Goals based investing is a process by which an individual aligns his/her investment plan to achieve certain targets. A goal-based approach is about defining specific and measurable financial goals and creating an investment plan based on risk tolerance level. It also provides discipline and clarity in your financial journey. In this article, we will help you understand how goal based investing works and how to implement it.
How Does Goal Based Investing Work?
The implementation of goal-based investment strategies is systematic. Besides the investment goals and objectives that you are going to undertake, there are other factors that need to be given due consideration.
This includes time to maturity, risk appetite, investment instruments, and more. You can also use investment calculators to create your investment plans. Let’s get started with how you can implement goal based investing.
1.    Identify Goals
As it has been mentioned before, the first stage of goal based investing is a definition and ranking of financial goals. These could be anything from saving for a holiday (which is short-term) to saving for retirement or for a children’s college education which are long-term savings.
You can build a clear structure of a proper investment strategy when you have a precise idea of what you would like to achieve.
2.    Determine Time Horizons
Secondly, arranging ambitions by their time horizon is another crucial task. They can be short-term goals which may span for 1 to 3 years, medium-term goals for 3 to 5 years, and long-term goals which may take more than 5 years.
Goals should be correctly classified based on time horizons as it can affect the investors’ perspective on investment decisions and risk. This can also assist in arranging your investments by priority and adjusting your strategy. This process ensures you meet your financial goals as per plan.
3.    Assess Risk Tolerance
Risk tolerance is critical in goal-based investing. Goals require an understanding of what one is comfortable with in terms of risks. It called for assessing the comfort zone concerning the positive and negative fluctuations in the market.
Ask yourself how much risk you are willing to take or would you be okay with market fluctuations in the short-term? This will help you measure your risk tolerance level.
4.    Select Investment Vehicles
If you are targeting a certain goal, it is crucial to invest in instruments that will assist you in achieving that goal. Based on your risk profile and the time frame of the investment, the options available include lump sum investments and Systematic Investment Schemes (SIPs) in mutual funds, stocks, bonds, etc.
Each of these has its benefits depending on the objectives they meet. Diversifying your investment choices can help you manage risks and increase returns.
5.    Use Investment Calculators
From planning out to managing your investments, investment calculators are practical. For instance, a lumpsum calculator helps you to ascertain how much one-time investment is needed to attain a particular objective.
In contrast, the SIP calculator helps you by arranging regular investments. In other words, you will know exactly how much has to be invested periodically to reach your objectives. You can devise a strategy based on this for mutual fund investments and reap benefits in the long run.
Conclusion
Goal-based investing lets you pursue financial goals with clarity and precision. By following a structured process, you can create a sophisticated investment technique. This method can assist in simplifying the investment process. It also reinforces discipline by keeping you on the right track to achieving your financial end objectives.
