When I have started investing, whatever little money I used to save was invested directly into Mutual Funds or FD. I never bothered about when I will need that money. 2020 is a year of uncertainty though I was grateful that I did not lose my job in this pandemic, this year is an eye-opener for me as well as for many.
PC: Pixabay.com
When you start to travel you know where are your destination and you start your journey based on that calculating the risk of traffic or any time consumed in middle. Similarly what I learnt is investing is just like travelling where we need to have a goal in mind so that we can take the appropriate risk in our portfolio to get to that goal. Like for example if I need money in 3 months I cannot put that money in shares or bitcoin but I can use the liquid fund for that because that is the lowest risk or keep it in savings account itself.
We, small investors, start investing with an eagerness to build a portfolio to get the higher returns, but the main thing is it cannot be effective until they are bought with purpose. So to be a smart investor, practising goal-based investment is the key.
Goal-based investment is a strategy where we invest with the objective attaining life goals like a child's higher education, buying a house or retirement corpus. This is also helpful so that investor reduce an impulsive behaviour when the market fluctuates just like 2020. The mantra of Goal-based investment is having the right amount of money when you need it. If you don't need money in like 20 years why to put in Fixed Deposit.
The first and foremost thing I have done is to identify my life goals or financial goals. This is the first and most important step because you need a lot of thought process to identify goals. Though it should not be perfect at the very beginning though we should revisit those goals every year so that we know what is the status of it. The goals which I identified are:
- Emergency Fund - In 1 year (Short Term)
- Vacation - In 3 year (Short Term)
- Child Higher Education - In 18 years (Long Term)
- Retirement Corpus - In 29 years (Long Term)
As you can see its a combination of long and short term fund and thus I started moving my investment inside these goals. I have started my investment in line with my goals so I moved or started the investment as shown below
- Emergency Fund - Fixed Deposit
- Vacation - Started Debt Mutual Fund
- Child Higher Education - 60% Equity + 35% Debt + 5% Crypto
- Retirement Corpus - 70% Equity + 25% Debt + 5% Crypto
PC: Pixabay.com
Thus the goal-based investment has given me the purpose of my investments as every investment class needs time to flourish like in 3 years Bitcoin touched ATH again. With the goal-based investment, you can decide which investment should go in which goal. It also helps in the investment discipline which is very much needed to create wealth also helps in attaining the right diversification which you need. And lastly, with this approach, you can attain financial independence in a simpler way.
Also if you need a car in three years why take a loan and give interest to the bank why not start investing now to get that money in three years, that is where the goal-based investment comes to the picture.
Happy Investing