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The Real Truth About Goal-Based Investing!

Goal-based investing, also known as Target based investing or Goal-driven investing has been into a lot of buzzes lately. The name itself defines this investing strategy.

However, still many investors do not know what exactly is a goal-based investment and how to pursue it. In this post, I’ll try to answer the most frequently asked questions regarding goal-based investing. Here are the topics that we’ll discuss today:

  1. What is a goal-based investing?
  2. How is goal-based investing different from traditional investing?
  3. Why goal based investing is the key to long-term success?
  4. How to get started with goal-based investing?

This post may change the way you look towards investing. Therefore, make sure that you read this article till the end. Let’s get started.

1. What is a goal-based investing?

Although goal-based investing is not a new concept and many financial experts have been following this strategy over a long period, however, it started getting fame recently.

Goal-based investing is a new way of wealth management where the individuals focus on attaining specific objectives or life-goals through their investments. Here, before starting to invest, the individual tries to answer the question- “What exactly are you investing for?”.

The best part about the goal-based investing is that here the investors do not focus on getting the highest possible returns. But the aim of this investment is to reach the desired returns that meet their goals.

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In a goal-based investment, the individuals periodically measure the progress on their returns against the specific goals. Instead of trying to outperform the market, they try to attain their goals within the desired time horizon.

Moreover, the goal can be person specific like planning for children education, retirement fund, buying a new house or even financial independence. A few factors included while planning goal-based investments are the aim of the person per age, risk tolerance, financial situation, and investment horizon.

2. How is goal-based investing different from traditional investing?

The main motive of traditional investing is to get higher returns and generally to beat the market.

Here, the individuals compare their returns with the index such as Sensex or nifty in order to find whether their personal investments are over or underperforming.

On the other hand, goal-based investing redefines the success based on the individual’s goals and needs, rather than whether they beat the market or not. This strategy tries to shift traditional investing to a personal financial goal approach and helps to invest based on needs and risk tolerance.

The problem with traditional investing is that they do not focus on the individual’s needs. In such a scenario, no matter, how good are the returns, if the individuals are not reaching your final goal, then the returns might not be good enough for the individuals. After all, investing is a long-term activity and NOT a phenomenon of beating the market for a year or two.

Goal-based investment allocates the funds depending on the individuals’ situation and aims. For example- if your goal is retirement, then you might choose a conservative strategy with a majority of investments in debt funds. On the other hand, if your goal is to build a corpus for your children’s marriage, you might choose an aggressive strategy with 50% investment is equity and rest 50% in debt.

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3. Why goal based investing is the key to long-term success?

The biggest advantage of goal-based investing is that it increases the individual’s commitment to invest consistently in order to reach their life goals. Unlike traditional investing, here the individuals participate actively and observe the progress towards their goals.

Moreover, having a long-term strategy helps the individuals to avoid making impulsive decisions based on market fluctuations. As the individuals are more focused to achieve their goals, they are less inclined to make spontaneous decisions just with an expectation to get a little higher return. Goal-based investing prevents rash investment decisions by providing a clear process of identifying goals and choosing strategies to achieve them.

Lastly, it also avoids the situation of under-saving (and under-investing). As goal-based investing continuously monitors the progress of individuals towards their goal, and hence they remain updated on how far they are from their goals. In a case where they are under-investing, they can re-improvise their strategy so that they can reach their goal in time.

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4. How to get started with goal-based investing?

Although planning a goal-based investing requires a detailed study of the individual’s goals, financial situation, time-horizon, and risk tolerance. However, here are a few simple steps that can give you a rough idea of how to get started.

The first step is to clearly define your goals and the time horizon to attain them. The goal can be building a corpus for buying a new house, savings for children education/marriage, retirement etc. You can even have multiple goals and differentiate them as short-term, mid-term and long-term.

The next strategy is defining your strategy of where you’ll invest and how. Depending on the risk-tolerance, required rate of return and time horizon, you can choose different funds like equity, debt or a combination of both. Further, you also need to decide your monthly, quarterly or yearly contribution to all these funds.

The next step is to be disciplined in following your strategy. To attain your goals, you need to make consistent investments.

Finally, periodically monitor and review your progress towards your goal. If your progress is not in line with your purposes, you might need to revise your strategy and re-allocate your funds so that you can reach your goal in time.

Closing Thoughts

Goal-based investing is a relatively new way to achieve personal needs by investing in a definite strategy. It’s a good alternative over traditional investing which does not focus on the individual’s goals and financial situation.

Most individuals start investing in the market without any goal. There are even a few who invest in the market just for fun and to make a few extra bucks alongside their primary income source.  And it’s perfectly okay to start like that. However, with time you need to eventually decide a goal for your investments. It will help you reach them in time and to avoid situations of taking unnecessary risks just in order to get some extra returns.

Besides, another benefit of goal-based investing is that it helps in ‘Guilt-free spending’. Here, as you already know that all your goals have been taken care of, you can spend the additional income on something that you love without any guilt.

Final thoughts, “Investing is good. But it is even better when attached to a goal.”

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