Attaching goals while investing in mutual funds


Every investor has some goals in life to reach either in the short term or long term

Your job is not complete with just investing your money in mutual funds

Investing in mutual funds is one of the best investment options individual investors have. But the process of buying mutual funds should start with identifying goals that you intend to achieve. The biggest mistake investors make most of the time is that their funds are not aligned with their goals. Take a smart approach while investing in mutual funds as your goals in life depend on these investments.

What is goal-based investing?

Every investor has some goals in life to reach either in the short term or long term. Doing informed calculations and investing to reach that financial goal is called goal-based investing.

How to allocate goals between your investments?

Any mutual fund investment you start or already own must have a specific goal. There could be multiple investments that are tagged to a single goal or a large investment to fulfil more than one goal. You need to know what is required for retirement and what is required for your daughter’s education and similarly for other goals. The primary objective of tagging is that you know what every investment is intended to achieve.

Why is tagging of mutual funds to goals so important?

It is all about giving a method to a vision. You have too many goals and too many SIPs or investments, and you do not know where you are heading. That can spoil all the efforts made. So you need to evaluate each of your mutual fund investments regularly to see whether it can achieve the milestones it is intended to achieve. You can rebalance your overall mutual fund portfolio to make sure that you are on track to meet the financial goals.

Step by step process to tag goals to your mutual fund investments

Step 1: Start with identifying your financial goals

The very first thing you need is to identify your financial goal. It could be anything like a foreign trip, child’s education, retirement planning, purchasing a house or car, or something else. Also, do not forget to create an emergency fund in your list of financial plans.

Step 2: Set the time required to achieve the goal

Once you have identified your financial goal, evaluate how much time is required to achieve it. Whether it can be made in a short period or it will take longer. For instance, a foreign trip or buying a car is a relatively short term goal, which can be achieved in around 1.5 years, but the daughter’s marriage or buying a house is a long-term goal that may take 15 to 20 years. Choose the fund following the time you set to meet your goal.

 

Time HorizonMutual Fund
1 day - 3 monthsLiquid Funds
3 months - 1 yearUltra short duration fund
1 year - 3 yearsShort term / duration funds
3 years - 5 yearsHybrid/ Balanced Fund
5 years - 10 yearsSmall/ Mid Cap Funds
More than 10 yearsSmall, Mid, Large and Debt Funds

In case of time horizon of more than five years, there are Equity Funds.

Step 3: Determine your risk bearing capacity

It is essential to know how much risk you can bear before investing in mutual funds and which funds suit your low, medium, or high risk-taking capacity.

 

Time Horizon / RiskLow RiskMedium RiskHigh Risk
Short Duration (Up to 3 years)Liquid Ultra Short- duration FundsShort-duration FundsArbitrage Funds
Medium Duration (3 years - 5 years)Short duration fundBalanced Advantage FundsEquity Hybrid Funds
Long Duration (7 years and above)Large cap FundsMulticap FundsMid and Small cap Funds
Step 4: Study funds and compare

Now you need to compare various mutual funds. Mutual funds are broadly divided into three categories – Equity Funds, Debt Funds, and Hybrid, known as an asset class. Start with deciding the asset class of the fund, that is, which one you would like to choose equity, debt, or hybrid fund. Equity funds are perfect to meet long-term needs. For achieving medium-term goals, balanced and debt funds are ideal, and for very short-term goals, there are liquid funds. To select the mutual fund that best suits your requirements, you need to study the performance of a fund against its benchmark, its performance consistency, and several other factors.

Step 5: Do not forget about the tax implication

The tax implications are vital in the case of mutual fund investments. Mutual fund investment offers two types of earnings – Dividends and Capital Gains – and they are taxed differently. The fund house deducts Dividend Distribution Tax (DDT) at the rate of 10% from the dividend paid to you, and on the other hand, capital gains tax is taxable in the hands of the investor.

Step 6: Regular monitoring and rebalancing your fund portfolio is essential

Your job is not complete with just investing your money in mutual funds. It requires regular monitoring and rebalancing. Usually, monitoring is done at two levels regarding your goals and the external environment. And rebalancing can be undertaken ideally once in three years, considering long-term goals. After the thorough study of the performance of funds along with external factors, you can rebalance your overall mutual fund portfolio and restore the original levels. It is the last step to make sure that you have a smart mutual fund portfolio to achieve the milestones you set.

In the end, you all must know that mutual funds are subject to market volatility. The systematic approach is the best to achieve long-term goals through mutual funds. The investment discipline comes with it automatically, and you can plan your outflows much better. However, if you are undecided, consult financial planners to ensure your financial goals from SIPs and other mutual fund investments.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh / Enquire