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Experts suggest that investors should always follow a structured approach while investing their money in mutual funds by mapping their investments with different financial goals. Let’s understand how modern goal-based investing differs from the traditional approach. But before that, let’s look at what is goal-based investing?
The Goal-Based Investment Strategy
According to this strategy, each investor has short-term, medium-term, or long-term financial goals that need to be achieved through his investments. When an individual makes regular investments with a clearly defined goal to achieve the set financial targets, it is referred to as a goal-based investment. Now, there are primarily two schools of thoughts when it comes to goal-based investing - the old school or traditional approach and the modern approach.
The Traditional Approach
The traditional approach to goal-based investment focused on identifying a few crucial goals and opting for a single or few investment avenues to meet these clubbed goals. The returns expected were based on the historical performance and volatility of different financial instruments.
The Modern Approach
The modern approach considers the fact that every financial goal differs in terms of its significance, risk-tolerance, and time frame to achieve it. It treats every financial goal as an independent milestone. There may be some crucial goals and cannot be compromised upon, such as the funds for children's education, retirement corpus, marriage, etc.Similarly, there may be less-crucial goals such as funds for vacations, buying the latest car, etc., where you are ready to take more risks. The modern approach aims to get the right combination of investments for every goal independently.
The Traditional Vs Modern Approach:
Below are some of the key differences between traditional and modern goal-based investment:
| Traditional Approach | Modern Approach |
| The investment plan is generalized for a few essential goals together. | Each goal (Critical and less critical) is treated differently with a separate investment plan. |
| A single portfolio is maintained for all the goals, and the overall performance is monitored. | Asset allocation is done for each financial goal based on their criticality, returns expected, and the level of risk the investor is willing to bear for that particular goal. |
| Risk management is done commonly for all the goals. | Risk management is done separately for each goal based on its importance for the investor. |
| Performance assessment is done commonly for all the goals. | Performance analysis is done for each goal based on the returns expected for that goal. |
Goal-Oriented Baskets
Mutual fund houses nowadays offer various goal-oriented baskets designed by experts that help investors to pick the curated, right investment mix for their goals. Some of the baskets may be:
- Children education fund in the next 15 years
- Retirement corpus of 1 crore in 10 years
- Time-based baskets such as best funds for a 6-month investment or top funds for a 5-year investment
An investment plan can give the desired results only if done keeping in mind a specific goal and doing the risk analysis and asset allocations accordingly. Since the modern goal-based investment addresses every goal separately, it can potentially deliver better results than the traditional approach.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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