Mutual fund is a goal-oriented investment instrument. This article will help you understand the basics of goal based financial planning with the help of mutual funds.
Mutual Fund is one of the most popular investment instruments opted by many new investors to create a financial corpus and build wealth. Every investor, whether new or seasoned, has financial goals that they want to achieve. Financial goals, for example, can be long term like retirement planning, building a new or bigger home, marriage of children, or it might be a short-term goal like planning for a foreign trip or buying a brand-new car. These goals are personal milestones which are important for every individual. In order to achieve these financial goals, you need to invest properly as the amount invested and the manner in which the investment is done determines the amount which will received at the end of the investment period as maturity corpus.
Moreover, in today’s age where inflation is on rise and everything is getting expensive, it is imperative that you invest in new age investment instrument like mutual funds. Mutual fund is very beneficial and helpful investment instrument as it gives a wide array of opportunities to widen the nature and scope of your investment. The mutual fund investment portfolio offers opportunities to all type of investors i.e. whether aggressive investor or moderate investor or conservative investor. The mutual fund portfolio gives you freedom to choose the tenure of investment i.e. you can invest for longer tenure or shorter tenure, as well as have the freedom to choose the amount of investment i.e. small or large amount. You can use various schemes available under different mutual funds to achieve your desired financial goal.
A Financial goal can be any personal milestone and hence, choosing the best mutual funds to invest is an important factor. The following table shows some the most important milestones of an individual investor’s life and the most suitable investment instrument he/she should opt for meeting that financial goal.
- Retirement Planning: Diversified Equity Mutual Fund for longer tenure
- Tax Planning: Investment in ELSS
- Children Education and Marriage: Investment for longer tenure in Balanced fund, Gold Fund and Index fund.
- Buying Car, Foreign Holiday, Home Renovation: Short term investment in gilt funds or debt funds
- Regular Pay-out Planning: Investment in systematic withdrawal Plan under mutual fund scheme
Investing by keeping in mind financial goals is a practical perspective of achieving your dreams. Here is a quick questionnaire that will help you in defining your financial goals and the means to achieve it.
Ask yourself what is the financial goal?
Ask yourself whether you are saving enough to achieve the set financial goal?
Ask yourself whether you have covered your risk before planning for financial goal?
Ask yourself the probability of achieving your desired financial goal?
If the answers to most of the questions is positive, then it means you have defined the right path for your investments and you shall achieve your financial goal. Asking the above questions shall help you in setting a direction towards your specific financial goal and help you in monitoring your progress periodically.
Now that you have defined your financial goals, let us understand the advantages of investing in mutual fund.
The beauty of mutual fund is that it allows diversification i.e. you can invest in various companies, having different risk profile from a mutual fund. Capital market is volatile in nature; however investing in mutual fund is similar to putting your eggs in different basket. So if one egg breaks, the rest remain intact. Thus, investing in diversified portfolio will help in mitigating the risk associated with capital market.
While investing in mutual funds, you should plan as per your financial needs. One should ensure that your investment portfolio meets your financial goals i.e. whether short-term or long-term.
Irrespective of setting up financial goals, it is advantageous if you set short term targets as they will help you in doing targeted savings. Short term targets will help you in reviewing your progress periodically and keeping your savings on track.
Investing in mutual fund is less risky as it offers diversification of portfolio, which in-tunes the performance of your investment with your set financial goals. Even though the risk is diversified, it is best to seek professional advice.
Tips to a newcomer before starting investing journey
The correct way of investing in mutual fund is by building the right mix of mutual fund portfolio. A mutual fund portfolio is a collection of various investment instruments used for investing under mutual fund and these instruments help you in achieving your financial goals. The returns earned on your mutual fund is dependent on the performance of your entire portfolio and not related to a specific fund. So, building the right mutual fund portfolio by selecting right mutual fund is important. Following are certain factors that every newcomer must consider while building their mutual fund portfolio
Purpose of investing in mutual fund: Before investing in mutual fund, it is imperative for you to define the purpose of your investment. Defining the purpose of investment will help you in planning effectively for your financial goals.
Picking and choosing right mutual fund instrument category: Category refers to the type of instrument you must opt for to achieve the set financial goal. Mutual fund allows you to invest in various instruments namely: Multi Cap mutual fund, Balanced Fund, Tax Saving Fund, Ultra Short-Term Debt Funds, Equity Mid Cap Fund etc. defining the category of investment instrument will help you in determining the type of investment strategy to opt. Choosing the right mutual fund instrument category also depends on the purpose of your investment in mutual fund.
Picking right mutual fund: Once you have defined the investment instrument category, it become easy to choose the right mutual fund for investment as you have clearly defined your financial goal, purpose and investment instrument.
- Reviewing the performance and rebalancing: The final and most important step in mutual fund investing is keeping a track of your investments. It is advised that you check the performance of your portfolio every one or two months as it will give you a clear picture of your fund. If the performance is not as per your set financial goals, then you can review and rebalance your portfolio again.
Thus, the article encapsulates a simple framework that will give a head start to a newcomer who intends to create wealth by investing in mutual funds.
Recommended Read: Why Picking the Right Mutual Fund is Very Important?