22/12/2020
*How Goal-Based investment helps in Wealth Creation*
*Goal-based investments keep impulsive expenses*
Following an asset allocation strategy helps strike a balance between rewards and risk by diversifying investments across different asset classes like equity, fixed income, others, as per risk appetite, investment horizon and financial goals
When investments are goal-based, a person is better prepared to deal with financial needs such as a child's education, wedding, retirement, health emergencies, job loss, etc.
Goal-based investments not only help create significant corpus but also help save money in a disciplined manner over a period of time.
Here, we look at the importance of goal-based investments in wealth creation and why it is necessary.
1. Helps identify accurate investment amount
*When you invest in a financial goal, it gives a fair idea about the amount of investment required. Evaluation of the money required for fulfilling your short-term, mid-term and long-term goals help you work towards the funds needed to accomplish it.*
*“If the education costs ₹5 lakh today, you must calculate how much it will cost in the future, assuming an average rate of inflation. For example, with a 6 per cent inflation rate, it may cost nearly ₹9 lakh in 10 years, or ₹16 lakh in 20 years. Therefore, with a goal in mind, you can start working backwards, taking the necessary steps to create this wealth."*
2. Helps avoid taking out a loan
A loan can help you in fulfilling crucial goals and also comes to rescue during any financial emergency. With different types of loans available in the market at viable interest rates, relying on them to fulfil financial requirements is common practice.
*“You should avoid borrowing more than you need or can repay since this can disrupt your finances and slow down the achievement of financial goals." You may also land up in a debt trap and lose your assets. Therefore, instead of opting for a loan to meet your short-term or long-term goals, you can easily achieve them via wealth created through your savings*
3. Helps maintain fiscal discipline
Having a goal-based approach helps in building discipline in saving and investments. It also keeps impulsive expenses in check. It keeps you away from dipping into savings for discretionary spends and encourages using savings for wealth creation.
4. Helps in following the right asset allocation strategy
*Following an Asset Allocation strategy helps strike a balance between rewards and risk by diversifying investments across different asset classes like Equity, Fixed income, Gold and others as per risk appetite, investment horizon and Financial Goals*.
"For instance, as equities can be very volatile in the short term, investing in fixed income instruments like fixed deposits and debt funds will be more prudent as capital preservation becomes a more important objective than capital appreciation for short term financial goals. *Similarly, as equities beat fixed income instruments by a wide margin over the long term, investing in equities or equity mutual funds would help achieve long term financial goals with much lower contributions than what is required in case of fixed income instruments."*
5. Helps in taking corrective actions
When all investments are linked financial goals, you can track, review their performance at intervals. Doing so not only allows you to identify underperforming avenues but also helps you correct any deviations that can take you away from the set goal. Therefore, even though if there is a problem in a particular investment avenue attached to one goal, it will not impact the fulfilment of other goals.
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