Choosing Mutual Funds as per your Financial Goal

Mutual funds are often suggested as the go-to investment avenue for meeting a variety of investment goals. It is not surprising to see that all major mutual fund houses launch mutual funds designed to meet specific goals such as taking a vacation, buying a home, or providing for your child’s education. However, the challenge that most investors face is not knowing the correct way to choose mutual funds aligned to your financial goals. So here are some tips to keep in mind before you pick the next mutual fund and park your hard-earned money:

Know your goals

This is easier said than done. Most investors think having a broad picture of the goals they wish to achieve through mutual fund investments is enough. However, it’s not that simple. 

The first step is to segregate short-term, and long-term goals as your risk appetite for each may vary. For example, investing in a mutual fund to save up for a holiday next year is a short-term goal, and you may be more willing to take risks. On the other hand, picking a mutual fund to save money for buying a house is a long-term goal and will require a slow and steady approach. It is also a good practice to decide a time frame within which you wish to achieve the goals so that you know exactly how long you need to stay invested in a fund. 

Take, for instance, Tina, a freelancer with an annual income of INR 10 lakhs. She wishes to buy a house in the next ten years, which will cost INR 1 crore approximately, and also wants to save up at least INR 15 lakhs for her wedding in three years. However, given that her annual salary is a lot less than the financial goals she has set for herself, the best course of action would be to consider long-term SIPs and prioritize one goal and focus on it. If her income increases, she can always change the SIP amount or even diversify her portfolio through other mutual fund investment options to meet all her goals. 

Know how much risk you are willing to take

Identifying your risk appetite is non-negotiable. Regardless of the quantum of investment, every investor needs to take a holistic approach toward investments and have a clear idea about how much risk they are willing to take. After all, this is your hard-earned money and investing in schemes that do not match your risk appetite is a futile effort. 

Your risk appetite depends on various factors, including age, personal and financial situation, investment horizon, health conditions, etc. Don’t simply pick a fund because it looks attractive — carefully consider the risk involved and ask yourself if you are ready to bear it. For example, if your financial goal is to save money for your child’s education and your risk appetite is moderate, investing in debt mutual funds with steady returns is a safer bet than putting the entire investment amount in high-risk equity funds simply because the returns look more promising. 

Allocate assets wisely

Never put all your eggs in the same basket. The best way to ensure that your mutual fund investments are aligned with your financial goals is to spread out your investments across different asset classes. 

The time horizon of your financial goal plays a vital role in deciding what type of mutual fund investments are best suited to you. As a rule of thumb, the longer the horizon, the more sense it makes to invest in equity funds over debt as they become less risky over a long time frame. However, it doesn’t mean that you should stay chained to equity mutual funds alone. Speak to a mutual fund investment adviser to work out the correct mix of equity, debt, and gold mutual funds that will help you to reach your financial goals in a sustainable manner. 

Review your portfolio periodically 

Investing and forgetting doesn’t work with mutual funds. It is important to review the portfolio periodically to check the actual performance vs. expected performance. Doing so can also help you to adjust the portfolio based on your current financial situation. Moreover, if you want the mutual fund to help you reach your financial goal, it is extremely important to get rid of underperforming investments quickly. 

Which fund is suited for your goal?

  • For short-term goals such as paying tuition fees for a semester, liquid funds, ultra-short-term funds, and short-term maturity debt funds are an excellent choice as they provide stable returns over the short term. The investment duration of such funds ranges from a couple of days to a few weeks and offers good returns with very less market volatility.
  • For medium-term goals such as purchasing a car or taking a vacation, consider long-maturity debt funds. These are perfect when your investment horizon is 3 to 5 years and are more suited for conservative investors. You can also opt for balanced funds & Monthly Income Plans. Balanced funds offer a combination of both debt and equity whereas, in Monthly Income Plans (MIP), a greater portion of funds is invested in debt securities and a small portion in equities. MIPs are a great pick for risk-averse investors who want to earn stable returns over their tenure and also enjoy capital appreciation.
  • For long-term goals such as planning for retirement or children’s wedding, equity-oriented and aggressive hybrid funds can do the job. Investing over a long period of 7 to 30 years can help leverage the potential of equity and also aid in the wealth creation process. While these funds deliver higher returns, they are also highly risky. So make sure that you have a high-risk appetite before investing in them. You can choose from a large range of equity funds such as Large Cap/Mid Cap/Small-cap funds, ELSS, diversified funds, and sectoral funds.

Need more help with choosing the right mutual fund scheme?

Aligning your mutual fund investments with your financial goals is not an impossible task. Make sure to follow these tips to the T, and if you need more assistance, don’t hesitate to reach out to the experts at Moneyfront. We’d be happy to guide you further!

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Yonita is the pillar of Client servicing at Moneyfront. She has worked with Citibank for over 25 years in operations and client servicing. In her stint with Citi, she has managed large service setups and her rich experience of banking spans across managing clients, operations, audits and compliance matters. She epitomises ‘client excellence’ in the true spirit of the word. Her motto and single-minded focus is to make sure every client is a happy client.