What is a Goal-based Investment, and How Should You Do It?


Equirus Wealth

13 Jan 2023 5 min read


When you want to go on a holiday, do you pick a random place and travel?

Most of you don’t! You shortlist a place, book advance tickets and accommodation, plan an itinerary and then undertake the trip. A lot of planning goes into an ideal vacation. Why should your investments be any different?

Everyone earns to provide for themselves and their families. Like others, you might have different financial milestones that you want to achieve, like
buying a car, buying your dream home, going on an international trip, planning a wedding, a child’s higher education, etc. To achieve these milestones, you need to plan your finances. This is where goal-based investing comes into the picture.

Let’s understand.

What is goal-based investing?

Goal-based investing is a systematic method of investing your savings based on your financial goals. Under this method, you identify your financial goals and their horizon and then invest toward such goals. The objective of the goal-based investment is to create sufficient funds for the short-term and long-term financial goals that you might have.

How to make a goal-based investment?

Though goal-based investing is a process, it is quite simple to accomplish. You just need to strategize a few things, and then your investment journey can start. Here are the steps on how you can make goal-based investments to create the desired corpus for your financial goals –

  1. Identify your financial goals.

The first step in goal-based investing is obvious. You need to identify your financial goals, i.e., all the financial needs for which you have to save and create a corpus. Common examples include –

  • Buying a car
  • Buying a house
  • Taking a vacation
  • Planning a wedding
  • Children’s higher education
  • Retirement planning

List down all your goals so that you have a clear idea of the responsibilities that you have to fulfill.

Pro tip – No goal is small or big. Even if you want to buy a new electrical appliance or take an international vacation, a goal is a goal. List it out so that you can save for it.

  1. Prioritize them

Once you have listed down your goals, the next step is prioritizing them. You need to estimate the timeline for each goal so that you can give it the relevant priority. Categorize your goals into the following time horizons –

  • Short-term goals
  • Medium-term goals
  • Long-term goals

For instance, if you want to buy a car shortly, it will be a short-term goal. Similarly, if you want to save for retirement and you are in your 30s or 40s, it will be a long-term goal.

Assessing the timeline of each goal helps you channel your savings accordingly. Short-term goals take priority, and you need to save for them first. Then you can direct your savings toward medium-term goals and long-term goals, respectively. Moreover, you might have to direct a larger portion of your savings towards short and medium-term goals, while for long-term goals, you can save small amounts since you have a longer period on your hands.

  1. Estimate the corpus for each goal

Once the goals are identified and listed chronologically, the next step is estimating the corpus needed to fulfill them. Then you can figure out the savings needed to create the estimated corpus.

For instance, say you want to buy a car costing Rs.10 lakhs in the next two years. If you invest in an avenue that gives a return of 10% per annum, you need to save approximately Rs.38,000 every month to create a corpus of Rs.10 lakhs in two years. Alternatively, if you want to avail of a loan and save for the down payment only, the amount will reduce. Considering a down payment of Rs.4 lakhs, saving approximately Rs.15,500 would do the trick.

So, estimate the corpus for each goal so that you can estimate the savings required to create the said corpus.

  1. Assess your risk appetite

Before you invest toward your goals, you need to assess your risk appetite. There are different types of investment avenues in the market, and each avenue has a different risk profile. It is important to choose an asset based on your risk appetite so that your investments do not shock you. Moreover, based on your risk appetite, you can select the most suitable investment avenues to grow your savings.

For instance,

  • If you are a risk-loving investor, you can invest in equity
  • For those who have a low-risk appetite, debt instruments are a better fit
  • If you have a moderate risk appetite, you can invest partly in equity and partly in debt or a mix of both asset classes

You Might Find Interesting - How to Determine Your Risk Appetite while Investing in Stocks?

So, assess your risk appetite and then choose investment avenues that align with it.

  1. Invest

All said and done; it's time to invest. Direct your savings into the selected investment avenues based on your goals and risk appetite. Create a diversified portfolio so that you can mitigate investment risks and enhance the return-generating potential of your savings. Also, review your investments at regular intervals to ensure that they are aligned with your goals and are on the right track to creating the corpus that you need.

The bottom line

Just like a well-planned trip is relaxing and enjoyable, a planned-out financial portfolio is result-oriented. It helps you manage your finances in the best possible way so that you can achieve your financial goals. When your goals are taken care of, you get financial independence and can live a worry-free life.

So, understand the concept of goal-based investing and adopt it in your investment strategy.

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