For goals with tenure less than 5 years, the focus should be to preserve capital, however, for goals beyond 5 years, investors can focus on maximizing returns.
Most people just invest in an unplanned manner, because they do not plan their investments according to their goals. Experts suggest goal-based investing adds direction to a person’s investments. But what is goal-based investing?
It is a structured, well-thought-out process for investing. With goal-based investing you know the purpose behind the money that is being invested. There are steps towards having a goal-based investment. For instance, it firstly looks at your existing assets, risk profile, asset allocation, expense patterns, and the many short, long and medium-term goals. It then creates a road map for each of these goals in a predictable manner.
The planning generally comprises of two parts — planning and then investing. It notifies you the amount that is required to fund the goal and on a regular basis or one-time, how much is needed to invest, to get to the desired amount. And then investing that amount in the most suitable investment tool will help the investor achieve the goal without any difficulty.
Get the best of goal-based investing
Firstly you need to determine and analyze your current financial situation. Only after that can you set your goals. This way you come to know what do you want to do with your money, how do you want to utilize it to smoothen your future financially. This planning is set in 3-time-frames — short-term, mid-term and long-term.
Short-term – Time-frame of a few months to 1 year. This could include immediate goals such as going for foreign vacation or buying a car in the near future.
Mid-term – Time-frame from 1 to 5 years. This could include goals like buying a house or starting a business a few years down the line.
Long-term – Time-frame with more than five years. This generally includes goals such as child education or retirement.
Why do you need it?
Goal-based investing is the only way to invest when you are saving for something particularly, experts suggest, or else you would not know where your hard-earned money is being put. If you are not headed towards your goals with your investments, then you could end up in a place where you did not intend to be.
Hence, goal-based investing ensures that you with your investments are heading towards your goals by selecting the appropriate tool for your investments.
For instance, in the short-term or for short-term goals, investing in equity to funds can be fatal. And, for long-term goals like wealth creation, it happens over a long term period only, with the power of compounding, which works efficiently for goals more than 5 years of time horizon.
Note that for goals with tenure less than 5 years, the focus of the investor should be to preserve capital and, hence, generate better post-tax returns when compared with fixed deposits. However, for goals beyond 5 years, the investor can focus on maximizing returns.