Choosing Between Goal-Based Investing and Maximizing Returns: Making the Right Investment Approach

Who doesn't want massive returns on their investments? Everyone right?

We all dream of our ₹1 lakh investment turning into ₹10 lakhs or ₹1 crore in less than 5 years, but we know that with high return expectations, high risk will follow anyway. Hence we need to allocate our investments depending on our future goals and risk appetite.

However, with so many investment options available, it can be challenging to determine which investment strategy to follow. When you invest money, you can either focus on achieving a specific goal, like saving for a new car or trying to earn as much money as possible. In this blog, we'll talk about these two approaches and help you figure out which one is best for you and your money.

What is Goal-based Investing?

Goal-based investing is a strategy that involves investing to achieve a specific financial goal. This approach focuses on identifying your financial objectives and investing in assets that can help you achieve them.

For example, if your goal is to save for retirement, you will plan your investments depending on the funds that you would require at retirement. If your retirement phase is more than 10, or 20 years from now then you can allocate around 20% or even 30% in stocks to earn better returns. If the retirement phase isn't that far, say less than 10 years, allocating a lower amount for risky assets like stocks is a sensible thing. Basically in Goal-based investing, the approach could vary, but the thing that remains constant is the goal. However, the amount can also vary due to inflation and lifestyle changes.

Also Read: How to Calculate Funds Required at Retirement?

The key advantage of goal-based investing is that it helps you stay focused on your objectives. It encourages you to set realistic goals, identify the risks associated with each goal, and create a portfolio that can help you achieve them. With goal-based investing, the investor can examine the performance of his investment portfolio and understand if there is a need for a change in their investment strategy. This approach is ideal for investors who have a clear understanding of their financial objectives and want to achieve them systematically.

What is Maximising return-based Investing?

Maximizing return-based investing is a strategy focused on achieving the highest possible returns on your investments, regardless of your financial goals. This approach is ideal for investors who are willing to take on more risk in exchange for higher returns. Now, you might think that why would anyone invest their money without having goals in mind?

Some people have more than enough investments, earnings, and savings that could easily look after all their basic needs like retirement, child education, and others. Such investors, invest some amount of their money with a mindset to get maximum returns because they have the flexibility to explore risky investment options. Even if they lose all the money invested in risky assets, their basic needs will be fulfilled

Which Approach should you follow?

The answer to this question depends on your financial goals and risk appetite.

However, most experts suggest going along with the goal-based investing strategy and staying focused on your goals, keeping a check on your risk and reward ratio. Other than this even if an investor with excess money allocates a certain amount for maximizing return strategy, then they should be mentally prepared to lose that money or not be dependent on it for important goals in life. Because such risky investment options could give you more than 100% return in just a few months/weeks or could even put your investments into heavy losses for many years, which you wouldn't want to withdraw.

Conclusion

As we already mentioned plenty of times throughout the blog that choosing investing style is a major part of personal financing, which depends on one’s earnings, liabilities, goals, and risk appetite. If you believe that your basic goals have been taken care of and you have a higher risk appetite to maximize your returns and you are sometimes even prepared to lose money, maximizing returns may be the right approach for you. This approach can help you grow your wealth quickly, but it is also riskier than goal-based investing. But if you are not sure whether your basic goals are manageable for you, we suggest following goal-based investing and then thinking about maximizing your returns.