fun. But what if you took a trip by yourself just on a whim? Here’s what would happen – You would probably get lost in an unfamiliar city and you wouldn’t know where to go. And during this whole time, you would probably chide yourself for not planning ahead.

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Sure, you may think that you’d meet your soulmate and the two of you may have a grand adventure. But unless you are in the middle of a Bollywood film, chances of this happening are very unlikely.

Investing without a proper plan can be quite similar to travelling without preparation. In this article, let us find out how goal-based investing can make your investment journey a lot easier.

Vague investments vs well-defined goals

Here are two investment approaches:

  1. I want to earn a lot of money
  2. I want to earn Rs 1 crore in the next 10 years so that I can buy a 2 BHK house

Can you spot the difference between the above two statements?

The first statement is very vague but the second one is a well-defined investment goal. When you have clear-cut investment goals, you are well aware of the finish line. You know how much money you need to earn and you are also aware of the deadline. With these inputs, your investment purpose becomes clear and you can work towards achieving it.

Identify the best investment choices

Lets continue with the above example of buying a house.

Here, you know that the financial goal is Rs 1 crore. The time limit is ten years. In this situation, where should you invest? There are many investment choices in the market but what is the best choice that can help you meet this goal in the best manner possible?

Unless you have a huge initial capital, debt instruments may be out of the question because the returns may not be high enough to earn the specified amount in the time period. On the other hand, you could invest in equity. Here, you have the ability to earn higher returns. For example, by investing Rs 40,000 per month in an equity mutual fund [at 14% per annum], you could end up with Rs 1.04 crore by the end of ten years.

Similarly, if you have a short-term goal like taking a vacation with your family in the next 12 months, it may be better to invest your money in a liquid fund or a short-term mutual fund. Identifying the right investment avenue becomes clear when you invest for specific goals.

Monitor your investment journey

There are a lot of investment choices available for you. Fixed deposits, bonds, mutual funds, stocks, real estate, gold and so on. For instance, even if you put all your money in a low-interest fixed income instrument it would be considered as an investment. But is that the best way to deploy your money? At the end of your career, you don’t want to find out that your retirement fund is not big enough.

Avoid this situation by identifying your investment goals and working towards them. You can go online and use an investment calculator to find out your future financial requirements. And during the investment journey, do not forget to regularly monitor if your investments are on the right track or not.

Segregate your funds for different goals

Everyone has different financial goals. However, not all goals are the same. You may have short, medium and long-term goals. In addition, each goal can differ in terms of importance and urgency.

For example, taking an exotic vacation may not be as important as clearing your credit card debt.  By identifying these differences, you can channel your funds more appropriately.

Here is another example. When people invest without specific goals, they tend to dip into their savings whenever any financial need arises. Your son needs money for a new course at college: dip! You need to renovate your kitchen: dip! Pretty soon, your fund amount doesn’t look as large as it used to be. This is not to say that you shouldn’t finance your child’s education. It means that you should explore all options in front of you. Perhaps, you could take an educational loan to pay for the course. This way, you protect your retirement fund while helping out your son at the same time.

To sum up, investing is good but goal-based investing is better. With this approach, you can clearly identify your financial goals and meet them comfortably at the right moment in time.