How does goal based investment work?

Good investment advisors are increasingly endeavouring that their investors do not make random investments in mutual funds and instead map these with their various financial goals. Most Indian investors do not have a structured approach to savings and investments. Most people do not have saving targets as the amount of money they save depends on their spending habits.

What is the meaning of goal based investments

Every individual has financial goals that he needs to reach in the short, medium or long term period. Investing regularly to be able to reach the respective financial goal is called goal-based investing. For example, if you plan to buy a car in next 2-3 yeas, it can be called a short-term goal. Likewise, if you wish to plan for your retirement and children’s higher education, then these can be termed as long term goals.

How can you plan for financial goals

First, you need to know your various financial goals which you wish to achieve over various time periods. Then you need to figure out the time you have in hand to reach those goals. Once you are clear about these two – goal and the time frame – work out the present cost of each of these goals. Now, apply inflation to the current cost and you know the future value of your goal.

For example – your current cost of a future goal, which is 10 years away from now, is Rs 20 Lakhs. Assuming the average annual inflation rate at 6%, the future goal value would be Rs approx 36 Lakhs. Therefore, you need to plan investments to reach the goal of Rs 36 Lakhs and not Rs 20 Lakhs.

Some of the common financial goals that you may need to plan could be Retirement, Children’s education and marriage, Savings for vacation, Vehicle or Home purchase in short to medium term, Tax Savings and Regular cash-flows / income planning.

How investment in mutual funds can help meet these goals

Mutual funds are ideal investment solutions for a wide variety of financial goals basis the time horizon and your risk appetite. You can use different kinds of mutual funds with different investment objectives to reach your goals. We will look at some most suited mutual fund options to invest in for these goals.

Equity funds

– These funds invest primarily in equity and equity related securities. There are different types of equity funds depending on market capitalization segments orientation (e.g. large cap, large mid cap, mid cap, small cap, multi-cap etc.) and investment strategies (e.g. value funds, sector or thematic funds, dividend yield funds etc.). Equity Funds can be ideal investments if you have a long term goal of 5+ years.

Debt funds

– Debt Funds invest in fixed income securities like money market instruments, Government Bonds (G-Secs), non-convertible debentures (NCDs) etc. There are different types of debt funds depending on maturity / duration profiles (e.g. overnight funds, liquid funds, ultra-short duration funds, low duration funds, short duration funds, medium duration funds, long duration funds etc.) and credit risk profiles (e.g. Gilt funds, corporate bond funds, credit risk funds, banking and PSU debt funds etc.). You can choose right debt fund categories for your short and medium term goals of few months to few years

Hybrid funds

– Hybrid funds invest in both, fixed income and equities. There are different types of hybrid funds based on asset allocation strategies (e.g. aggressive equity oriented hybrid funds, dynamic asset allocation funds, equity savings funds, conservative debt oriented hybrid funds, multi-asset funds, arbitrage funds etc.). You can invest in the right hybrid funds depending upon your risk taking appetite and goal time horizon. For example – Hybrid aggressive funds can be ideal if your risk profile is moderate but you are aiming for a long term goal. On the other hand, if you plan for a family holiday goal which is 12-18 months away from now, you could use arbitrage funds.

ELSS mutual funds

- You can invest in mutual fund Equity Linked Savings Scheme (ELSS) for your tax planning goals. You can claim deduction upto Rs 1.50 Lakhs in a year from your taxable income and save taxes under Section 80C of Income Tax Act 1961. Depending on your financial goal, you can invest for medium (3 to 5 years) to long (more than 5 years) term. As ELSS funds are diversified equity funds, it serves the twin purpose of saving taxes as well as marking these tax investments with your long term goals.

Mutual funds provide flexible investment option for goal based investment

To meet you various financial goals, you can invest in mutual funds either in lump sum or through systematic investment plans (SIP). SIP is an ideal investment option as you can invest regularly; say every month, for each of your financial goals. If you do SIP for each of the goals separately, you can track the progress of each goal and therefore know how much you have achieved against a particular goal at any point in time. SIP investments also help you increase the amounts in line with your changing financial situation like increase in salaries every year. If you increase your SIP amount annually, you can reach your financial goals faster.

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