December 22, 2022
Reading time: approx. 10 minutes
Listen here why you should avoid investing in mutual funds without a goal
Even today, many individuals do not have a coordinated approach to savings and investments. The amount of money they save depends on their spending habits and is not budgeted or set aside with a specific purpose in mind. Likewise, some investors who have accumulated a sufficiently large amount of savings without any specific goal invest in various means like bank FDs, post office small savings schemes, stocks, bonds, mutual funds etc.
Recently, I was hanging out with my friends, Rahul. “I’m planning to start investing in mutual funds, but I’m confused about how much to invest, where to invest and how long to invest to get good returns.”
Anita asked in response to this “Do you have a specific goal you want to achieve?”
Rahul replied: “There is no such goal, I will think about that later. For now, I want to invest in mutual funds and gain from the growth in the market.”
And I answered him. “Rahul, starting your investment journey with a mutual fund is a great idea, but you must have a goal to guide your investments. You see, investing in a mutual fund without a goal is like a car without a steering wheel.”
Why is goal planning important for an individual investing in mutual funds?
Not knowing how much to invest, where to invest and for how long to invest can result in your hard-earned money being wasted on pointless investments. If you start investing in mutual funds in pursuit of higher returns, seeing existing investors get inflated returns, you will lose money by investing in high-risk markets. Additionally, if your sole investment objective is to maximize returns without considering any other factors, you may run the risk of selling your investment at a loss if the market declines and returns become negative. Determining your financial goals is the first step in creating an appropriate financial plan, which is essential to making meaningful money.
Planning investments based on your financial needs or goals will let you know how much to invest in which mutual fund category to achieve your financial goals by taking minimal risks as per your risk appetite. As a result, you will be mentally prepared to invest that amount and hold the investment until the objective is achieved.
Whether you have a formal financial plan or not, we all have different financial goals in life. Some goals may be personal or family-oriented (such as international travel, buying a home or car, etc.), while others may be stage-specific (such as saving for children’s higher education, wedding expenses, or retirement planning). To achieve all these goals, we need a certain amount of money, be it in the short, medium, or long term.
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Goal-based investing helps investors determine the right asset allocation for their portfolio. Following an approach based on tactical asset allocation prevents the investor from being affected by short-term exposures such as high market volatility. Likewise, by making wise decisions, you can take advantage of the opportunities offered by the market.
Many investors choose random mutual funds for their Strategic Investment Plans (SIPs) such as Rs. 1,000 or Rs. 5,000 every month without any specific goal in mind. Investors are advised to set SMART financial goals and align their SIP with those goals.
How can investing in mutual funds help investors achieve their intended financial goals?
With various opportunities in the market today, mutual funds have become a popular choice, making them a good tool for creating a solid investment portfolio and achieving various financial goals.
However, note that different types of mutual funds have different investment objectives and characteristics. Before choosing your mutual fund strategy, it is critical to clearly establish your financial goals. This will help you decide the duration, amount required to invest and which plan will suit your goals.
With the help of a little exercise, you can identify your financial goals; Ask yourself:
– What do I want my life to look like in five years?
– Do I want to own a car or a house?
– Do I want to be debt free? Or pay off my student loans?
– If you are married and there are children in the picture, should I save for my child’s education or wedding expenses?
– How do I imagine my life after retirement?
Having realistic goals makes investing in mutual funds easier, as it gives you the light to work towards and realize those goals. To successfully reach your goals, you need to break them down into short, medium, and long-term goals. Let’s look at some common goals and the most suitable mutual fund options for investing in these goals.
Saving for an international vacation or buying a car in 2-3 years: This can be considered a short-term goal. If you are planning a vacation that will last for three years and the budget is around 5 lakhs, then you need to consider the cost during that period. For this short-term goal, the best option is a debt fund with an average fund maturity commensurate with your investment horizon, depending on your risk tolerance.
Debt funds like small term funds, short term funds etc. are suitable for these goals. If your time horizon is short ie less than 1 year, liquid funds and ultra short duration funds are more appropriate investment choices.
Tax Savings: To save your tax, you may consider investing in Mutual Fund Equity Linked Savings Scheme (ELSS) to claim deduction under Section 80C of the Income Tax Act. Note that ELSS funds have a lock-in period of 3 years. Depending on your financial needs, you can invest for medium (3 to 5 years) or long term (more than 5 years); The longer your investment tenure, the higher it can be.
retirement planning; This is a long-term goal that many investors delay as a task for years to come. However, the earlier you plan for your retirement, the better, and it will help you build a rich corpus to meet your needs after retirement.
Retirement planning is a long-term investment and equity mutual fund schemes are known to yield high returns in the long run. Various equity mutual funds like large-cap funds, multi-cap funds, mid-cap funds, small-cap funds etc. are suitable. Depending on your risk appetite and investment horizon, you can consider investing in these schemes.
Children’s education and wedding expenses; These are also considered long-term goals, but their time frames are often shorter than retirement planning. Large cap funds, index funds, hybrid funds (eg aggressive equity oriented hybrid funds, multi-asset allocation funds etc.), gold savings funds like gold ETFs etc. are suitable. As you get closer to your goals, you may want to switch to debt funds to reduce the risk.
Regular income stream; Mutual Fund Strategic Withdrawal Plans (SWP) are one of the tax-efficient cash flow solutions for long-term investment periods for investors, especially retirees, who need regular cash flow from their investments for a long period of time. Hybrid funds are suitable investment options for SWP as they have lower side effects than pure equity funds and have the potential to produce better after-tax returns over longer periods.
SIP is the best way to invest in mutual funds over long investment periods as you can benefit from the power of compounding and leverage rupee rate averaging volatility. If you want to reach your desired financial goals more quickly and comfortably, consider increasing your SIP amount gradually. It ensures that the amount you invest grows at the same rate as your income and makes it easier for you to effectively hedge against inflation.
Many individuals find it challenging to choose suitable mutual fund schemes that match their financial goals. However, a thoughtfully constructed investment portfolio of best-suited mutual funds linked to your goals will ensure success in achieving your financial goals.
You’ll need to estimate the amount of money needed to achieve each goal within a given time frame, work backwards to figure out how much you need to save each month, and decide where to invest. So, you can consider PersonalFN SMART Fund Explorer, which takes the hassle out of choosing mutual funds and helps you plan your mutual fund investments wisely.
All you need to do is simply define your SMART financial goals by goal type (buying a house, retirement, etc.), set a reasonable time frame for achieving them, and enter your amount. Willing to invest in your goal.
The PersonalFN SMART Fund Explorer provides you with two mutual fund investment options (A & B) that you can choose based on your exposure profile, taking into account the details you enter. Additionally, you can quickly find a list of the most suitable mutual fund schemes based on your preferred scheme.
As we approach the new year 2023, this is your chance to start your wealth creation journey with a list of mutual funds recommended by our research team. So what are you waiting for? Click the button to achieve your financial goals with PersonalFN’s SMART Fund Explorer.