Goal-based investing is an approach towards investing that is linked with your financial goals. It maps down your savings and investments towards a fixed financial goal. Goal-based investing aims to bring a sense of discipline to your investing method.
It majorly focuses on; age, income, and outlook.
Some common financial goals:
Financial goals are classified into 3 types, one is a short-term goal. They consist of smaller financial targets that could be achieved within a year. For example, getting a new computer or planning a marriage, or home renovation.
Whereas, mid-term goals could take about 5 years to achieve. These are the types of goals that you have planned later down the road. For example, getting a car or saving for a home loan down payment.
The last type is the long-term goal. They require proper planning and determination as the duration increases 5+ years. Since you won’t need the money right away, consider investing the money you are saving for a long-term financial goal. For example, saving for a child’s education, Investing for your retirement plan, etc.
How does one go about selecting the right or the most appropriate or investment product?
Selecting the most appropriate goal solely depends on your future needs. As per the time horizon, one should focus on selecting their financial goal. For example, a child education plan is the best long-term investment for your child. Nowadays, the fees of courses are already so expensive.
Say you invest 10,000 monthly for 18 years. As you will be needing money by the time your child turns 18. If we expect a return of 11% your investment could grow to Rs. 68.01 lakhs* after 18 years. The power of compounding will grow your wealth exponentially.
Figure out your requirement. Figure out whether you want a short-term, mid-term, or long-term goal. Accordingly, plan for it!
How do we manage the risk of these
investment products?
Time horizons of the goal lead us to select the most appropriate goal. There are 2 reasons for this, 1st when you select an equity product, the risk of investing in equity gets mitigated over the long term.
If you invest in an equity product for over 1 year, there is a 60% probability that you’ll make money. But if you extend the time horizon to 3 years the probability of making money in equity increases to 75%. On a 10-year basis, almost 99% of you’ll make money.
This is how you reduce the risk of investing in the equity market.