Goal-Based Investing – What Is It and How Does It Create Wealth

Why do you save and invest?
 

Ask this question, and the common reply might be – to create a fund for a particular goal. This goal can be planning for your child’s future, buying a home or a vehicle, taking an international trip, saving up for retirement, etc.

While you save for your goals, do you invest according to them? If you don’t, it’s time you choose goal-based investing.
 

What is goal-based investing?
 

Goal-based investing is an approach wherein you plan your investments according to your goals. In simple words, it’s like setting up a GPS for a particular destination that you want to reach and following the directions given by the GPS.

Goal-based investing involves identifying your goals and then investing in suitable avenues to create a fund for those goals. For instance, if you want to buy a car in the next 5-6 years, you will try and choose an investment avenue that can help you save and create a corpus within the same horizon. In such cases, short-term investment avenues make sense. However, if you plan to create a corpus for your child’s higher education when your child is 2 years old, you have ample time to save. In such cases, you can choose long-term savings avenues to create the desired corpus. So, Unit Linked Insurance Plan ULIPs can be helpful in creating a corpus with a goal in mind⁵.

How does goal-based investing work?¹
 

For goal-based investing, here’s what you can do –
 

1. Identify your goals
 

like child planning, retirement planning, estate planning, planning for buying a home or wedding, etc.
 

2. Quantify the identified goals
 

quantifying your goals means assessing the corpus needed to fulfil each goal. This will help you analyse how much savings you would need to create the desired corpus.

3. Assess the time horizon
 

the next step is to find out the time after which you will need the corpus to fulfil a specific goal. For instance, if your child is now 5 years old and you need funds for your child’s higher education, you have 10-12 years to save for that corpus. Similarly, if you want to make a down payment on a home loan in a couple of years, you have 2-3 years to save up for the same.
 

4. Choose suitable investment avenues
 

when you have identified and quantified your goals, you know – what you need to save, how much you should save, and for how long. Now, the next thing to do is choose suitable avenues, depending on your goals, to create the required corpus. This is the essence of goal-based investing.
 

ULIPs for goal-based investment planning²
 

Unit Linked Insurance Plans (ULIPs) can help you with goal-based investing. These plans are life insurance plans with an element of investment that allows you to invest in market-linked funds, associated with risk and enjoy  return potential.

ULIPs offer you  dual components  of life insurance and investment and offer complete flexibility in the choice of the premium that you pay and the policy details. You can also manage your investment the way you want and build the desired corpus for your goals. ULIPs can be also be used for goal-based investing in addition to the Life Insurance component offered because –

• They help you earn market-linked returns and create a corpus to combat inflation⁸.
• They help save tax.
• There are different types of ULIPs, allowing you to choose a plan that best matches your goals.

 

How to use ULIPs for goal-based investment planning?
 

Wondering how can you use ULIPs for goal-based investment planning?

Here are some possible ways –
 

1. Choose the right type of ULIP:
 

As mentioned earlier, there are different types of ULIPs. As such, you need to choose a plan which best aligns with your goal. For instance,

• To create a corpus for your child’s secured future, choose child based ULIPs³.
• To save up for retirement, choose retirement based ULIPs, which will not only help you create a retirement fund but also allow you to avail of lifelong income after maturity³.
   

2. Choose a suitable tenure:
 

After choosing the right type of ULIP, choose a suitable tenure for the plan. This tenure should align with the horizon of your goal for which you are saving so that you get the corpus when you need to fulfil the goal. For instance,

• If you want to save up for short-term goals, like buying a car, funding an upcoming wedding, etc., choose a short-term ULIP⁴.
• For long-term goals like retirement planning, you can choose tenures going up to 20 or even 25 years.
• If you want lifelong coverage, you can also choose whole-life ULIPs.
   

3. Choose the right premium:
 

Choosing the right amount of premium is also important because the premium you pay will be for life insurance coverage and the remaining amount will be invested in market-linked funds to create the corpus. If you pay a lower premium, the corpus might not be sufficient to fulfil the specified goal. So, assess the corpus you need and choose the premium that can help you build the desired corpus.

ULIPs allow you to check the expected corpus that you can create at a given premium and tenure. You can use ULIP calculators to find the expected corpus at a specific premium that you pay. You can adjust the premium to arrive at the amount that can create the desired corpus.

This way, you can save up enough to create a corpus for your financial goals. The life insurance coverage of  ULIPs  provides financial security that, in your absence, your family will be financially compensated so that they can fulfil their financial goals.

So, choose goal-based investing and create earmarked funds for your goals for effective financial planning. ULIPs, with their range of benefits and flexibility, can help you plan and save for your goals. So, buy ULIPs and start your goal-based saving journey at the earliest.
 

FAQs
 

1. How can ULIPs help with child planning?
 

Some child ULIPs have a  waiver of premium rider either as an inbuilt benefit or as an optional one⁶. This rider waives the premium if the parent passes away during the policy tenure. The policy remains unaffected and continues till maturity, and the insurance company pays the premium on the parent’s behalf. On maturity, the fund value is paid. This ensures that the child receives the expected funds when he needs them for higher education, even in the absence of the parent.

2. What is goal-based investing?
 

Goal-based investing is a focused approach wherein you invest based on specific financial goals.

3. How do you invest based on goals?⁷
 

To invest based on your goals, you need to –

• Identify your goals,
• Quantify them,
• Assess their horizon,
• Choose investment avenues that will help you create the desired funds within the specified time for specific goals.