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Goal-Based Investing – What Is It and How Does It Create Wealth

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Goal-Based Investing: How Does Goal-Based Investing Work
March 12, 2024

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In this policy, the investment risks in the investment portfolio is borne by the policyholder

Welcome to the world of goal-based investing, where dreams meet reality and financial aspirations are transformed into tangible achievements. Securing your financial future in our fast-paced world requires a systematic and tailored approach. Gone are the days of haphazard investments and vague objectives. Let’s better understand the art and science of goal-based investing and see how it can pave the way to a secure financial future.

What Is Goal-Based Investing?

Goal-based investing is a strategic approach to wealth creation that revolves around setting clear and specific financial goals. Unlike conventional investing, where returns take precedence, this approach focuses on aligning investments with your life objectives. From buying a dream home to funding your child’s education and planning a comfortable retirement, each goal receives the utmost importance.

How Does It Help Me?

Goal-based investing enables you to identify the ideal investments for your goals. Let’s understand this further.

  • Identifying Investment Targets

Before you start investing, you must set realistic and well-defined goals. Goal-based investing encourages you to define your aspirations, quantify them, and assign a time frame. Doing this helps you understand how much you must invest regularly to achieve your goals.

For instance, let’s say you wish to purchase a house in the next five years. You can assess the current property prices and estimate the future cost. By understanding the required corpus, you can work backwards to determine the monthly investment amount needed to reach the goal within the timeline.

  • Identifying the Right Investment Options

Once you set your financial objectives, you must identify appropriate investment options. Each goal may demand a unique investment strategy. For short-term goals, like planning a vacation or building an emergency fund, low-risk instruments like fixed deposits and liquid funds may be suitable. On the other hand, long-term goals, such as retirement or children’s education, may benefit from Unit-Linked Insurance Plans (ULIPs) that offer higher potential returns.

When you match the goal duration with your risk appetite, you can optimise your returns while minimizing risk.

  • Reviewing and Rebalancing the Portfolio

As life unfolds, circumstances change, and so do your goals and risk preferences. Goal-based investing encourages periodic review and rebalancing of your investment portfolio. It involves assessing the progress made towards each goal and adjusting your investment allocation accordingly. Regularly reviewing your portfolio enables you to make informed decisions, helping you stay on track despite volatile conditions.

  • Avoiding Debt Traps

Goal-based investing helps you meet financial goals without relying on debts. A well-structured investment plan tailored to your objectives enables you to avoid debt traps. By saving and investing systematically for each aspiration, you create a safety net that shields you from the burden of high-interest loans, ensuring financial stability and peace of mind.

  • Maintaining Financial Discipline

Goal-based investing instils fiscal discipline and curbs impulsive spending. You become prudent with your finances when you have a clear vision of your objectives and understand the commitment required to achieve them. Building financial discipline aids in cultivating a strong savings habit and promotes a responsible approach to money management.

Benefits of Goal-Based Investing

1) The amount required to achieve your financial goals can be accurately determined

In goal-based investing, you define your specific goals, the timeline for achieving them, and the financial resources needed. The current cost of the goal and inflation-related increases are taken into account during this process.

Imagine saving for your child's higher education 10 years from now, and the current cost is Rs. 15 lakh. Based on an inflation rate of 8%, the projected cost in 10 years would be approximately Rs. 32.4 lakh. It is clear from this calculation how much money is necessary to achieve the goal.

2) Financial goals guide your selection of appropriate investment products 

In order to develop effective investment plans, it is critical to understand the required amount and timeframe for accumulating the corpus. Based on your investment horizon and financial objectives, you can choose from a range of asset classes, including equity, debt, and gold. For goals that require quick access to funds, such as travel or school fees, Debt Funds or Fixed Deposits are the most suitable options. Medium-term goals, like buying a car, may benefit from a combination of Equity and Debt, making Hybrid Funds a good choice. Lastly, for long-term goals focused on growth, pure equity funds are the recommended approach.

3) Rebalancing your portfolio is easier with financial goals

Assuring that all investments are linked to financial goals assists in periodic portfolio reviews and rebalancing, allowing for appropriate asset allocation.

To illustrate, you should gradually switch from equity products to fixed income products as you approach a long-term goal like retirement. In this way, gains are safeguarded and funds are available when needed.

4) You avoid the debt trap by setting financial goals

If no clear goals are defined and investments are not made accordingly, there is a risk that insufficient funds will be available when needed, potentially resulting in the need for loans. A goal-based investing approach reduces the need for desperate loans, promoting financial stability.

5) Maintain fiscal discipline through financial goals

By adopting a goal-based investing approach to investing, investors are more likely to stay focused and committed, avoiding distractions and arbitrary decisions. Clearly defining financial goals and understanding the impact of not investing can serve as a powerful incentive for consistent and disciplined investment. This approach not only helps navigate market fluctuations but also enables investors to make informed decisions and choose the most suitable investment options. 

How to Use ULIPs for Goal-Based Investment Planning

Unit-Linked Insurance Plans (ULIPs) can help you achieve your goal-based investment strategy. A ULIP combines the benefits of insurance and investment, making it an attractive option for long-term financial planning.

ULIPs offer a diverse range of funds catering to different risk appetites. The variety allows you to align your investment choices with your specific goals. Moreover, ULIPs allow investors to switch between funds and take advantage of changing market conditions or evolving financial goals.

Additionally, ULIPs provide tax benefits under Section 80C# of the Income Tax Act, making them even more appealing for investors looking to save on taxes while building wealth for their dreams.

Goal-based investing is a revolutionary approach that empowers you to create a roadmap to achieve your financial ambitions. By defining clear objectives, matching them with suitable investment options, and regularly reviewing your progress, you can take control of your financial destiny. Goal-based investing ensures that your wealth creation journey is purposeful, disciplined, and tailored to your individual aspirations. Remember, no dream is too big, and with the right investment strategy, you can turn your dreams into a reality. So, take the first step towards goal-based investing today and witness your wealth grow as you move closer to your life goals.

Conclusion

Developing a thorough understanding of your financial needs allows for a clear assessment of your current financial status. Adopting a goal-based investment planning not only helps answer important questions about the amount, location, and timing of investments, but also instils a sense of purpose in adhering to investment commitments. Moreover, it serves as a valuable tool to counteract impulsive decision-making, effectively addressing one's susceptibility to impulsive behaviour.

FAQs on Goal-Based Investing

Q: 1. What are the benefits of goal-based investing?

In goal-based investing, financial goals are clearly defined, facilitating precise investment decisions.

Q: 2. What is goal-based financial plan?

With a goal-based financial plan, you can align your investments with specific objectives, ensuring that your wealth is managed strategically.

Q: 3. How do I start a goal-based investment?

To begin goal-based investing, define clear objectives, determine the amount of funds required, and choose suitable investment avenues.

Q: 4. What is an example of goal-based investing?

Saving money for a child's education, ensuring that funds align with future costs after inflation, is an example of goal-based investing.

Q: 5. What is a SMART financial goal?

SMART goals are specific, measurable, achievable, relevant, and time-bound, ensuring effective wealth management.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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# The afore stated views are based on the current Income-tax law. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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