financial planning, one needs to set a goal, an objective, a direction or an aspiration. Historically, when an investor starts making a financial plan, they usually follow one of the two schools of thought – goal-based investing or age-based investing. But when one starts financial planning the most important concept is asset allocation, which simply means how much money one needs to park in which asset.
Let’s see what this means and what works best in today’s prevailing world of investment. Goal-based investing is a systematic approach that channelises all investments in the direction of the pre-defined goal and a predefined tenure. This strategy is highly personalised, as it considers one’s life goals, time horizon, risk appetite and expected returns.
This goal creates discipline in investments, prompting people to stay invested and avoid impulsive financial decisions. When it comes to age-based investing, a good rule of thumb to follow is 100 minus a person's age to determine the ideal asset allocation for one’s age. For instance, if they are 30 years old, then 100 – 30 = 70, so one must invest 70% of their investment money in equity funds and the other 30% in debt or guaranteed return investments.
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