Goal Based Investing: Importance of setting the Financial Goals

Created on 19 May 2020

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Updated on 10 Sep 2022

“An investor lacking investment objectives is like a traveler without a destination.” This is where a Goal based investing approach is adopted as a methodology that helps the investment approach to shift from higher returns to funding an individual's personal financial goals.

Most of the time we start investing with an eagerness to build a portfolio that gives us a higher return. However, investments cannot be effective until they are bought with purpose. Hence, practicing goal based investment is a must. 

What Is Goal Based Investing?

Goal based investing is a relatively new concept in wealth management wherein the emphasis is on investing with the objective of attaining specific life goals. It involves measuring one’s progress towards these specific financial goals, such as savings for children’s education, buying a house, or building a retirement nest-egg, rather than focusing on generating the highest possible portfolio return or beating the market average in a given period. It revolves around an increased commitment to their life goals by allowing them to observe and participate in tangible progress. This contributes to a reduction in impulsive decision-making and overreaction, based on market fluctuations.

‘Having the right amounts of money when needed’ – this is nothing but our financial goal. Hence the first step is to understand our financial goals.

Identifying Financial Goals

Identification of financial needs will help us in listing out our financial goals. We need to restrict these to a limited list for the start, so that it becomes easy to focus. Moreover one can revisit these goals periodically as situations and needs keep changing. Some new goals get added to the list. Some old ones get less priority, or some existing ones attract more attention. Also the duration of achieving these goals may vary, as they may be short term goals or long term goals.

Different people will have different goals. But surprisingly they are often very similar. You can make a list of “non-compromising” financial goals as an example and fix some for yourself. Before investing our first penny anywhere, it’s better to first identify the financial goals. Practicing goal based investment has huge advantages. Adopting a goal based investment strategy will make you more skillful and scuttle.

Importance of Goal Based Investment

A goal based investing approach is vital for the following reasons:

1. It gives a purpose to your investments - The surplus funds can be routed to the right investment and for the right period of time. This is because you know the exact amount that is needed and when it is needed to meet your objectives allowing you to determine how much you need to invest.

2. Assists in choice of investment products - Knowing your requirements, gives you the leeway in determining the life cover needed, what allocation of funds needs to be made in mutual funds, and the amount you would need to invest to ensure financial freedom post-retirement. This will enable you to make the right investment decisions sans following the herd mentality.

3. Creation of investment discipline - This approach will prompt to maintain an investment discipline. You may opt to start a Systematic Investment Plan (SIP) in a mutual fund ensuring a certain amount is invested at regular intervals to yield higher returns.

4. Attain portfolio diversification - To achieve your varied goals you will include different investment products. Diversification of your portfolio would result in reducing your risks while being beneficial in wealth creation over a period of time.

5. Achieve financial independence - As your investments match with your time-bound financial goals, you are in a position to achieve financial independence. You are aware that your objectives can be easily met without any financial stress.

Investment Procedure - Mutual Funds an Ideal Option

Investing in the right financial product requires in-depth knowledge and analytical skills. In addition you need to hold to your investments for a longer period to benefit from the power of compounding. Investing in Mutual Funds and specifically in SIPs make the task simple and beneficial.

Most financial experts recommend investing in mutual funds to achieve one’s medium and long-term goals. As there are several schemes in the market, analyzing and narrowing down on the right one may seem a daunting task. 

The mutual fund basket provides you with a variety of options based on your risk appetite - whether you are a conservative or aggressive investor or on financial goals be it short-term or long-term goals and most importantly the amount you have to invest. You can use different kinds of mutual funds with different investment objectives to reach your goals.

Let us map these common goals and the most suited mutual fund options  

Financial Goal

Investment Timeline

Type of Fund Suited

Child’s Education/ Marriage expenses

Medium term

Equity Linked Savings Scheme

House Renovation

Short term

short-term gilt funds, short- to medium-term debt funds

Retirement Savings

Long term

Equity diversified mutual funds, sector or thematic funds

These are all indicators of the type of schemes. One can always take the help of a financial advisor to further guide you. The flexibility offered by Mutual funds is that you can mirror your life-stage and progressively reduce the exposure to volatile assets and move to more stable options as you grow old. Overall, you have a variety of mutual funds to choose from, each with a different investment objective. Further, you can leverage mutual fund investments to instill financial discipline and meet your financial aspirations in a structured and timely manner. 

One also has the option to suitably equip oneself on the nuances of investing in Mutual funds. A simple and easy manner would be to enroll for an online course like the one offered by Finology on ‘The Academy of Mutual Funds’ where experts will not only guide you but give you a certification of completion. Equipped with the knowledge obtained by this certification you can use scientific methods to evaluate different mutual fund schemes. You would be able to match your investments according to your risk appetite, lifestyle, and financial goals.

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An MBA Finance graduate, having worked in the Telecom and Banking sector as a Risk and Compliance Manager. An avid blogger with a penchant for traveling

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