5 Benefits Of Goals Based Investment

When someone thinks about making investments there are multiple options available and it can often be confusing as to how to go about it and where to begin. This is a common problem that day to day investors have to deal with.

One of the most effective approaches is to start thinking about investment goals and then use those goals to make investment decisions. Here are the top five benefits of using a goals based approach to investing.

1. Clarity of thought
2. Target to aim for
3. Return requirements
4. Risk assessment
5. Better control

Clarity Of Thought – When you start thinking about your investment goals, one of the main advantages is that it provides clarity of thought and helps you envision where you want to be. Identifying and setting goals directly results in helping you choose the path you want to take to get to that goal.

Some common goals could be – buying a house, saving for children’s education or marriage, planning for retirement and so on. Clearly identifying goals such as these will help de-clutter the mind and make the whole process less overwhelming.

Target To Aim For – Goal setting is not only about identifying the purpose but also involves clearly calling out a target amount and time horizon. For example, someone may identify ‘buying a house’ as a goal. That goal can be further defined as needing 15 lakhs in 5 years’ time for the down payment.

This clear definition of the amount and time horizon has now set up a target to aim for. This directly informs the type of return and risk that the investor has to take on in order to reach the goal successfully.

Return Requirements – Defining the goal in terms of an amount and time horizon also helps set return expectations. Depending on the starting position, calculating the required return in order to achieve the goal is fairly easy.

For example if someone has a starting capital of 10 lakhs and the target amount is 18 lakhs over a period of five years, the required return is simply 80% or roughly about 15% annually. Laying out these numbers already helps clarify what kind of investments may be necessary to achieve the required returns. In some cases it may also help assess if the goal is realistic.

Risk Assessment – Once the required return is available, it automatically informs the amount of risk to be undertaken to achieve the stated goal. As the age old saying goes ‘higher the risk, higher is the return’.

As in the example above, achieving 15% annually for 5 years requires a higher level of risk and the choice of investments will need to reflect that.

A longer time horizon also typically will allow for a higher risk taking ability. Whereas a short time horizon may not leave a lot of room for riskier investments as capital protection would take higher priority.

Better control – When there is a target to drive toward and a path has been charted out, it makes it possible to course correct if the situation demands. Just like how Google maps suggests alternative routes depending on traffic, investments can also be diverted to alternative options if the situation demands.

Investing toward a defined goal provides the necessary motivation to make periodic adjustments in order to achieve that goal as against random investments that may end up languishing in poor quality instruments.

In conclusion, the time tested method of goals based investing makes available the necessary tools to plan for life’s important milestones and goes a long way in achieving financial freedom.

Authored by Prashant D R – MBA, CFA