What if, in a football match, there are 22 players running after a ball but there are no goalposts? Doesn’t make sense, does it? It doesn’t.
But when it comes to investments, most of us make this mistake. Most people do random savings and invest without financial goals. As the saying goes, “An investment without a goal is like a traveller without a destination.”
Why goal-based investing?
Money can be a tool to accomplish greater goals in your life, such as giving your child the best education, pursuing your hobbies, travelling to the destinations you’ve always wanted, buying your dream home, saving for your golden years… the list goes on.
You’re closer to achieving your goals when your money goes into goal-based investments rather than random savings. Goal-based investing ensures that you save for each goal in advance, which makes it more likely for you to achieve them. Also, it helps you match your time horizon to your asset allocation.
Before investing your money, you should know the 4Ks – Kya? Kab? Kitna? & Kaise?
Kya – what is the investment for?
Kab – when would you require this money? If you know what your goal is and the time you have in hand, it’s wiser to invest in equities that work best in the long-term, rather than investing in short-term assets and compromising the return.
Kitna – how much money would you require? You need to adjust the current cost with the inflation to arrive at the future cost.
Kaise – how much do you need to invest? Investments can be done via SIPs or lump sums. Here, you also need to define your asset allocation, which will depend on your risk appetite. You can get your risk profile test done to arrive at the asset allocation.
Below are some of the behavioural and financial reasons why goal-based investment is a better way of investing:
1) Avoid under-saving: Goal-based investments make you think and enumerate your goals in advance. This prevents you from miscalculating how much money you’ll need to invest for your financial goals. Instead of random savings, you will save the appropriate amount.
2) Plan ahead, save less, achieve more: Goal-based investing means lesser liabilities. Here’s how: when you start saving for a goal well ahead of time, you need to save less. Why? Because you will benefit from the power of compounding. The earlier you start saving, the more time there is for the investments to grow.
For example, you require a corpus of Rs. 100 lakhs for your children’s higher education. You need to save just Rs. 17,000/month for 18 years if you start at the time he/she is born. But if you start 5 years later, you need to invest Rs. 31,000/month – 55% more every month.
Returns are assumed at 10% per annum. (Investment amounts are for illustrative purposes only and does not assure any guaranteed returns.)
3) Save for a tangible outcome: Think about the outcome of your investment. When you attach a real outcome to the purpose of your saving, you’re more likely to work towards that goal. It also discourages you from withdrawing or redeeming the funds in between due to short-term market fluctuation and it keeps you on track.
4) Guilt-free spending: While some might find it surprising, there are people who feel guilty and are uncomfortable with spending large amounts of money. But when you spend money from an investment specifically earmarked for that purpose, you will spend it without guilt.
5) Achieve optimal returns: Goal-based investing matches your time horizon with your asset allocation, and you can allocate investments according to the time frame of the goal. A bike is best for going around the city, but to go to another country, you need to get on a flight. Similarly, different assets work differently in different time horizons. Goal-based investing ensures that you invest in the most suitable asset depending on your goals to ensure optimum returns. For example, if your goal is 12 years away, equities would be the best way to go. But if your goal is just a couple of years away, equities might not give you the desired results.
If you aren’t investing based on your goals, you’re just running in a field with a ball, not knowing where to shoot. Start goal-based investing now and win the game!
Happy Goal-Based Investing!
Views are personal: The author – Abhishek Mohta, CFP & Founder, Trustedarms Wealth
The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.
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