Goal-based investing is an approach that focuses on investing with the clear objective of achieving certain financial goals, which can be short, medium, or long-term goals.
In this process, you need to have a critical focus on your progress towards particular life goals, such as building after-retirement savings or saving for children’s education, instead of focusing on generation of the highest possible returns or beating the market. Once you have ascertained the goal that you need to save for, and the money that you need to put aside every month, you can reach out to professionals to understand the options available for deploying your money. based on your risk profile. Contact now!
The goal-based approach is remarkably different from the traditional approach because it stands for a major shift in the ways in which financial guidance is imparted, and investment decisions are made.
The traditional approach is more theoretical and quite complex. It mainly focuses on the risk profile of an individual rather than what they aim to achieve. The individuals, in this case, are directed towards pre-packaged investment solutions that match their risk profiles.
The goal-based approach is all about developing an in-depth understanding of the present and future liabilities of the individual, and then, creating a solution with the aim of achieving their financial objectives through a mental accounting structure. In the case of goal-based investing, the risk is not seen as under-performing or outperforming a benchmark. It is more about not falling short of the goals and doing enough to stay on track to meet those goals.
Before setting the financial goals, it’s important to thoroughly analyze your present financial situation. You need to determine what you aim to achieve with your money in the times to come. In order to determine that, you need to set specific goals, which are basically classified into the following categories:
- Short-term goals: Short-term goals are supposed to be met within one year. It includes goals like purchasing a new laptop or going on an international holiday.
- Medium-term goals: Medium-term goals usually have a time period between one and five years. It includes goals such as financing your child’s education or purchasing a new car.
- Long-term goals: All the goals that have a time period beyond five years are classified as long-term. It might include retirement or higher studies of children.
The process starts with determining your present financial situation and goals. After this, you need to chalk out a proper plan on the ways to achieve the goals within a pre-decided period. You should have a clear understanding of the following factors:
- The amount required for meeting your goal
- The investment amount as a monthly plan or lump sum
- Identification of the right investment products based on risk-return balance and investment horizon
It is essential that you invest in the right financial products by closely analysing and understanding the various aspects of the financial products on offer. The investments have to be held for a longer time in order to build wealth. It ensures that you gain the compounding power in the long-term.
The power of compounding lets your income get invested in the same instrument for earning added returns. This helps in building a considerable corpus in the long run. SIPs (Systematic Investment Plans) in Mutual Funds are an easy and simple way of benefitting from the compounding power. Leverage the power of compounding and create wealth for the long-term. Check out our Systematic Investment Plans now!
Mutual funds can also be used to achieve long and medium-term financial goals. The abundance of different types of mutual fund schemes on offer today mean that these investments must be done only after careful evaluation and analysis. Standard Chartered’s Fund Select suggests top mutual fund ideas for you, based on a comprehensive analysis of the market. Check out now!
Given below are the three reasons why goal-based investing can be a powerful strategy:
- It offers a purpose to the investments
When there are surplus funds present, you might have questions regarding the ways, the amount, and the timespan of investments. Goal-based investment answers all these questions as you know exactly the amount you need and when you require it for meeting your objectives and letting you determine the amount needed to invest. It is an effective step towards wealth creation and meeting financial objectives.
- It helps you select the right investment options
After knowing how to invest, you will be able to select the right investment tools. You know exactly what you need, and that lets you determine the right investment option that would be beneficial for you. It keeps you away from the herd mentality by helping you invest only in those options that can let you achieve your goal.
- It helps you ensure portfolio diversification
The main objective of investments is to gain higher returns. You will earn higher returns when each rupee of your investment works towards your financial goal. It is also likely that you may need to include various investment products for meeting different objectives. For example, investment in equity options for growth and investment in fixed income for capital preservation. Portfolio diversification allows you to reduce your risks while being useful in long-term wealth creation. Learn more about portfolio diversification here.
Matching your investments with time-bound specific financial goals is one of the first steps towards achieving financial independence. It gives you the assurance that you will be able to meet important objectives in your life without financial stress or difficulties. In fact, not having to worry about funds as you set about achieving the major milestones in your life is one of the best parts of goal-based investing.
Standard Chartered offers a suite of investment products to help manage your wealth and grow it across major asset classes and mutual funds.