Financial planners believe one of the best and disciplined ways to allocate money in
mutual funds
is to tag your
investment
to a goal. This avoids unwanted addition of schemes to the portfolio, random selection based on current themes & favours and keeps investors focused on their goals.
What Is Goal-Based In vesting?
Every individual has some life goals that need to be reached.
Some of these could be immediate or in the short term or 1-2 years down the line, like a vacation or children’s annual education fees, while others could be long-term oriented — typically more than five years away — such as children’s higher education and retirement. Investing and building a corpus in the time span available to meet these goals is called
goal-based investing
. For example, if you want to take a foreign holiday in 2025, which is 12-15 months away, it is a short-term goal. If you wish to plan for your three-year-old child’s higher education, you have 15 years, so it will be considered a long-term goal. If your age is 40 years and you retire when you are 60, you have 20 years, making these, too, long-term goals.
How Can An Investor Achieve These Goals?
The starting point is to identify the goals and the time taken to reach them. Once that is done, find the cost of the goal today. Add a reasonable amount of inflation to that, which will give you an idea of the cost of the goal in the year you wish to achieve it. Decide the asset class yourself or the fund category that you wish to use to meet that goal or consult a financial advisor to arrive at a decision. Once that is done, work backwards and calculate the amount you could save through SIPs, or lump sum, or a combination of both to reach the goal.
Can These Goals Be Met Except Through MFs?
Yes, mutual funds have schemes across all asset classes and are suited for different timeframes in which you can invest to reach your financial goals. For example, to save up for the foreign holiday planned 12-15 months from now, which will cost you say 5 lakh, you can use a combination of debt funds and arbitrage funds to meet the goal. Since it is a near-term goal and the time is less than three years, investment advisors would suggest a very small equity allocation in an equity savings fund. Do your math and decide whether you wish to opt for a lump sum investment or stagger through SIPs. Do also take the tax implications into account. For your child’s higher education, which is a decade away, you could use a combination of equity mutual funds which could also include a sectoral fund based on your risk profile.
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