We all have financial goals that we want to achieve in our life. Realising these goals can be a bit challenging taking into account present financial obligations but one can work towards such goals by adhering to a good financial plan.
Let us take the example of Mr and Mrs Sharma. They have some dreams and life goals. A few of them are:
- Buying a 3 bedroom flat in an upcoming locality
- Getting a good branded car
- Saving for an international trip
- Gathering Funds for their child’s higher education abroad
- Saving enough for the child’s marriage
- Building a corpus for a self-reliant retirement life.
All the above goals of Mr and Mrs Sharma are achievable if they invest in advance and follow a proper plan.
Mutual funds are one of the best available market-linked product that can help to achieve financial goals. They are one of the best since they give a lot of flexibility to the investor – flexibility by way of being available for investing across asset classes (equity, debt investments, gold etc) as per risk profile and time horizon.
A step by step guide for achieving financial goals through mutual funds:
- Identifying financial goals
To start with, one needs to identify the goal/s for which he/she wish to invest. It is a must to set a list of financial goals which are realistic and achievable. It is also important to take into account one’s investing capabilities and prioritizing goals which are most important before chalking out a plan.
Goals can be long term or short term. A family vacation in a foreign country in 2019, which is just two years away, is a short-term goal. Planning for a child’s marriage who is five years old now is a long-term goal.
- Cost of goals and ways to invest to reach these goals
Once a goal is identified one must find out the time needed to achieve it. Then the cost of the goal in present day terms is to be determined. Add to it the inflation factor and a person should know what the goal would cost in the year it should be accomplished.
One can either use a systematic investment plan (SIP) to save for it or opt for a lump sum investment or even a combination of both to achieve the goal/s.
- Using mutual fund to achieve these goals
Once goals are set, identifying mutual funds which can help to achieve it is necessary. One can decide on the type of mutual fund taking into account the following factors.
Risk appetite: Each asset class brings with it a certain amount of risk. An investor should find out the asset class that suits his/her risk appetite. Risk-taking capability depends on the income level, age, liquidity and time horizon of investment.
For example, risk taking capability will be much lower in case one is nearing retirement. It will be higher in case of a young person of 30 years of age. Similarly, a person with a stable income and sufficient emergency funds can afford to invest more in high-risk equity funds than one who has just started career and has insufficient emergency funds.
Asset allocation: Asset allocation is the process of assigning the investible surplus across various asset classes (equity, debt, or gold) for the objective of attaining various financial goals. Asset allocation needs to be optimally structured to work for an investor (in the financial plan). It should be done on the basis of long term and short term financial goals.
Diversification: Diversifying investments within asset classes should be done to reduce risk. Diversification can be done by investing in three or four diversified/multi-cap/flexi cap funds. Diversifying investments in terms of fund houses should help, too. Diversification across asset classes is also important.
Mutual funds can help achieve different financial goals whether one is looking for long-term wealth creation or funds for a short amount of time.
It caters to the aggressive and conservative investor, long-term or short term, to all income categories and all age groups. Each type of fund provides optimum returns at certain time periods and it is important to align one’s financial goal to the right fund.
- Long term Goals
Planning for retirement : While planning for retirement goal, mutual funds can be a great avenue for building a corpus through capital appreciation over traditional savings options.
Young risk taking investors can invest a larger proportion in equity funds. Though equity funds are risky, they tend to outperform all other asset classes in the long term on the basis of return on investments.
The conservative investor can go for large cap funds which invest in bluechip companies with strong fundamentals.
Planning for child’s education and marriage: With sound financial planning , the costs of a child’s education and marriage can be taken care of in advance.
Depending on the investment horizon, a couple of options are available.
Balanced funds can be an option to save with exposure to both equities and debt. While they may not outperform aggressive equity funds, they carry lower risk and give steady returns.
Index funds/Passive funds can be considered as an option. Index funds invest in stocks that constitute their benchmark index in the same weightage and rarely underperform or outperform the benchmark. These have a lower expense ratio as compared to actively managed funds.
- Short term Goals
Investment in debt fund categories is ideal for short-term goals depending on the time horizon.
It is good to invest in liquid and ultra-short term funds to meet emergency funds requirements or for financial goals within six months.
Short term funds can be used for goals between six months to two years , like buying a vehicle.
Income accrual and dynamic bond funds are ideal for investments over two years.
- Saving tax Goal
ELSS or Equity Linked Savings Scheme can be a good tax saving fund option. Any investments in an ELSS mutual fund are tax deductible under I-T Section 80C for a maximum of Rs 1.5 lakh. It has the shortest lock-in period of three years among other tax saving options and any capital gains or dividends are completely exempt from taxation.
Investors in Higher Tax Bracket (30%) can invest in arbitrage funds with dividend option. Most of these funds invest in equity shares and hedge equivalent amount of this investment in futures and options segments of stock exchange. They carry limited risk for investor. Investing in arbitrage funds is ideal for an investment horizon of more than 60-90 days.
Investing in various options requires analysis of time horizon, investment objective, risk appetite and pririty of need of funds goal wise.
Once the financial plan is implemented through mutual funds, review of the performance of the funds at least once in a year is a must. Disciplined and consistent investing is the key to successful investing in mutual funds.
Debalina Roy Chowdhury