Choosing a Mutual Fund Investment Based on Life Goals

Several of our life goals, like buying a car or a house, taking an international holiday, or even having a comfortable retirement require a financial commitment. Mutual funds are an effective means of achieving these financial goals for many who have invested in them. To achieve the maximum benefits from your investment, it first helps to be clear about your goals and then choose mutual fund schemes that align well with your needs.

Keep in mind that when setting your financial goals, you need to be very clear about how much you will require and how much you will need to save to achieve that goal. Also, consider the impact of inflation on the cost of your goals so that you can account for that as well in your investment.

Understanding Life Goals Based on Time Horizons

One of the first steps you could take to align your investments with your goals is to categorize your goals based on when you need to achieve them. The three main categories would include short-term goals, mid-term goals, and long-term goals.

Short-term goals: These are goals that you would like to achieve within three years or fewer. Examples of short-term goals could include:

  • Paying off your credit card debt within six months.
  • Taking an international holiday in one year.
  • Buying a car in two years.

For these types of goals, you would ideally look for mutual fund schemes that are better suited for short-term investing. Typically, schemes that are low-risk and could generate moderate returns over the course of the investment horizon could be suitable for such goals. Debt and debt-oriented hybrid schemes might prove to be the investment solution for you in this scenario. From fixed maturity funds that you can redeem at the time you require your money, to liquid and overnight funds that you can redeem in 24-hours, debt funds offer a range of short-term, low-risk schemes that could suit your needs.

Mid-term goals: Goals that you hope to achieve between three to eight years can be termed as mid-term goals. These goals could include:

  • Getting married in the next 4-5 years.
  • Paying off your car loan in six years.
  • Completely renovating your home in the next 5-7 years.

As the time horizon is a little longer than that of short-term goals you could consider taking a slightly higher risk when choosing your mid-term investment options. When looking for moderately high-risk schemes, you might want to consider equity-oriented hybrid schemes that give you the potential for capital appreciation through equity as well as capital protection due to the debt component. Dynamic asset allocation funds that are actively managed by a fund manager might also be an option if the risk levels suit you. With these funds, the fund manager adjusts the asset allocation between equity and debt based on market conditions to minimize risk and maximize returns.

Long-term goals: Any goal that you hope to achieve after eight years is considered a long-term goal. Long-term goals could include:

  • Children’s higher education
  • Retirement planning
  • Buying a house

The advantage of long-term goals is that you have time on your side and can give your investment capital a chance to grow considerably. Long-term investments also lend themselves better to higher risk as they can weather short-term market fluctuations and take advantage of the overall rise in market value over longer durations. Because of this longer investment horizon, you could consider higher-risk options like equity mutual funds that show potential for wealth creation over the long term. Investing in small-cap, multi-cap, and Flexi-cap mutual fund schemes could prove to provide inflation-beating returns that help you comfortably meet your financial goals. However, you might also want to consider balancing your portfolio with moderately high-risk schemes like large-cap and balanced advantage funds to afford some protection to your investment.

When planning your goals, you might also want to consider creating an emergency fund that you can withdraw at short notice. As mentioned earlier, liquid funds could be a good option to invest idle cash if you might need it in a hurry. The advantage of investing in liquid funds is that while you are not using the money, you are giving it the potential to earn returns that could accumulate over a few years. 

As each individual could have several financial goals, it would make sense to create a portfolio with a variety of schemes that can help achieve each of these goals. Make sure to create a diverse portfolio that you review occasionally to ensure that it still aligns with your needs.

Article Shared by ICICI Prudential AMC