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When you invest money in an investment product, the main objective is to multiply the amount invested as quickly as possible or make profits. The concept of goal-based Investing is in quite a contrast to this traditional mindset. As the name suggests, goal-based investing is funding for a specific goal.
A specific and clearly defined purpose and investments are made to provide for its funding. There can even be a combination of goals. The investment options are also chosen considering various factors, such as the number of required returns, the time when the funds are required, the purpose of investing, etc.
Since investing is for pre-determined goals, they vary from person to person depending upon their needs. These goals can be broadly divided into three categories based on time:
When an investment expert designs a plan for any person who is investing without a specific goal, they choose those options that yield the maximum returns in the minimum time. But when it comes to goal-based investing, the selection of investment options is careful and requires more analysis on the part of the expert. It is majorly affected by the time and amount requirements of the investor. Let’s understand this with an example:
Suppose a female X is 45 years old and has a 15-year-old daughter. X wishes to invest an amount and use the returns for two things:
Now the investment expert will invest the money in such a way that a part of it generates higher returns in relatively less time, and a part of it will be invested to generate returns over a longer period. So, a major part of it can go into equities, and a lesser part can be invested in sources like fixed Income.
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After you make a decision to invest an amount, you just go and invest in any option that seems lucrative, irrespective of the certainty of returns. On the contrary, when you identify your goals and invest according to their requirements, you are in a win-win situation. Some of the benefits of goal-based investing are:
There is another side to the picture of goal-based investing. There are some challenges a person might face while going for this type of investing. These are:
Here is a thorough comparison of goal-based investing vs. traditional investing:
Basis | Goal-Based Investing | Traditional Investing |
---|---|---|
Meaning | It is investing for a pre-specified goal | It is investing to generate returns |
Objective | The objective is the purpose for which investment is made | The objective is to generate the highest possible gains |
Risk | The risk is limited | There is a higher risk as investing is very aggressive |
Investment Portfolio | The investment portfolio will always have a combination of various investment options depending upon the goals | The investment portfolio might or might not involve a combination of investment options |
In a world where people are increasingly realising the importance of Financial Literacy, financial planning, and investments, a concept like goal-based investing is exactly what they need. But since it is a very novel mechanism, and there is still a lot to learn and explore about it, people are a bit hesitant. Nevertheless, it is clear that this concept guarantees financial security in the future. So, if you are trying to save funds to accomplish a set objective, try your hands at goal-based investing today.