Anything remotely related to investments can be somehow explained by several everyday chores or activities. One such activity is going from point A to point B. Yes. We all take or prefer the least time-consuming, convenient, cost-effective, and fastest mode of transportation to reach our destinations.

We can use an employee who has to commute for 4-6 km to their office located in HSR Layout in Bengaluru, the melting pot of start-ups, as an example. Granular details can be found when they talk about the factors they consider before choosing a mode of transportation and the route to commute to work and back home.

Now, let’s link this analogy to investing. You know that saving is the first step towards financial security. Next comes investing, which is the equivalent of putting one’s money to work. Now, before putting any resources to work, one should know what it is that they are working to achieve. Do you agree? That is what finance professionals call “goal-based investing” – being aware of what one is investing for. As simple as that even if it means investing for future financial freedom for unknowns.

Why is goal-based investing important?

We all earn money and save a decent portion of it so that we can afford to do something we consider important for us. Be it higher education, a tour across the world, a house, a marriage, a child’s education, simple financial freedom, and so on. Each of these reasons for saving money has its own distinct set of attributes – some are recurring, and some are one-time expenses, some are smaller expenses while some require large amounts. Some of these reasons incur expenses over a long period of time and some in one go. Some give delayed returns and some only yield experiences.

So, one should invest as per their goal, keeping in mind the time available to achieve that goal.

How can one get started with goal-based investing?

Just as it’s helpful to have a properly laid out plan before one executes it, there are a few important things one should decide, consider, have clarity about and keep in mind before setting out to achieve the financial goal:

Know your goals
As mentioned in the earlier section of the blog, goals could be anything – financially demanding, once in a lifetime, recurring or anything else.

Is your goal a “must have” or one of the items on your bucket list?
To start with, one should be able to put their goals into at least two categories: “absolutely required” and “good to have.” Clarity on this part will determine where the investments will be made and the approach to investing.

Make proper estimates of how much is required to achieve the goal
Because each goal has its own set of unique needs – some might require frequent pay-outs, others a lump sum payment – keep in mind the various factors that will come into play. The obvious factors would be inflation, your level of income and its growth, when do you need the money, when do you plan to execute on your goal, etc.

Research about where investments can be made
Depending on the significance of the goals, i.e., if they are a must-have like children’s education or something that reflects a wish-list item (not a need), one should choose investment products.

For the must-haves or short-term needs, it’s safer to have more allocation in investments in secured debt products that offer fixed returns and for those that are NOT must-haves or long-term goals, hybrid and higher equity allocation products could be considered that carry higher volatility and risk but offer good returns over a long period of time.

Know how much risk you can undertake
Risk appetite is a critical factor that one must be aware of before making any investment. Risk appetite, with respect to investments, basically refers to how much financial risk one can withstand if the investment were to go bad.

Periodic monitoring
Everything is not done after investing in the ideal type of products that suit your goals. Every now and then, it’s sensible to keep track of how the investments are doing – if they are in line with your goal(s) or not. If they are off target by a big margin, rebalancing might be required. However, if investments are made in fixed-income debt products, one will know how much they will get for X amount invested in T amount of time. The same may not apply to market-linked investments like equity.

In summary, investing in the same set of products for all financial goals is no different from a “one size fits all” kind of approach. Such an approach is less likely to work out when it comes to investing for specific goals. Goal-based investing can help one sort out their financial needs with a clear-cut plan with the fewest possible obstacles and will help in avoiding scenarios where one has to painstakingly arrange for funds at the cost of their overall financial health.