Why Goal-based Approach To Investment Is Crucial

By Adhil Shetty | April 26, 2018

When you have decided on your goals and match it up with the right type of investment strategies, you get to balance your portfolio and achieve financial inclusiveness.

A financial industry first creates a product and then convinces the consumers to buy the product. This is a global phenomenon which applies to the Indian financial realm as well. The consumers, most of the times, also have little knowledge how to invest their money in the wisest manner. They just go by the words of any financial adviser or the best-advertised product and invest without concrete goals in place. The end result is landing up with investments that fall short of expectations. Hence, it is crucial to invest in a goal-based approach not only to build a portfolio but also to fulfil all dreams.

So, What Is This Goal-based approach Towards Investment?

We all have a goal when we start our careers. It can be short-term, mid-term or a long-term goal. However, just investing haphazardly in financial tools that beat inflation or give maximum returns won’t fulfil these goals. It is best to adopt a goal-based approach towards investment that also provides you with the financial freedom to achieve your targets as you progress in life and career.

These Goals Can Be Best Described In Three Parts:

Short-term Goals (0 to 5 years): It can be about buying your first house, or a car, or a destination wedding.  This can be even further broken down to must-achieve or good-to-achieve goals.

For example, buying a house may be a top priority for you. Hence, it can come under must-achieve goal. But destination wedding can be a good-to-achieve goal or you may even scrap it if you wish to invest that money to pay off a major chunk of your Home Loan.

Mid-term Goals (5 to 10 years): It can be goals that do not need your immediate attention, but you must invest from now on to have the financial security to achieve them as and when they arrive. Children’s education, a second house or early retirement come under this bracket. This can also be divided into must-achieve or good-to-achieve goal depending on how you prioritise them.

Long-term Goals (Above 10 years): These are goals such as a holiday home, or a retirement fund to have a secured life once you call time on your career.

Once you have identified your goals under the various timelines or categories, you can start matching them up with investment strategies. This is an important step to goal-based approach towards investment as correct matching will make you financially independent to achieve each goal. Here’s how to match them up.

Short-term goals: In this category, you cannot go for volatile or high-risk investment strategies. You would be looking towards the return of capital and a marginal return on your investment to fulfil the goals. Debt Funds are the best investment tools to achieve goals under this category.

Mid-term goals: Under this category, your ability to take risk is high due to the longer duration of the goal. But you cannot still go for extremely high-risk financial strategies. Hence, you need to balance it out with a mix of equity (high-risk) and debt (low-risk). Ideally, it should be an equity: debt ratio of 70:30 under this category.

Long-term goals: You can take higher risks under this category due to the bigger timeline as you can sustain market volatility over the duration of the investment. Equity is the best asset class for this category of goals. It can give you high returns to meet goals. Besides, compounding benefit comes into play when investment is done over a longer duration.

Why Goal-based Approach Towards Investment Is So Important?

When you have decided on your goals and match it up with the right type of investment strategies, you get to balance your portfolio and achieve financial inclusiveness. So, make the right choices today and start-off.

However, do consult a financial expert when you plan your investment strategies to meet the various categories of goals and know of little nuances.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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