“Goal-Based Investing” – Why It Works Better Than Random Saving?

What is Goal-Based Investing?

Goal-based investing is an investment strategy that aligns your savings to specific financial goals within a stipulated time frame, rather than unplanned savings. It is all about finding an answer to - What am I saving for? When do I need it? What is the target amount? And how much should I save?, etc.

Goal-based investing is gaining traction among investors of all ages. A study by Accenture reveals 79% of high-net-worth individuals believe goal-based investing is more effective than just focusing on outperforming the market. SEI investments report suggests that investors using goal-based investing strategies have an 84% satisfaction rate.

How Does Goal-Based Investing Work?

To make investment plans based on goal-based investing strategies, you need to understand how goals are categorised. Here is how goals are categorised based on the timeframe:

Short-term financial goals

Goals spanning between one to three years are generally categorised as short-term goals. For example, setting aside emergency funds, buying a vehicle or planning a vacation.

Medium-term financial goals

Goals spanning between three to seven years are generally categorised as medium-term goals. For example, children’s college admission, buying a dream home.

Long-term financial goals

Goals with a more than ten-year timeframe are generally categorised as long-term goals. For example, building a retirement corpus, saving for children’s higher education, and wealth transfer.

In goal-based investing, you list your goals, categorise them, and then quantify those measurable goals. Once you set a specific target amount for the goal, you can match the instrument for that goal and then review it regularly to ensure you meet the goal.

Financial goals can be categorized into three main types based on their time frame. Short-term goals, which typically span one to three years, are suitable for purposes like building an emergency fund. For these, instruments such as fixed deposits and liquid funds are recommended. Medium-term goals range from three to seven years, and an example is saving for a home. A suitable strategy for these goals is a mix of equity funds and balanced funds. Lastly, long-term goals are for time frames of seven years or more, such as saving for a child's higher education. These goals are best addressed with a mix of direct equity, PPF, equity mutual funds, and ULIP.

Once you get this clarity and your expected rate of return on each instrument, you can decide the amount to be invested in to achieve the target amount. This structured approach brings efficiency to your financial planning.

How Goal-Based Investing Works Better Than Random Savings?

Random saving generally falls short of the specific goal, mainly because a large portion of savings goes into low-yielding financial instruments like fixed deposits, recurring deposits, etc, that give an average return of 6% to 6.5%. The returns cannot even outpace the inflation ( 4.5% to 6%) post-tax. Hence, unplanned and random savings are often not enough for future goals.

On the other hand, goal-based investing works better as you assess the future cost and then invest accordingly. For example, you have to build a corpus of INR 50 lakhs over the next ten years for your daughter’s higher education. You need to invest INR 22,000 (approximately) in an equity mutual fund monthly SIP with an expected rate of return of 12% (CAGR). For the same goal, if the time frame is 15 years, you can invest INR 1.5 lakhs in ULIP ( with an expected rate of return of 10%) to build a corpus of INR 50 lakhs. ULIP also provide dual benefits by offering life cover.

At Jio Insurance Broking, you can compare various investment plans offered by the insurance companies and then choose the best one suitable for your goals. You can even customise the investment plans as per your goal.

The following are the benefits of goal-based investing:

1. When you attach investment to measurable goals, you will have financial clarity and clear focus. You can also handle market volatility more effectively.
2. Goal-based investing involves periodic review of investments to ensure your investment performance is in alignment with the financial objective.
3. Goal-based investing approach matches each investment with a specific goal set for a different time horizon and risk profile. Hence, personalisation of investment decisions optimises the potential return on investment.
4. When investments are aligned with goals, investors avoid impulsive decisions and frivolous expenses.
5. A structured approach to investing reduces the need for borrowing.

Conclusion

To conclude, goal-based investing is highly effective in comparison to random savings. Goal-based investing brings discipline, clarity and a structured approach to financial planning. It not only keeps a clear focus on financial goals but also optimises wealth by transforming financial objectives into achievable realities.