Everyday Money: Why Practicing Goal-Based Investing Is a Must
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Why should you invest? The most common answer to this question is to save and grow money. That’s a valid answer but saving money without a plan is akin to taking out your car on a drive without knowing your destination. Without a destination, you cannot decide which route to take and for how long do you have to drive.
Similarly, you need to have a goal for your investments to plan your finances better. For instance, you have accumulated Rs 1 lakh by investing in a mutual fund. After meeting a colleague who has just returned from a foreign vacation you are tempted to go yourself. You redeem your mutual investment to book the flight tickets and hotel. For the rest of the bookings, you decide to take a travel loan, which means you will pay EMIs for the next 6-8 months.
Amidst the excitement of the vacation, you forget that you had to pay fee for an online marketing course you have to enroll in next month. Lack of goal-based planning can lead to such mistakes.
What is goal-based investing?
It’s an investment approach where you invest with the target of achieving specific goals, such as saving for a house, vacation or building a retirement corpus. The objective is to invest systematically as per your risk profile and time horizon of the goal instead of chasing returns or beating the markets.
Map out your goals and estimate the corpus needed for each goal. This will give an idea about for how long and how much you need to invest.
Benefits of goal-based investment
Foremost, goal-based investing gives a purpose to your investments. When you have a clear idea about your goals, you will know how much to invest and for how long. This also means that you are less likely to get affected by market movements and make impulsive decisions.
Second, you can manage asset-allocation in your investment portfolio better when you have defined goals. Investment horizon (short-, mid- and long-term) is one of the most important factors to choose suitable products for your investments. For instance, a short-term goal (1-2 years) calls for saving in debt and fixed income instruments. A mid-term goal (3-5 years) should be a mix of equity and debt whereas a long term goal (>5 years) can have maximum exposure in equity.
Related Read: Why Is Asset Allocation Important
Last, goal-based investing helps inculcate investment discipline. Being committed to your goals will make you to save and invest regularly and hence, improve financial management.