Goal-Based Investing – An Approach to Meet Financial Objectives

Goal-Based Investing

Goal-Based Investing
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Last updated on July 30th, 2022 at 09:10 pm

Goal-Based Investing – A Structured Approach to Meet Financial Objectives 

“Action without any ultimate Goal and a Goal without any corresponding Action will give you 100% failure”.

This also applies to our investments. If we invest our hard-earned savings and money without aligning them with our goals, we may not have sufficient funds when we actually need them the most.

Goal-Based Investing is a structured and continuous investment planning approach wherein investment decisions are taken strategically considering the investor’s overall profile to accomplish various financial goals in the future. This approach gives vision, understanding, motivation, and direction to the financial plan with clear objectives.

Let’s understand the key difference between ‘Traditional Investing’ and ‘Goal-Based Investing’ approaches

The yardstick for measuring successful investment is different in both the above investing approaches.

In the Traditional Investing approach, the focus is mainly on maximizing the portfolio returns and beating the market benchmark. This may lead to mismanaged, hyperactivity, and irrational decisions. As per behavioral finance theory, investors generally become greedy when markets are continuously going-up and become fearful when markets are incessantly moving down. This may end-up them buying more when markets are nearing their highs and sell their investments when markets are actually approaching their bottom.

In the Goal-Based Investing approach, investors stop worrying about outperforming or underperforming a benchmark as financial goals are never achieved by beating the markets and generate superior returns over the short term. They mainly focus on attaining specific predefined goals and measure how well the portfolio is tracking liabilities with the available funding over multiple time horizons. This helps in avoiding emotional reactions and urges to respond inappropriately and irrationally during the high market fluctuation.

Process of Goal-Based Investing

  1. First and foremost – one needs to analyze its current financial situation and savings
  2. Predict your key financial goals what you want your money to achieve in the future. The goals may vary based on age, your income and savings, circumstances, and priorities in life. Determine the time you have to reach your goals. Identify investment horizon to achieve each of the goals. Prioritize each of the goals Classify Goals into short-term, mid-term, and long-term goals. Some of the most common types of investment goals are listed below
    • Short Term Goals: Save taxes, dream vacation, expensive treatments, emergency funds
    • Mid-Term Goals: Purchase House, new/upgrade vehicle, Fund children education, and wedding expenses, Start own business
    • Long-Term Goals: Retirement planning
  1. Predict the amount required to attain each of the individual goals. This should consider the current cost, inflation, and market uncertainties.
  2. Assess the risk appetite. Review if the risks are adequately covered
  3. Identify the right investment products and suggest the most appropriate asset allocation based on individual goals.
  4. Invest systematically and regularly to achieve your objective.
  5. Regular monitor and realign the portfolio based on any new goals, changing times, new market dynamics, revision in tax rules, etc.

What are the key advantages of the Goal-Based Investing approach?

The Goal-Based Investing approach differentiates goals into long-term, mid-term, and short-term categories, which helps in choosing the most suitable investment products based on each of the time-horizon categories of the goals.

Further, it brings investment discipline, reduces impulsive decision-making and overreaction, especially in times of highly volatile market conditions.

This approach supports in achieving financial independence, assists in attaining portfolio diversification, increases commitment to life goals by allowing to observe and participate in tangible progress, and gives a purpose to the investments.

Should one consider seeking financial advice?

Certainly Yes. We all want to live a good life with long-term financial security. Starting and regularly monitoring your serious long-term investment goals can be tricky and challenging.

There are multiple investment products and options such as mutual funds, life insurance, equities, fixed-income products, physical assets (gold/real estate), and so on. Each of the products has its own set of risks and return profile, tenure, taxation rules, lock-in period, etc.

It requires an experienced financial advisor who can understand your future needs and suggest the most appropriate investment products considering the age, stage of life, risk appetite, overall financial position, liquidity needs, tax efficiency, etc. Financial Advisor should not be there not only at the time of initial investments but should always be there to help in course correction with minimal switching costs based on the fast-changing external market environment or revision in the investor’s goals.

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CA Ankita Khetan
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Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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