Goal based investing is the easy way to achieve financial goals. It is based on the premise that financial planning is more effective when you work towards achieving a goal rather than chasing returns. A goal based investment strategy first creates a personalised financial goal according to the investor's age, income, expenses, savings and risk appetite.
Then, based on that personalised goal and the time period available to achieve the goal, an approximate amount is calculated while taking inflation, expenses and other investments into consideration. Also, one needs to calculate the amount that must be invested regularly (monthly, quarterly, half yearly or annually) to build that corpus in the predetermined time frame.
The next question the investor may ask after that is: Where to invest money? Again, the answer to that question will be based on your desired corpus size, timeframe and risk appetite.
How to get it right
You know everything about goal-based investing and are ready to start now. But to get it right, there are a few rules that you should always keep in mind and follow them religiously. Here are a few important ones.
Be sure about your goals – You must introspect carefully to identify your goals and time horizon before you start. Be absolutely sure about what you want and that you will take all measures to get there.
Be accurate – If you are planning to send your child to a medical college, consult a parent whose child is studying in one to get all the details. Take the rate of inflation into consideration when you calculate the investment goal according to the time horizon.
Know how much you can invest – Be realistic about your capacity to save and invest based on your income, expenses, loans, other investments, etc. Don't forsake important investments plans such as those for your retirement in the process.
Determine the average rate of return – When you calculate the average rate or return for a ULIP or mutual fund, refer to the weighted average of returns. Also, remember that rate of return is based on expected compounded annualized growth rate (CAGR).
Decide on equity exposure – Don't put all your eggs in one basket. You can invest in both equity and debt instruments to reach your investment goal. Your equity exposure should be depending on your investment horizon.
Consider your risk appetite – Your capacity to bear financial risk is an important factor in deciding the investment instrument and portfolio distribution. If your risk appetite is high and you have a long-term horizon, you can have more exposure to equity funds. On the other hand, if your goals are short-term, your fund allocation must be more debt-oriented.
Review regularly – You need to review your investment portfolio regularly to ensure that you are on track with your goals. Not only you can switch funds, you can also top-up your investment for higher returns if your portfolio is performing well.
Remember that it's important to have the right mind-set if you want to succeed in goal based investing. Patient, perseverance and consistency are essential and indispensable virtues in this method of investing.
You know everything about goal-based investing and are ready to start now. But to get it right, there are a few rules that you should always keep in mind and follow them religiously. Here are a few important ones.
Be sure about your goals – You must introspect carefully to identify your goals and time horizon before you start. Be absolutely sure about what you want and that you will take all measures to get there.
Be accurate – If you are planning to send your child to a medical college, consult a parent whose child is studying in one to get all the details. Take the rate of inflation into consideration when you calculate the investment goal according to the time horizon.
Know how much you can invest – Be realistic about your capacity to save and invest based on your income, expenses, loans, other investments, etc. Don't forsake important investments plans such as those for your retirement in the process.
Determine the average rate of return – When you calculate the average rate or return for a ULIP or mutual fund, refer to the weighted average of returns. Also, remember that rate of return is based on expected compounded annualized growth rate (CAGR).
Decide on equity exposure – Don't put all your eggs in one basket. You can invest in both equity and debt instruments to reach your investment goal. Your equity exposure should be depending on your investment horizon.
Consider your risk appetite – Your capacity to bear financial risk is an important factor in deciding the investment instrument and portfolio distribution. If your risk appetite is high and you have a long-term horizon, you can have more exposure to equity funds. On the other hand, if your goals are short-term, your fund allocation must be more debt-oriented.
Review regularly – You need to review your investment portfolio regularly to ensure that you are on track with your goals. Not only you can switch funds, you can also top-up your investment for higher returns if your portfolio is performing well.
Remember that it's important to have the right mind-set if you want to succeed in goal based investing. Patient, perseverance and consistency are essential and indispensable virtues in this method of investing.
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