The importance of goal-based investing for wealth creation
Its not without reason that there is an entire industry dedicated to making people more cognizant and committed towards attaining their goals. Setting goalposts is something that we have been seeing since childhood in our school report cards but as we grow older and the burden of liabilities and responsibilities increases, staying on the right track for achieving one’s goals becomes more difficult than bypassing the benchmarks laid down in the school report card.
When it comes to fulfilling our aspirations, it is only upto us to decide our goals and figure out how we want to achieve it. Complacency in setting goals could mean implicitly allowing fate a greater control over your life. Whereas when you pro-actively set goals, you are choosing a life path of your choice and that can make a difference between the life you want to lead and the life and that destiny hands out to you.
Goal setting isn’t just essential when it comes to reaching higher professional echelons. When it comes to money management goalposts can play a critical role in ensuring that you maintain financial discipline and your saving and investment strategies are not going awry. In fact,several studies on the benefits of goal-setting have also indicated that it can be a pivotal factor in attaining success. According to a study published by Edwin Locke and Gary Latham in 2006, setting goals is linked with self-confidence, motivation, and autonomy. Another study conducted by psychologist Gail Matthews in 2015 revealed that when people jotted down their goals, they were 33 percent more successful in achieving them than those who formulated outcomes in their heads.
With goal-based investing, you can assign values to your goals and this can pave the way for your financial resources to be utilised in an efficient and optimum manner. Mukund Seshadri, an AMFI-certified mutual fund distributor says, “Goal setting helps set the direction of your financial plan. On the basis of that, your portfolio allocation can be decided which in turn can help you make good investments decision based on your tenure and risk taking ability. Hence goals are the starting point of wealth creation and it helps us understand whether we are on the right track with regards to our priorities.”
Using goals for charting your financial journey
Parvati iyer, chief investment officer at Femwealth.com, an online investment management platform emphasizes on how chalking out goals can shield you from taking erroneous decisions pertaining to your finances. She says, “Goal based investing involves a structured approach to investing and saving. Many people buy and sell investments without a specific purpose in mind. How much they save is dependent on how much is left after spending. This lack of objectivity results in a lopsided approach. It is necessary to link investments with an understanding of when we are going to use it and why we are investing. When investments are done with a goal in mind we are in a better position to plan financial needs such as retirement, children education, emergencies, weddings etc.”
By embracing the strategy of goal-based investing, you will also be asking yourself the right questions regarding the progress you have made with respect to achieving your goals. It brings to your attention the vast realm of possibilities that exist and how you can tap into those to bridge the gap between where you are and where you want to be. For instance, if you have set a goal of buying a vehicle within a year, you will be able to remind yourself to stay focused on it whenever you feel like giving in to the temptation of diverting your finances for random indulgences instead of keeping them for your goal. This can help curb unnecessary expenses and the money you save on wants can be invested for other needs which in turn can aid in wealth creation in the long run.
Tapping into the power of mutual funds
Thanks to the variety and flexibility offered by mutual fund investments, they can be a great way to add structure to your goal strategies. There is a vast array of mutual funds that provide solutions for varying investment tenure and risk appetites and what with the minimum subscription amount for SIPs being as low as ₹1,000 you do not have to wait to gather a lumpsum amount before you start investing. Also, there are multiple distributor and aggregator portals that recommend specific investment plans to support specific life goals such as retirement or even short-term goals such as a vacation abroad.
Iyer goes on to explain how timelines play a crucial role in formulating an investment approach tailored to your goals. “Every individual has short-term, medium-term and long-term financial goals. Buying a car within one year is a short-term goal whereas planning for your retirement is a long-term goal. It is necessary to identify the nature of various financial goals and the specific timeframes for each of those goals. This allows us to predict the future cost of your goal. This in turn, depending on the time horizon and risk appetite leads us to a decision on your asset allocation and then further on which mutual funds to invest in. Thus goal based approach brings about an orderly step by step planning that is easy to visualise and also execute.”
Iyer opines that the SIP route can simplify things and make it easier for you to stay on track with your plans. “Doing a SIP for each goal separately helps you to track the performance of your investments for each goal. You can also see how much you have achieved against a particular goal at any point in time. This then can identify underperforming goals and make you take corrective actions. Again a step by step process is at play. In essence you are building discipline for saving and investment. Putting this on autopilot keeps impulsive buying and spending at bay and reduces the urge to dip into savings for our discretionary needs.”
• It is important to demarcate between goals driven by needs and those driven by wants when you are jotting them down. You would not want to land in a situation where your need-based goals are being compromised for your wants.
• Do not forget to factor in your existing debt burden when laying the roadmap for your investments for various goals.
• The importance of having an contingency fund should not be relegated to the backburner because in the event of an emergency, your investments for your goals may have to be disrupted if you do not have a reservoir to fall back on.
Disclaimer: This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.