What is goal-based investing and how it helps in wealth creation?

What is goal-based investing and how it helps in wealth creation

While recurring deposits, public provident funds, voluntary provident funds, fixed deposits, etc., have been a preferred investment mode for risk-averse investors, of late many have even gained traction to invest beyond fixed-income instruments. Many now invest a part of their investible in debt or equity mutual funds. However, most do it in a haphazard way as they are unaware of what type of financial product is well matched and what corpus they must aim for to meet a specific financial goal through mutual fund investment. This inadequate knowledge often results in ill-informed decision-making. 

So, in the case you are one of those who invest in a mutual fund without any goal or aim, it is time you end such kinds of investments and design your long-term and short-term financial goals and work towards meeting them. Read on to understand what a goal-based investment is and how can this approach help you create wealth.  

What is goal-based investing?

Goal-based investing in mutual funds refers to the approach of computing and forming a strategy to attain a wide range of financial goals and objectives. The idea here is to avoid chasing returns on financial investments and instead invest to attain a purpose. 

A financial goal can be to invest funds for a home, higher education, vacation abroad, retirement or wedding expense. To attain such financial goals, forming a goal-based investing is crucial as it endows a purpose for your investments and assists you to achieve financial independence. 

Here is the stepwise approach for creating adequate wealth using a goal-based investing approach through mutual fund investment – 

  • Identify a particular financial goal

You must link every investment with a particular financial goal. This can be ensured by financial goal prioritisation with an estimation of the monetary value required for meeting them. Knowing the corpus requirement for every goal allows you to design a better strategy to attain them within the deadline. 

  • Categorise financial goals into long-, medium-, or short-term

Long-term financial goals have a time horizon of 5 years and above. For instance, retirement planning, child’s higher education and marriage planning can be long-term goals. Short-term financial goal spans up to three years. For example, purchasing a product that would generate a decent corpus to finance your vacation can be a short-term goal. Mid-term financial goals come with a time horizon that ranges between 3-5 years. For instance, this may involve corpus creation for your home loan or car loan’s down payment. 

  • Asset-allocation strategy 

You must identify a well-matched asset mix for your investment as per your risk tolerance level and time frame. Asset allocation strategy allows you to pick from distinct asset classes like debt, gold, equity, etc., according to your financial goals and investment timeframe. For example, for short-term financial goals, it is suggested to invest in fixed deposits or debt mutual funds. Doing so allows you to earn satisfactory returns and safeguard your capital investment. For long-term financial goals, it is suggested to invest in equity mutual funds because equity as an asset class has the potential to generate inflation and fixed income beating returns over the long term by a wide margin. 

  • Review your investment portfolio periodically 

You must not follow the approach of investing and forgetting. Instead, you must ensure to constantly track your investment’s performance, periodically review your life goals, and accordingly relocate your funds. 

Ending note

Understanding all your requirements gives you a crystal-clear picture of your finances. Following a goal-based investing approach allows you to answer crucial questions like where you must invest, how you should invest, for how long you must invest and when you must begin with your investment. Additionally, it even endows you with a purpose to remain invested.