Manish KothariPaisabazaar.com
All of us have financial goals that we want to achieve in our life. These can be buying a house, getting our first hatchback, going out for a holiday abroad, saving for our children’s higher education or building a corpus for a self-reliant retirement life. Realising these goals can be challenging for most of us if we take into account our present-day financial responsibilities and lifestyle. It sure is challenging, not impossible! You can work your way towards your goal by following a well-strategised plan, taking into account your investment and optimum risk-adjusted returns required for achieving it.
Mutual funds are one of the best available market-linked instrument that can help you achieve your goal, given that they are available for investing across asset classes (from equity to debt investments, and even gold), risk profile and time horizon (starting from as low as 1 day and extending for decades). Here’s how you can achieve your financial goals through mutual funds:
Identify your present financial status
The first step towards financial planning is to identify your current financial status, including your present income, monthly expenses and savings and your present investments. This will help you to determine the money and time horizon required to fulfill your goals.
Assess your risk-appetite
As each asset class carries a certain amount of risk; your next step should be to find out the asset class that suits your risk appetite. Your risk-taking capability will largely depend on your income level, age, liquidity and time horizon of your investment. Your ability to tolerate risk will be much higher if you are less than 30 years and on the contrary, it will be much lower (in most cases) in case you are nearing your retirement. Similarly, a person with a stable income and sufficient emergency funds can afford to invest more in high-risk equity funds than one who is in his early career stage and without sufficient emergency funds.
Determine asset allocation based on your goals
Asset allocation is the process of apportioning your investible surplus across various asset classes for meeting your financial goals and hence, it is imperative for you to determine asset allocation on the basis of your long term, as well as short term financial goals. Remember the trade-off between risks and returns during asset allocation process - higher the risk that you can afford, the higher would be your gains.
As equities are volatile in nature, they can deliver negative returns in the short-term. Hence, consider investing in them for your long-term financial goals (above 3 years) as these goals would give you the required time to recover from market setbacks (if any) caused from pursuing more aggressive but rewarding strategies. Opt for debt funds to meet your short-term financial goals (less than 3 years). Opt for hybrid/balanced funds for your long-term financial goal if you have a very low risk appetite and you prefer stability of returns over high returns.
Security Selection
Once you are through with asset allocation, the next step is to reduce your risk by diversifying your investments within asset classes.
The best way to do so is to invest in three or four diversified/multi-cap/flexicap funds. Fund managers have the flexibility to capitalise on investment opportunities across market capitalisations and sectors; and align investments according to changing market conditions. Also, try diversifying investments in terms of fund houses so that even if one fund underperforms the market because of fund-management issues, your remaining investments would take care of your portfolio.
Opt for diversified equity funds for long-term goals, such as building retirement corpus or a corpus for your child’s education or wedding. You can also invest in mid-cap/small cap funds for your long term goals if you have higher risk-tolerance.
Invest in large-cap funds if you have relatively lower risk appetite within equities. These funds invest in blue-chip companies and hence they are considered to be the least risky among all equity fund categories. Avoid sectoral/thematic funds unless you have a clear idea of the workings of that sector/theme.
Your investment in debt fund categories will primarily depend on your time horizon. Invest in liquid and ultra-short term funds to meet your emergency funds requirements or for financial goals within six months; short term funds for goals between six months to two years and income accrual and dynamic bond funds for investments over two years.
If you are in higher tax bracket (30%), you can look at investing 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. Consider investing in arbitrage funds if you have an investment horizon of more than 60-90 days.
Once you have started implementing your financial plan through mutual funds, do not forget to review the performance of your funds at least once in a year. Also remember that key to successful investing in mutual funds is disciplined and consistent investing. Use systematic investment plan (SIPs) mode of investment to invest consistently and reduce the risk from market volatility. Try to top up your mutual fund investments by making lumpsum investments during market crashes.
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